Is This Really the End of China’s Economic Growth Miracle?

China Matters - China Special Issue

China pundits come in two distinct flavors. On one side, we find the Apocalyptics, who have been forecasting China's impending collapse for at least 20+ years now, due to some combination of a property market implosion, the shadow banking sector's non-performing loans, rising youth unemployment, and the potential unraveling of a one-party, non-democratic political system.¹  On the other side, we have the Converts, who envisage China either as an existential threat necessitating the West's concerted efforts to curb its ascent or as an unparalleled business opportunity.² Notably, since 2012, both camps have cast China’s President, Xi Jinping, in the role of omnipotent puppet master orchestrating an intricate dance of power from his figurative throne in Beijing.³

Lately, the Apocalyptics have gained momentum again; the World Bank has revised its 2024 Chinese GDP growth forecast from 4.8% to 4.4%, marking another in a string of unanticipated downgrades,⁴ The Economist has written extensively on "Peak China" and "Xi's Failing Model,”^5,6 and Adam Posen of the Petersen Institute for International Economics characterizes China's challenges as a case of "economic long COVID.”⁷  Politico even wrote a sensationalist article speculating on "a Stalin-like purge sweeping through China's ultra-secretive political system, with profound implications for the global economy and regional peace."⁸

To be clear, this is not just an academic debate waged by the global punditocracy.  Whatever happens in China truly matters – not merely to multinational corporations vested in the region, or the myriad enterprises tethered to China-centric supply chains, but also to consumers everywhere.  In fact, China’s trajectory over the next few years will effectively shape the geopolitical, economic, and business environments for the remainder of the 21^st century.

Considering the high stakes at play, C-Suite executives need a far more balanced, nuanced, and robust perspective to make the required strategic, financial, and operational decisions.  And they can’t afford to simply wait and see how things turn out before making high-commitment decisions that will be difficult to reverse.  They need to develop alternative scenarios of the various potential end-states and evaluate the business impact of each scenario before formulating their business strategies and risk mitigation plans.⁹

The key question as we enter 2024 is whether China’s current economic challenges stem from transient policy decisions or signal deeper, lasting concerns.  It is crucial to clearly differentiate between near-term cyclical fluctuations and long-term structural issues – and recognize that China’s difficulties, though chronic, largely predate the recent slowdown.

China's current economic challenges stem primarily from a Covid-19 strategy that, initially successful, carried unforeseen consequences. Beijing’s strategy, marked by draconian, yet highly effective, lockdowns and the astonishingly rapid construction of emergency hospitals, positioned China as a global leader in the early stages of the pandemic. However, success came at a cost—particularly for its aging population, as the absence of natural immunity and an underdeveloped healthcare system left this demographic exceptionally vulnerable to the virus. Complicating matters, Beijing's decision to prioritize the development of domestically produced vaccines over capitalizing on Western breakthroughs in mRNA technology inadvertently created a “Sophie’s Choice” between the severe economic toll of a protracted lockdown and the unacceptable losses of life if the country were to open back up too hastily.

Beijing’s strategic misstep, and subsequent procrastinating, combined with preexisting issues such as local government debt and property bubbles, left it with the worst of both worlds and a complex recovery process that continues to unfold. Nevertheless, the current slowdown doesn’t suggest fundamental changes to economic conditions. While the era of sustained double-digit growth is surely over, China’s economy will likely continue to achieve a growth rate surpassing that of most developed economies in the foreseeable future.

However, the focus on cyclical trends does obscure China’s far more important long-term challenge of transitioning from predominantly labor-intensive, low-skilled manufacturing to higher value-added activities - the notorious middle-income trap – which has become increasingly urgent.¹⁰ Beijing’s political leaders have long understood the risks to their economy and are serious about the need for resolving them.  In fact, President Xi Jinping came to power in 2012 with a strong reform mandate after what was widely perceived as a lost decade under the leadership of Hu Jintao and Wen Jiabao.¹¹ 

In response, Xi introduced a comprehensive 60-point economic plan, focused on market reforms and liberalization, including reducing reliance on investment-led growth, rebalancing towards domestic consumption and services, upgrading the industrial base, and rectifying the undesirable byproducts of its hyper-growth phase, such as pollution, safety concerns, and endemic corruption.  Led by Premier Li Keqiang, an economist, the plan became known as Likenomics and was enthusiastically welcomed outside of China where Xi Jinping was widely seen as a transformational leader.¹²

Things look very different a decade later.  While Xi has certainly been a transformational leader, progress against the 60-point plan has been much slower than intended in China itself and hoped for elsewhere.  Despite some progress in, for example, trade openness and financial system development, China remains far behind OECD norms in portfolio and direct investment openness as well as the creation of a market-led innovation system.¹³ Instead, the initial focus on market-based reforms has taken a backseat to national security concerns and party ideology; Likenomics has been replaced by Xiconomics.¹⁴

What happened? Xi’s initial strategy did rest on a strong commitment to implement the required economic and other reforms, but also on an equally strong conviction that doing so required absolute sociopolitical stability, as well as an attempt to package the required, painful, reforms in an aspirational, emotional, and nationalistic agenda: i.e., a Kennedy-like appeal to a Chinese Dream, which placed the reforms in the context of China’s experience of the last 150 years of chaos and upheaval, and wanting to become a strong, prosperous, and proud nation again.

