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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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China’s Misfiring Engine

China’s total debt has doubled since the 2008 financial meltdown to 275 per cent of GDP. This is unsustainable, especially with several foreign firms employing a China +1 formula by shifting some supply chains out of China

Photo Credit : Vectomart


In a provocative article in The Times of India (01 November 2022), author and global investor Ruchir Sharma wrote that China faces a terminal economic decline. Its GDP is estimated to grow at three per cent in 2022-23. But that’s not the only bad news for Beijing. Sharma argues that China’s long-term economic growth going forward will sag to an annual average of 2.5 per cent.

Sharma argues, “Chinese President Xi Jinping’s goal is to make China a mid-level developed country in the next decade, which implies a growth rate of around 5 per cent. But underlying trends – bad demographics, heavy debt and declining productivity growth – suggest the country’s overall growth potential is about half that rate. The implications of China growing at 2.5 per cent have yet to be fully digested anywhere, including Beijing. For one thing, assuming that the US grows at 1.5 per cent with similar rates of inflation and a stable exchange rate, China would not overtake America as the world’s largest economy until 2060, if ever.”

The good news for Beijing is that analysts sometimes get their forecasts wrong. That’s cold comfort for Xi Jinping. He knows better than anyone else that China is facing a triple whammy: an ageing workforce, a shrinking population, and unsustainable debt. Together they could prove Sharma at least half-right.

China’s economy may not overtake America’s by 2030 as many had confidently predicted. But overtake it, give or take half a decade, it probably will. What we are likely to witness over the next few years, however, is the quasi-Japanification of the Chinese economy.

Japan’s demographic dividend took off in the 1960s. A young, post-war generation of Japanese led the world with turbocharged GDP growth. From industrial robots and passenger cars to electronics and bullet trains, Japan’s technology-based innovations posed a challenge to US and European economic domination. Japan’s GDP rose rapidly to become the world’s second largest after America’s.

Then suddenly, as soon as the surge had begun, it tapered off in the early 1990s. Japan had started ageing. Its population began to shrink. Workforce productivity fell. The symptoms are strikingly similar to those increasingly visible in China.

China’s demographic dividend began in the 1990s. The country’s one-child policy, imposed in 1980, had yet to impact birth rates. China’s population continued to grow. Its economy surged to USD 6.10 trillion in 2004, leaping ahead of Japan (USD 5.29 trillion) for the first time. Between 1992 and 2022, China’s three golden demographic decades, GDP grew an unprecedented 45-fold from a paltry USD 0.42 trillion to USD 18.32 trillion.

But as in Japan, once a country starts ageing and workforce productivity falls, economic growth slows. In Japan, it has stalled for nearly 30 years. Japanese GDP in 1992 was USD 3.91 trillion. In 2022 it is still only USD 4.30 trillion (though that is partly due to the yen’s depreciation against the US dollar).

The average Japanese today is 48.6 years old – the oldest median age in the world. The average Chinese is 38.4 years old but growing older rapidly. The average Indian is a youthful 28.7 years.

As Neelkanth Mishra, co-head of APAC Strategy at Credit Suisse, put it, “China runs the risk of growing old before (it) becomes wealthy. Like individuals saving for old age, countries also need to build a certain level of wealth to sustain their lifestyles when their populations have aged, if necessary, by importing labour and talent, like the European countries do currently.”

Japan grew rapidly post-war because it spent virtually nothing on defence. After its surrender in World War II, Japan was placed under America’s nuclear and military umbrella. That enabled Japan to devote its resources to industry and infrastructure.

China’s growth followed a different path. As a Communist rival of the United States, it could access US technology only by stealing it. That is what it did, often under the benign gaze of a US administration fixated on keeping China on its side during the Cold War with the Soviet Union.

China lost that access after Washington woke up to the geopolitical threat Beijing posed. China, however, has made matters worse for itself under Xi’s autocratic rule. It has systematically eroded the edtech and fintech sectors and sidelined China’s most innovative business leaders like Jack Ma of Alibaba.

Zero-Covid lockdowns have hit the real estate sector particularly hard. China’s total debt has doubled since the 2008 financial meltdown to 275 per cent of GDP. This is unsustainable, especially with several foreign firms employing a China + 1 formula by shifting some supply chains out of China.

The United Nations recently published a report on global population trends that should cause considerable disquiet in Beijing. It predicted that China’s population will fall steeply as the 21st century unfolds.  India will overtake China as the world’s most populous country in July 2023 with 1.42 billion people. China’s population will then fall off a demographic cliff: in 2100, its population will halve to 800 million. The economic and geopolitical ramifications are far-reaching.

The contrast between India and the US couldn’t be starker. Unlike Communist China, India and the US have a diverse populations. China is overwhelmingly ethnic Han. India and America are polyglot nations.

While Europe faces the same problem as China of a shrinking population, immigration has swelled America’s population. New immigrants have higher fertility rates than Americans of European descent. Immigration from Asia and Latin America could help the US dodge the demographic bullet that has laid Japan low and could lay China low too.

As Sharma says, “If anything, 2.5 per cent is an optimistic forecast that downplays the risks to growth, including growing tensions between China and its major trade partners, growing government interference in the most productive private sector – technology – and mounting concerns about the debt load.  China at 2.5 per cent has major implications for its ambitions as an economic, diplomatic and military superpower. A lesser China is more likely than the world yet realises.”

China’s ethnic insularity is its Achilles heel. Like Japan, its Han population is homogenous. Immigration is severely curtailed. India’s historical ethnic diversity and America’s contemporary immigration-led diversity have given both heterogeneous countries the demographic cushion China lacks.

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