China and America are set for Great Divergence 2.0
As US growth remains sluggish, China is rebounding
On Sunday, China’s Premier Li Keqiang announced at the National People’s Congress that China has set a 5% GDP growth target for 2023.
Chinese GDP figures should always be taken with a pinch of salt. Indeed, Keqiang himself once said that the figure was “man-made” and unreliable. He instead suggested tracking other metrics such as railway cargo volume, electricity consumption, and loans disbursed by banks. China watchers have since come to refer to this as the ‘Li Keqiang index’.
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Yet when we look at alternative metrics, they do appear to track China’s official GDP figures. And since Chinese GDP figures usually clock in close to the target set by the Government, it is safe to say that Keqiang’s promise to deliver around 5% GDP growth in 2023 is reasonable.
What is interesting about this announcement is that it is made at the same time as many developed economies slip into stagnation or even recession. This is striking because, for the past 20 years, the Chinese economy has ebbed and flowed with the rest of the world. When the United States and Europe were growing, so too was China; when they were slowing, China followed accordingly.
Yet the forecasts for the developed economies in 2023 are dismal. Where the United States is expected to grow at only 0.1%, Europe isn’t much better (0.7%). The fact that China is expecting robust growth implies that its economy is decoupling from the developed economies.
We could now be entering a great divergence between two of the world’s biggest economies. If the developed world sees five years of sluggish growth — which is perfectly possible — while the Chinese economy continues to grow at its forecast pace, this could have profound implications for the world economy as a whole. It may mean that we are moving into a new world where US supremacy is no more — and where the much vaunted Chinese takeover as the world’s leading economy is finally coming to fruition.
It is also interesting to note that China announced at the Congress that it would increase its military budget by over 7%. Some commentators pointed out that this was higher than its GDP target, but this is an error. China’s GDP targets inflation-adjusted output; its nominal GDP target is around 8%. Nevertheless, this is a substantial increase in China’s military budget.
In part, this likely indicates increased security concerns around Taiwan, but it’s also a reflection of the Chinese Government’s attempts to rebalance its economy away from wasteful investment spending. Increasing military spending means that less money needs to be channelled into property and infrastructure investments, some of which have dubious market value. It is a novel move from a country which is taking advantage of the coming recession in the West to forge its own economic path.
I’m very interested in the growing US versus China divide, but I’m unable to interpret the mountain of data and commentary on that subject.
Mr. Pilkington is consistently bearish on the economies of Western countries. In previous articles, he highlighted the huge money printing associated with the pandemic, the self-harm to Europe through its energy policies, and the negative effects of Russian sanctions. My sense is he’s right that the West is in an increasingly weak economic position.
But is China really so strong? This weekend I read that Premier Li Keqiang, mentioned in the current article, is stepping down, sidelined by Xi in favor of Xi’s ideological supporters. Li Keqiang was, from what I’ve read, a clever, realistic policy maker, especially in economics. He was a technocrat, and he’s being replaced with an ideologue. That seems to be Xi’s style and I’m not sure it bodes well for China’s economic future. Look at China’s draconian covid lockdowns. No one can doubt they were driven not by science but by politics and a desire to make China’s response appear better than the West’s. They were a disaster.
Then there’s China’s baby bust. I’ve read the country has already entered a catastrophic population decline. My gut sense is China is in trouble socially and economically. They might pump up their GDP for a few years but that’s likely unsustainable.
But I’m only guessing based on my reading of a wide range of articles. Maybe what we’re seeing is a struggle between two ailing giants and victory will be defined as the difference between exhaustion and collapse.
No one can read, let alone interpret the mountain of data and commentary, wise words of warning.
Population ageing/decline + housing bubble + other debt look very negative in the medium term and day-to-day China relies on American controlled sea lanes for access to oil, food and markets.
I don’t think the personalities involved matter much.
Remember on discovering the coronavirus leak they sealed Wuhan off from the rest of China while keeping flights open to the rest of the world. Not how to make friends and influence people.
Population decline might be helpful to China to manage the social impact of the next wave of automation in Chinese industry. There is a lot of low productivity labour that needs to be rotated out of labour intensive industry and a lot of GDP per capita catch up to do it with.
The UK only managed it by accepting complete collapse of strategic industries, high unemployment that drifted into an entrenched non-working segment of adults, and paid for it by running down overseas assets by £1tn in 40 years. The British failures (and successes) won’t be lost on the Chinese leadership.
And if that all fails, being an utterly ruthless dictatorship with unprecedented social control, if contraception started to become less effective and accidental births started increasing, what can any Chinese citizen do…… abstinence isn’t an option when the Nanny State controls access to the mucky websites!
I was interested in your comment “and paid for it by running down overseas assets by £1tn in 40 years.”
Do you have more detail?
They have built the BRI so they don’t have to rely on those sea lanes.
They are trading enormous amounts of stuff with russia.
