China's economy is stalling. The most likely economic scenario over the course of the next decade is not high growth or an economic collapse, but stagnation. If this occurs, the Chinese Communist Party (CCP) will have difficulty sustaining its ambitious national development and strategic plans. In particular, Beijing will not be able to avoid a more serious "guns v. butter" tradeoff.This has sharp implications for American policy. Most importantly, while the US certainly has its own structural problems, it is far wealthier and more powerful than China, and that gap may actually grow or at least hold, rather than shrink. The dominant Sino-US relations paradigm of a declining power managing a rising power is inaccurate. A truer depiction of the Sino-American relationship is that China is a capable great power seeking to compete with US primacy in Asia, much as Russia has become a US rival in Europe and the Middle East, while Iran challenges American interests in the Persian Gulf. To attribute to China the capability to "overtake" the US or compete with it globally—or to describe the power dynamics as a "power transition" from Washington to Beijing—is at best premature.
To understand why stagnation is likely, first consider other countries. While the categories are not well-defined, far more economies rise out of poverty than become truly rich. This is sometimes referred to as the middle-income trap.In the postwar era, the most impressive economic success stories are in East Asia, which bodes well. However, in comparison with the world as a whole, ]. Only one country with a population over 30 million has become rich for the first time in the postwar era: South Korea. A long list of countries that have not gone beyond middle-income, from Argentina to Thailand. It would not be surprising if Chinese cities the size of Singapore had income levels similar to France. I[/b]t would be astonishing for the PRC as a whole to match French income, much more astonishing than what it has accomplished to date.. In terms of what people actually have in their pockets, China reported disposable income per person equivalent to $3,400 at the end of 2015, less than one-tenth of the US.. The PRC's economic weakness did not appear in 2015, as some seem to think. It did even not begin with the 2008 financial crisis. It began in 2003. From 1978 to 2002, several waves of partial pro-market reform created a new economic powerhouse. In 2003, the new government under Hu Jintao decided state-owned banks lending to state-owned enterprises (SOEs) should continue to constitute the core of the economy, employing large numbers of people and otherwise serving the party's aims. Fresh market-oriented reforms were soon displaced by soaring publicly directed investment. After a four-year boom, the economy began to hiccup. It was no longer greater productivity from market reform driving the numbers but increasing dependence on foreign consumption to buy the goods ultimately produced.The global financial crisis was a double blow. Foreign demand plummeted. And on top of the previous public investment surge, Beijing conducted arguably history's biggest stimulus through state-run banks. Loans grew 32 percent in 2009 alone, even as profit opportunities vanished. At this point the stagnation path became clearly visible.The PRC's national debt is in excess of $25 trillion and climbing. Roughly two-thirds has been accumulated in the past nine years.[b] In 2015, total debt rose four times as fast as nominal GDP, mocking the idea that China continues to enjoy comparatively rapid economic growth. When a country has already spent so much, the return on yet more spending is low. This is the main reason growth has slowed. A re[/b]lated point is that, when a country's debt is so large, a large amount of capital is spent paying it back. This is the main reason growth will slow further.
Demography also portends stagnation. Demography can cause social and political crisis when there are too many young people and not enough jobs. China is instead rapidly aging (by demographic standards), heading toward a situation of hundreds of millions of elderly requiring support and not enough workers to support them and expand economic activity.The government reports the number of working-age people started to inch downward in 2012 and has fallen progressively more sharply each year through 2015. These numbers may not be entirely accurate, but the work force will certainly shrink before this decade ends and continue to shrink throughout the next decade. The contribution of labor to growth will fade until labor actually detracts from growth, as it does in Japan and parts of Europe. Older countries tend to stagnate.
In addition, growth based on natural resources has disappeared. In the 1980s, farm productivity soared, permitting those who had become unnecessary farmers to become manufacturing workers and helping create the world's new factory. Land and natural resources will not spur economic growth again for the foreseeable future because the PRC has significantly depleted its resource endowment.. The World Bank cites water stress starting at 1,000 cubic meters of water per person per year; northern China offers one-fifth of that. Three-fifths of monitored national groundwater sites are rated by Beijing as unfit for drinking. Just as hefty payments are due on financial debt, they are also due on environmental debt, making growth even more difficult.Weakness in other sources of growth means increasing reliance on something that is hard to measure: innovation. The PRC has successfully imported foreign technology, legally and through the theft of intellectual property. As countries climb the technological ladder, however, they no longer benefit greatly from merely absorbing what others offer, and innovation becomes more challenging.The cost of ‘maintaining social stability' (weiwen), primarily through the police force, has become astonishingly high. The Chinese government's official budget for national defense in 2012 was 670.3 billion renminbi (about $109 billion), while the budget for police and public security was 701.8 billion renminbi (more than $114 billion).otwithstanding China's notorious budgetary opacity, there is reason to believe that maintaining a surveillance state costs as much as maintaining the People's Liberation Army.China, due to its historic one-child policy, has a fertility rate of 1.6 (below replacement levels) and a well-documented looming demographic cliff with its old-age dependency ratio set to increase to close to by almost 4x between 2010 and 2050. . . . Pension expenditure is already the single largest expense of the Chinese government, at US$200bn annually, higher than infrastructure, healthcare or defence, almost 20% of its total budget, (but still only totaling 2.7% of annual GDP), with coverage provided to less than half of the population above the age of sixty.These numbers will only rise.It seems almost unimaginable that it can sustain rapid growth in security spending as well. Xi's only political option given these circumstances is to create and sustain a new elite coalition around his nationalist program of "national rejuvenation" and the "China dream." Given slow economic growth and unfunded promises to seniors, Xi like Mao before him will have to ready his people for "sacrifices" in furtherance of China's return to greatness.