However, as the market-based reforms, and especially improving SOE competitiveness, turned out to be more challenging and slower than expected, Beijing’s focus necessarily shifted to the other two legs of the stool to compensate: sociopolitical stability and party ideology. This was only exacerbated by increasing geopolitical tensions and high-tech competition with the U.S., which, understandably, led Beijing to prioritize national security concerns over economic development.

Where does all this leave China? And what does it mean for the rest of us? Several scenarios are plausible, based on the interplay between various political, economic, social, and technological factors, including economic growth and reforms, sociopolitical stability, technological innovation, and US-China relations. In addition, next year’s presidential elections in the US and Taiwan will be especially important.

One scenario sees Beijing successfully meeting its objectives over the next decade and becoming a rejuvenated and increasingly prosperous society under the leadership of Xi Jinping and his successors. This China is world-class and independent in core technologies, such as AI, cloud computing, and semiconductor manufacturing. It is the undisputed leader of the Global South, who perceive China to be more stable, resilient, and future-oriented than the US and the West. Militarily, it has become the dominant power in the Asia-Pacific region.

Alternatively, we may see a weakening China that continues its current economic trajectory and does indeed “grow old before it becomes rich.”  Economic growth remains unbalanced and dependent on unsustainable infrastructure investments. Industrial upgrading, especially SOE reform, has stalled, and most Chinese firms still operate well below global best standards. Politically, President Xi and his successors are coming under increasing pressure to deliver on the CCP’s implicit social contract of delivering prosperity in return for political control.

In between these two bookends lie various “muddling-through” scenarios as well as scenarios where Beijing either becomes increasingly confrontational to deflect attention from its domestic economic and sociopolitical challenges or retreats under a combination of international and domestic pressure.

While some scenarios are more likely than others, all are plausible, and most companies will need to prepare for them. There are several ways to get started, either inductively through a bottom-up process of evaluating all combinations of uncertainties or deductively through a top-down process of defining “axes of uncertainty” to create alternative scenarios. A pragmatic third alternative is to simply stress-test the current strategic plan by creating scenarios based on the underlying key drivers and assumptions.¹⁵

For many companies, the stakes are far too high for a wait-and-see approach.  C-suite executives who invest the required time and effort will be amply rewarded, however, as companies that act thoughtfully and with strategic foresight during a crisis significantly outperform their competitors afterwards in terms of annual sales and profit growth (+7ppt).¹⁶ Similarly, forward-thinking companies tend to clearly outperform more complacent ones in terms of profitability (+33%) and market capitalization (+20%).¹⁷

The best time to prepare is now.

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¹ “The Coming Collapse of China,” Chang, Random House (2001)

² “When China Rules the World and the Birth of a New World Order,” Jacques, Penguin Press (2009)

³ “China’s Leader Now Wields Formidable Power. Who Will Say No to Him?” NY Times (6/20/23)

⁴ “East Asia and Pacific: Sustained Growth, Momentum Slowing,” World Bank (10/1/23)

⁵ “Peak China,” The Economist (5/13/23)

⁶ “Xi’s Failing Model: Why he won’t fix China’s Economy,” The Economist (8/26/23)

⁷ “The End of China’s Economic Miracle,” Posen, Foreign Affairs (Sep/Oct 2023)

⁸ “China’s Xi goes full Stalin with Purge,” Politico (12/6/23)

⁹ “Business with China: Should I Stay or Should I Go?” Cainey, C-Suite (6/23)

¹⁰ “Comparative Advantage and Middle-Income Traps,” Jullens and Robinson, C-Suite (7/23)

¹¹ “Will China’s New Leaders Step up to the Plate?” Jullens, Strategy+Business (11/13)

¹² “Understanding China’s Economic Reforms,” Jullens, Dagens Industri China Conference (10//14)

¹³ “Running Out of Road,” China Pathfinder Annual Scorecard, Atlantic Council / Rhodium Group (6/23)

¹⁴ “Xiconomics: What China’s Dual Circulation Strategy Means for Global Business,” Cainey and Prange, Agenda Publishing (2023)

¹⁵ “Decision-making under Uncertainty: Ostrich or Soothsayer?” Jullens, IMA CEO Forum Shanghai (2020)

¹⁶ “Roaring out of Recession,” Gulali et al, Harvard Business Review (2010)

¹⁷ Corporate Foresight and its Impact on Firm Performance: A Longitudinal Analysis,” Rohrbeck and Kum, Technological Forecasting and Change (6/18)