The USA is not an ailing giant.
How would you describe it then? Just look at all the indicators, not least the black hole that Ukraine has become. Multiply that by 5 for the upcoming war with China, the deepening distrust by the population duped into thinking the 0.1% need to be even richer while their own wages remain at 1990 levels and falling, the ever increasing corruption in politics (Dems + GOP bought and paid for by the same 0.1%), appalling standard of policing ..how can you say the US isn’t in decline? It’s clearly in terminal decline.
Nonsense. The population is still increasing and will continue to increase. It continues to be the destination of choice for the most skilled engineers from all over the world (and pays the most for them). People continue to queue up to get into the country.
There’s got to be a reason for all those things. The people making those decisions aren’t exactly stupid.
I’ve lived through decades of people telling me that the US is finished. I used to do it myself. I can recall working in the US in 1990 and telling my colleagues how the EEC (pre-EU) was going to wipe the floor with them. Didn’t happen, did it ?
You or I may not particularly like everything about the country or wish to live there. But there’s no doubt that it’s remains a country of tremendous economic dynamism which continues to generate world-leading new businesses.
If you have spent any time living in the US (I assume you haven’t, I have), you would be aware that the average American has a very different attitude to opportunity and inequality than the typical Britain. They are far more admiring of success and far less critical. They don’t really go in for the “tall poppy syndrome”. In many ways a good thing.
The USA is isolating itself with wars and sanctions. Doesn’t that normally go wrong historically?
This is not true. See my earlier reply. People from all around the world are still queuing up to try to live in the US. As they always have done. And probably always will.
They have more sanctions and tariffs in place than any other nation on earth:
They are trying to push the NOPEC bill:
Isolationist. I thought you advocated and understood the benefits of free trade mr b. I’m sure I’ve seen you say free trade is what brings prosperity.
Is the us upholding those principles?
In part, yes. Free trade relies on a system of rules – which includes things like intellectual property laws (patents and stuff like that). The Chinese government refuses to play by these rules and has routinely sponsored large scale industrial espionage and theft of Western technology. In those circumstances, the US is quite correct to impose sanctions. Likewise if the actions of China or Russia are a military threat to itself or its allies. I don’t seen anything controversial in that. Of course, it always has to make a choice whether actually imposing sanctions is actually in its own interested and will work (i.e. produce better results than not doing so).
Remember here that it is US naval supremacy which has been the guarantee of global free trade pretty much since WWII. They are the ones that keep the shipping lanes open – and pay the bills for this too. Say what you like about the US – and they do some pretty crazy stuff at times – but they’re the least worst option as the world’s policeman in my book (given we can’t do it any more).
Again, if the US is such an awful country, why do people from all over the world want to go and live there ?
I love this argument that china have stolen ‘intellectual property’. If the us did not want china near its stuff it’s multinationals should not have set their tech companies, massive brands etc manufacturing up in CHINA. Then made a sh*t load of money. Ahem.
Now. The idea that free trade works best when it is mutually beneficial and helps to prevent wars is a good one. If America wanted its tech made there, had no issue doing it, surely part of a mutually beneficial trade deal would be to not mind if that country copies what they are making for you?
The link I have provided, DOES NOT include sanctions as well BTW.
‘For many decades, the US antidumping regime has affected billions of dollars in global trade and hundreds of industries, while evading the proper scrutiny it requires.’
The us is not an awful country. My sister had a very white teethed American boyfriend for a little while, she’s been, very nice. I don’t blame people for wanting to live there. It’s economic and foreign policy though are not the same thing though are they? Surely in a democracy it is normal to question these policies?
For our American readers beware of what is to come
SVB – first domino?
From what I understand they are queuing up to get out of California currently.
Yet another fundamental misreading of what’s happening in China and what its future look like.
China has an absolutely massive and ridiculous property bubble – the largest in world history by a distance. Coupled with a rapidly declining population. There’s just no way to fake your way out of that.
A huge amount of Chinese growth is linked to the housing bubble (there is now a huge excess of housing in China) and massive bad debts from domestic infrastructure spending that will never be recovered (high speed train lines to nowhere).
There’s also a large build up of bad debt from the Belt and Road initiative – huge loans to Africa which will never be repaid.
The more we are economically decoupled from what’s going on in China, the better in my view.
I’ll get back to you in 5 years and we can see who is more accurate? My money is not on you btw; it’s on the other guy!
Look around your house.
How much stuff was made in China. The parts in your car, tech, tools, appliances, most mass manufactured stuff actually. Or quite a lot of it. Is made in CHINA.
We already have inflation. What will cutting off cheap goods do Mr B?
There seems to be some cherry picking of figures (again) from the writer. China is only now opening up after a lockdown much more prolonged and severe than anything seem even in Europe or the States, therefore you’d fully expect its economic output to receive a big initial jump as the rest of the world experienced the same thing. However the west has been back open much longer so you’d expect the growth to have settled down again.
