The U.S. and China Come to the Table

40 years after the "walk in the woods", Presidents Xi and
Biden walk around the Filoli Gardens in Woodside, CA (ABC)

When China adopted a hybrid version of capitalism, it was nearly a foregone conclusion that China would eventually become the world's dominant power. Although its per-capita GDP was "only" USD $13,000--a fraction of the United States' $75,000--China's GDP of $17.7 trillion was rapidly approaching the U.S.' $23.3 trillion in 2021. China was marching inexorably toward number one.

Not so fast. As Presidents Xi and Biden met today at nearby Filoli Gardens, China is struggling with a number of worrisome economic issues. [bold added]

China’s economy is beset by multiple challenges, from a deflating property bubble and unmanageable local government debts to slumping confidence and deflation. The U.S., meanwhile, has just recorded its strongest quarter in nearly two years while inflation subsides. China’s gross domestic product, which was 75% the size of the U.S.’s in 2021, had slipped to 64% in the third quarter, roughly where it was in 2017...

China’s growth, which averaged 10% a year from 1980 to 2012, was always bound to slow around now because of an aging population, less rural-to-urban migration and diminishing opportunities to catch up to wealthier countries.

But the slowdown has been sharper than expected. The World Bank now expects China’s annual growth in the next two years to average 4.5%, roughly a percentage point slower than it projected a decade ago. The International Monetary Fund sees growth averaging just 3.9% over the next five years...

During the global financial crisis of 2007-09 China launched a massive stimulus program aimed at infrastructure, housing and later, technology. Local governments and developers financed this investment by borrowing from banks and the Chinese public, using new financing vehicles to get around borrowing restrictions imposed by Beijing...

Whereas the U.S. has too few houses and infrastructure, China now has too much of both. Millions of apartments are vacant. Guizhou, a relatively poor province, is home to 23 of the world’s 100 highest bridges. High-speed railway track is growing more than twice as quickly as passengers, according to Rogoff and Yang.

Much of the debt to finance that investment, issued by developers and local governments to ordinary Chinese or Chinese banks, is in danger of default. The IMF estimates 30% of local government debt is nonviable. Collapsing revenue from land sales and business taxes have saddled local governments with yawning deficits. An August Rhodium report co-authored by Wright concluded that China has much less fiscal space than widely believed to finance industrial policy, defense and its Belt and Road Initiative of foreign infrastructure loans...

China’s declining population is a slow-moving problem that suddenly accelerated in the past two years. In 2017 the fertility rate, the number of children a woman could expect to bear over her lifetime, was around 1.6, below the 2.1 needed to maintain a stable population...

Chinese authorities are ideologically opposed to boosting consumption, such as through more generous healthcare and retirement benefits, which would reduce the need to save. Meanwhile, Xi has worsened confidence through “a series of profound policy choices…that are now coming back to hobble the Chinese economy and its recovery,” said Barry Naughton, an expert on Chinese industrial policy at the University of California San Diego.

Starting in 2020, the Communist Party unleashed a regulatory crackdown on private businesses in online commerce, online education and gaming, ostensibly to clamp down on privacy and anticompetitive abuses but mostly to cement its control over the private sector.

Despite these recently surfaced weaknesses, China still has immense power, particularly in manufacturing. It can easily disrupt supply chains of major industries around the world if it so chooses. And China's quest to expand territory, most notably to annex Taiwan, will threaten political and economic stability for decades.

The interesting aspect of this civilizational contest between China and the West is that, for the first time in memory, time is not on China's side. Its aging, shrinking population will force China to turn inward, while immigration and open markets are likely to continue growth for the U.S. and its allies.

Of course, President Xi is aware of these demographic realities. The near-term danger is that he may be tempted to accelerate his expansionist plans before the West gets stronger and China gets weaker.

Let's hope that President Biden can offer him deals that will help the Chinese people and their economy while at the same time defusing the prospect of military conflict.