Even as he faces greater financial strain, thus far Xi's national security approach has been to centralize control over security policy, to expand internal security, and most importantly to continue with Hu's more muscular stand on territorial claims in the South and East China Seas. In addition to these efforts, Xi has also put forth an ambitious development and strategic plan called One Belt One Road (OBOR), in which China will create a network of infrastructure projects linking itself with over 60 Central Asian, Middle Eastern, and European countries.As Chinese entities went overseas to find resources, security leaders feared that the US and its allies could cut off supply in the event of a downturn in Sino-American relations. To expand its maritime presence, China has deployed a naval task force in the Gulf of Aden since 2008, developed military forces able to project power into both the South China Sea and Indian Ocean, and built diplomatic and military logistics relationships through port calls in the Persian Gulf and Africa. Plans are on track to build China's first overseas base in Djibouti, as well. Hu also began to press maritime claims in the East and South China seas and demonstrated a dangerous capability with a high-profile anti-satellite weapons test in 2007.If Beijing's maritime ambitions were not enough, Xi has also turned west with OBOR. The grandiose hope is to link Asia with Europe, a plan so ambitious it leaves Xi enough room for variegated assessments of success or failure. If OBOR is mostly a way to rid China of excess capacity and purchase more influence in neighboring countries, it may well "succeed." But if the strategy is meant to reshuffle Eurasian geopolitics by creating a "New Silk Road" linking East and West, with China at the heart, it will almost surely fail.
The risks of Xi's foreign policy approach are twofold. First, as Xi acquires a base in an unstable region, devotes more resources to Central Asia, and pushes contested maritime claims, the chances of a foreign policy failure have grown. China has little experience managing a high-stakes competition with a set of capable rivals such as the US and Japan, or countries willing to stand up to it under certain conditions such as Vietnam. Eventually, one of its rivals may push back hard (e.g., demonstrating that the militarized new "islands" are indefensible or placing US and allied exercises closer and closer to its shores), leaving Beijing with few palatable options. This scenario could be highly embarrassing to Xi who has cultivated a strong-man image. Part of the party's claim to the mandate of heaven is that it is reversing centuries of foreign humiliation. No CCP leader can be seen creating new humiliations.
A stagnating China's best analogue is not the stagnant Japan of the past two decades. Because of Beijing's geopolitical ambitions, the better comparison is to Putin's Russia, albeit with a much larger economy and thus more durable power. Despite already poor demographic conditions and a shrinking economy, Putin continues to exert Russian power abroad. He remains a popular leader and therefore can sustain these ambitions for a strategically relevant period of time. Similar to Russia, China is discontent with an American-dominated geopolitical order and has a strong sense that it should be the leading power in its region. Political power will likely remain centralized, and opposition will be put down ruthlessly. Xi will walk a tightrope on foreign policy adventurism. Right now his activities in the South China Sea serve both strategic goals and his nationalist domestic policy goals. The risk of this approach has been, and will remain, low as long as the US continues its tepid response. Going forward, he will calibrate assertiveness based on how much he needs to fuel nationalism and how great the strategic payoff China receives, measured against the risk of a real or perceived failure (e.g., the US effectively stops China from creating new manmade islands).
Another key source of American leverage is CCP insecurity. Xi needs to inspire nationalism and demonstrate that he is leading the process of national rejuvenation, but he cannot risk a foreign policy failure that would make him look weak at home. That means he will press on contentious issues until it becomes too risky to continue. For example, his South China Sea aggression has worked. He has paid no real cost and can credibly claim to his people that he is retaking lost territory and gaining control over China's historic seas. But if the US took action to stop China from dredging new "islands" in such places as the Scarborough Shoal, Xi would not have many responses. If the US began to convoy fishermen to waters they can legally fish, Xi would be left with a host of bad options. If the US began an active diplomatic initiative with maritime claimants in Southeast Asia to resolve conflicting issues of maritime rights and territories without China, Beijing would be isolated. These strategic initiatives should be accompanied by a renewed US informational campaign emphasizing how Xi is isolating China when there are many other options to integrate the country with the international community.