China’s Economy Cannot Overtake US

China’s Economy Cannot Overtake US
A worker walks past a housing complex under construction by Chinese property developer Evergrande in Wuhan, in China's central Hubei Province, on Sept. 28, 2023. (STR/AFP via Getty Images)
Antonio Graceffo

It is no longer a foregone conclusion that China will surpass the United States economically, given China’s economic and diplomatic problems and U.S. strengths.

As part of his 2049 goals, Chinese leader Xi Jinping wants China to overtake the United States as the world’s largest economy. Now, many experts believe that the Chinese Communist Party (CCP) will not achieve this goal because of a combination of economic and political factors in China, as well as Beijing’s dwindling diplomatic power. At the same time that China’s ability to catch up is diminishing, the U.S. economy remains robust.
The Chinese economy has never fully recovered from the destructive COVID-19 lockdowns, which Xi kept in place longer than other countries. The lockdowns were so lengthy and unpredictable that many companies and countries began relocating at least part of their supply chain or manufacturing away from China.
By the time China reopened, new systems were already established, with countries like Mexico and India reaping the benefits. The manufacturing sector that stayed in China experienced the negative impact of a global economic slowdown, and Beijing is now attempting to maintain employment levels and stimulate economic growth with reduced manufacturing and exports.
At the same time that exports are declining, debt is mounting, with the debt-to-GDP ratio reaching 286.1 percent. Local governments are grappling with crisis levels of debt. Typically, real estate sales would help cover these obligations, but the real estate sector, which accounts for 20 percent of the nation’s economy, is in a downward spiral. China Evergrande, a real estate giant with over $300 billion in debt, has been ordered to liquidate assets.
Zhongzhi, a leading shadow bank with $65 billion in debt, has also declared bankruptcy, sparking concerns about the stability of the entire financial system. Fund managers are increasingly using the term “uninvertible” to describe Chinese markets, which have witnessed a consistent trend of sell-offs. The benchmark MSCI China stock index has shed just under $2 trillion in value since its peak in 2021.

The CCP’s aggressive foreign policy in the South China Sea and its disputes with the United States, Taiwan, the Philippines, Japan, and Vietnam are causing Beijing to become increasingly isolated. With fewer friends and diplomatic allies, investment and trade are also suffering.

For example, in South Korea, after repeated threats from Beijing and its proxy Pyongyang, trade, investment, and even student exchanges with China are all declining. The constant threats against various European Union members, Australia, and Japan are also taking an economic toll as these countries gradually seek to reduce their reliance on China.
Meanwhile, nationalist propaganda from the CCP is driving out foreign brands. Hollywood, U.S. car manufacturers, and companies like Apple are no longer experiencing the same returns in China as they once did. Many of these companies are shifting their focus to India, the emerging economy, the United States, or Mexico.
Much of China’s ability to achieve its economic goals relied on the CCP’s efforts to reshape the international rules-based order to better suit the regime’s preferences. The Belt and Road Initiative (BRI) played a significant role in this shift. However, the BRI is not progressing as Xi envisioned. Many countries along the BRI are facing financial distress as the promised increases in GDP have failed to materialize. Several nations find themselves in a difficult situation where BRI projects remain incomplete and revenue generation is contingent upon their completion, requiring further borrowing.

Observing the negative impacts experienced by other countries, some nations have opted to cancel their involvement in BRI projects. While Beijing highlights the number of countries that initially signed onto the initiative, many are not advancing with their projects. Additionally, Chinese lenders are now confronted with hundreds of billions of dollars worth of debts that may prove uncollectible.

On the domestic front, China is confronting deflation, record youth unemployment, and plummeting birth rates. Decreasing birth rates and longer life expectancies are propelling the country toward an aging crisis, where there will be more retirees than active workers. While innovation could potentially rescue the Chinese economy, the shrinking foreign direct investment and waning interest from foreign companies to establish operations in China mean there’s less new technology flowing in from overseas. Moreover, the communist regime’s inclination to favor state-owned enterprises during economic downturns marginalizes the private sector. Generally, the private sector drives innovation and introduces game-changing ideas and technologies.
Historically, the strength of the United States has been immigration, a trend starkly declining in China. When the private sector faced suppression elsewhere, or when entrepreneurs felt limited in their home countries, they often turned to the United States, bringing their vision and ideas. This influx of talent is one among many factors contributing to why the United States continues to be the world’s most innovative country.
The United States is the home base for 75 of the world’s most innovative companies. The United States also holds the top spot for research and development spending in real dollar terms and ranks third globally for R&D expenditure as a percentage of GDP. In contrast, China ranks 14th. Despite political divisions and emerging drug and crime issues, the U.S. economy has maintained its strength compared to other Western economies during and after the pandemic. Furthermore, U.S. institutions and courts remain robust, ensuring property rights and safeguarding intellectual property, which has led to more FDI flowing into the country compared to China.

Finally, although China’s GDP growth rate is higher than that of the United States, the U.S. economy is larger, meaning that even a smaller percentage of growth represents a greater amount in real dollars. To catch up, China must address its internal economic challenges and external diplomatic issues, but Xi appears to lack interest in doing so.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Antonio Graceffo, PhD, is a China economic analyst who has spent more than 20 years in Asia. Mr. Graceffo is a graduate of the Shanghai University of Sport, holds a China-MBA from Shanghai Jiaotong University, and currently studies national defense at American Military University. He is the author of “Beyond the Belt and Road: China’s Global Economic Expansion” (2019).
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