As the Year of the Dragon begins, the critical question for China is: Will it be able to successfully revive its economy? China’s economy has not performed the way many analysts expected since the pandemic. Will the country fall into the notorious middle-income trap? Will China face a structural or cyclical issue? Will China’s economic miracle end? The U.S.-China Perception Monitor recently facilitated an email interview on China’s economy with Logan Wright, a long-time China expert who lived in the country for over two decades.
Logan Wright is a Partner at Rhodium Group and leads the firm’s China Markets Research work. Logan’s research focuses on China’s financial system and credit conditions in shaping outcomes within China’s economy, as well as the policies of China’s central bank.
There are many reports about China’s economic challenges and headwinds. Based on your assessment, what is the overall state of the Chinese economy? Is China’s economy facing a structural issue or a cyclical issue?
Most importantly, the slowdown in China’s economy is structural. Many drivers of China’s past economic growth simply cannot be repeated. China saw the largest single-country credit expansion relative to global GDP in over a century following the global financial crisis—and it is now over, along with the resulting surge in investment. China has faced a declining working-age population for over a decade, and the demographic headwinds will intensify. You can only build more than enough housing for the entire population once.
The external political environment used to facilitate China’s economic growth rather than limit it, which is what’s now occurring. There is simply no plausible path for China to maintain anywhere near the rate of economic growth it saw over the past decade, and there are already clear signs that growth slowed sharply in 2022 and 2023.
That said, there is a case that cyclical momentum in China’s economy can stabilize in 2024, partly because the property sector’s adjustment has already been so severe, and partly because of an end to a sharp industrial destocking cycle.
Which areas or industries in China are still performing well? How will China’s economy develop in the next three to five years?
Despite de-risking or decoupling in global manufacturing, China will still remain at the center of several global supply chains, and its export industries are likely to remain globally competitive if the exchange rate continues to weaken, which is probable. Chinese firms will still remain globally competitive in several industries that have benefited from Chinese industrial policy—both subsidies and state-directed credit—over the past several years. The greater concern in global markets at present is that China will attempt to export its excess capacity onto global markets as the domestic economy slows, and will depress profitability and sustainability in several industries around the world, not just in China.
In your opinion, what should the Chinese government prioritize in order to spur economic growth?
The longer you wait to clean up the financial system and local government debt, the more difficult it will be to use both monetary and fiscal policy to stimulate the economy in the future. The fiscal system is truly constrained at this point. China collects only around 14% of GDP in taxes, well below even the lowest levels in OECD countries. There are problems with the stock of existing local government debt, the future flow of finance for local government investment, the balance of central and local revenue distribution, and the basic fiscal capacity of the system as a whole. China’s fiscal revenue all comes from investment-led growth, which is ending.