We all know the west has some economic difficulties at present, but China has a colossal property bubble and impending ageing workforce crisis, let’s not pretend it’s a bed of roses in Beijing either
Missed the point. It’s not how much growth when.
It’s that they achieve that growth without the west.
This sounds altogether too close to what the Chinese print in their own propaganda outlets. Short term numbers like raw GDP are not the best measure of geopolitical power. China’s demographic crisis is likely to substantially hurt their growth, but it’s impact won’t truly be felt for at least another few years or maybe a decade. China’s growth is living on borrowed time. GDP growth now means very little compared to the uncertain period that’s coming. Also, I think there may be more divergence on the way, as the US’s economy may do substantially better than Europe given they are a net energy producer. At the least, I expect Europe to fare worse in any global recession than others. There’s a distinct possibility in my mind that Europe enters a prolonged and severe recession worse than the rest of the world. Europe has lost Russia entirely as a supplier of energy, agricultural products, and natural resources, and let’s not forget that Ukraine is a large supplier of agricultural products in particular that is producing much less due to wartime conditions. The Ukraine invasion is very much a worst case scenario for Europe.
At the peak of Japan’s population, GDP per capita had caught up with the West. Innovation is much, much harder so productivity growth can barely keep pace with a declining workforce, hence the stagnation in nominal GDP.
China is in a very different position. Large parts of the economy have very low levels of productivity. Even just simple catch up of the Western half of China with the coastal East will deliver productivity growth far in excess of demographic decline for another 1 generation. This should keep Chinese nominal GDP growth strongly positive.
Bsyond that, China has built a formidable foreign investment portfolio in the regions of the world with the fastest population growth. I imagine that like Britain in the last quarter of the 20th century to today, China will in later years begin to liquidate them to cushion its decline for another 1 generation.
“increased security concerns around Taiwan” – would this be the possible Chinese invasion of Taiwan Pilkington is referring to? He makes it sounds as if it’s the Taiwanese engaging in unprovoked aggression against China, but then he has a similar line on the Russian invasion of Ukraine. Once again, as with his relentless, poorly-informed boosting of Russia’s supposedly world-beating economy, I find myself asking whether Pilkington is in the pocket of these revolting regimes, or just a useful idiot. Probably the latter – either way I find it hard to understand why the editors at both UnHerd and The Critic are so keen on his writing.
“It may mean that we are moving into a new world where US supremacy is no more”
Words like these are music to my American, tax paying, ears. American “hegemony” has been a curse for many of us. Our budget has been hijacked by the military addiction, our legislators have been bought by their lobbyists, our media is dominated by their points of view. Almost everything in our culture is in decline because of these greedy ambitions.
I know the Chines for industry, capability, willingness to learn, energy, great work ethics. All qualities that any cursory glimpse will reveal we no longer possess. This suits them to become the new international high performers. America is–after all our unforced errors–a hollowed out shell. A myth that has no relationship to reality. Our chief products are armaments, but we have never mounted an attack on our collapsing democracy. Our main international activity is war making: but we haven’t had success since WWII. And yes, I know it’s our own damn fault. I’m fine with Chinese success stories. We need a break from our own brutalizing obsessions. It is our own damned fault.
As a fellow American, I agree.
As a fan of America, me too.
Fan is no good Hugh.. we need more Americans to finally see the light! I too am a fan of the small minority of intelligent, decent Amer8can people that see the light.
Wow… that’s two of you! This us encouraging.
Finally a voice of reason …and from an American! It’s a great relief to see that at least some Americans have the brain power to see what’s going on! I sincerely hope there are many more like you out there!
Totally uncalled for, unfair and finally scurrilous remarks. The ONLY people talking about a US-China war are US generals; ie they are planning for war, hence the need for China to build up its military defences. Taiwan is merely the pawn in the US’s diabolic game, just as Ukraine is; and the US will again be happy to fight to the last Taiwanese just as it is happy to see Ukraine decimated solely to weaken Russia militarily and economically – it’s having the directly opposite effect of course.
Given the US willingness to blow up Europe’s oil pipelines it may be time for Europe to leave NATO and join BRICS+ and theteby back the winners rather than the US hegemony which is terminal decline..
This reads like it’s lifted straight from the China Daily.
Perhaps the Americans should pay a bit more attention to Russell Brand.
..and Noam Chomsky, and Cols. Douglas McGregor and Scott Ritter, and Jeffrey Sachs and Bernie Sanders and a bunch of others who appear to have more than two brain cells to rub together!
If the CCP says growth is 5%, reality is probably 2.5%, and effectively 0% when you account for all the useless infrastructure and housing included in the totals.
Just compare the GDP per capita – it’s no contest. US streets ahead, and CCP isn’t closing this gap anytime soon. And it’s got many internal looming problems. Quite possibly too it may do something in the South China sea next couple of years that causes itself much more long term economic harm.
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