Summary: CLM-Freeman Chair of CSIS Joint Conference on Peak China

On September 12th, 2024 China Leadership Monitor and the Freeman Chair of the Center for Strategic and International Studies held a joint conference to assess whether China has reached its peak in terms of economic growth, political power, and global influence. Below, we provide a brief summary of the main points discussed.

Economic Prospects and Structural Challenges

Although how economic growth and strength ought to be measured remains a topic of contention, China’s economy can be said to have peaked in terms of its global Gross Domestic Product share. In 2021, China’s global share of GDP hit the high of 18.3%. However, in 2023, this percentage dropped to 16.9% and is predicted to continue to decline. This decline can largely be attributed to the fact that China’s credit and investment-led growth has ended, and its financial system can no longer support credit-fueled growth. In the past, China’s economic growth has been highly investment-driven, with real estate and infrastructure sectors being the two largest drivers. Specifically, whereas historically property investments accounted for nearly 25% of China’s GDP, oversupply,  debt-burdened developers, and declining property values have eventually led to the crash of the real estate market. Local governments that relied on land sales and infrastructure investments are as well facing significant fiscal strains.  

These negative trends have both been exacerbating and been exacerbated structurally by the Chinese banking system and the aging population. Firstly, although China has the largest banking system in the world by assets, it is now largely paralyzed by its non-performing loans in real estate and infrastructure. This has greatly constrained its ability to extend new credit even though its economy has previously benefited the most from credit expansions. Secondly, China’s working-age population has been shrinking since 2013 and the total population for the first time showed negative growth in 2022. As the population ages while birth rates remain low, rising healthcare and pension costs are placing an increasingly significant strain on government resources, potentially dragging down long-term growth in addition to the inherent economic challenges that are posed by a shrinking working population in terms of productivity and innovation.

A similarly important aspect of evaluating the economic prospects of a country is its innovation achievements and progress. A particular focus was put on the realm of artificial intelligence at the conference. China can be seen to have a highly competitive innovation capacity but be is largely lacking in diffusion capacity, impeding its ability to implement innovations across various sectors in a way that generates profit and continues to spur technological developments. AI has struggled to diffuse organically because of the state’s extended reach in technology planning in China. Although China has been relatively successful in implementing top-down diffusion of technologies such as high-speed rails, AI as a general-purpose technology is much more difficult to diffuse in a top-down manner due to its need for ecosystems and structures where it can be applied to.

Global Influence and Geopolitical Strategy

Despite the aforementioned domestic economic struggles, China remains a formidable player on the international stage. The idea of the China Model as an alternative continues to exist, especially as China continues to expand its influence through foreign direct investment and infrastructure development projects. As of now, China has equity stakes in 145 overseas ports, and this is just a part of its long journey in expanding investments funded by its foreign exchange reserve. Of these ports, 17 are majority-owned by China, and many speculations exist as to what implications exist given that 14 of the 17 can have naval uses.

Furthermore, China’s overseas finance and aid like that under the Belt and Road Initiative, for example, largely help China redefine global dominance by increasing the import of Chinese goods through the giving of Official Development Assistance loans. In that sense, China is a major donor that simply cannot be ignored on the global stage. While many have raised concerns about such financing being China’s “debt-trap policy,” it is more likely that these “traps” have not been intentionally set up, but rather have surfaced due to mismanagement.

The state is in fact not the only actor in such overseas investments. Chinese private companies play a role as well. Specifically, too much domestic pressures and low profitability have led private companies to continue to export their products and services.  Such private and public sector investment overseas may not support domestic economic structural reforms or encourage a consumption-driven economy, but it is necessary and critical to helping maintain China’s global influence in the face of rising trade barriers.

Power Consolidations as Governance Challenge

Governance in China can both be seen as a cause and effect of China peaking. Since assuming office, President Xi Jinping has concentrated power within the Party by restructuring the leadership and eliminating rivals by using anti-corruption campaigns to purge his opposition. Surrounded by “yes men” and having lifelong tenure, Xi’s power is formidable. The outcomes of centralized governance, however, are concerning. The anti-corruption campaigns, for example, are corrupt themselves.

As such, there exists a fundamental paradox in the concentration and aggregation of power and effective governance. Firstly, the lack of information and access to informed opinions in a system where only supportive voices are heard has significantly hindered the government’s ability to make good policy decisions. Secondly, the tight centralized political control has not allowed localities to adapt policies made by the central government to local situations. Finally, political elites are “lying flat” given that they see no incentive to really engage in effective governance when the central government is not supportive of initiative and risk-taking behaviors.  

We see this tight centralized political control in effect when observing the Chinese government’s response to the emerging" Peak China" thesis suggesting that their power and prosperity may have already peaked. Xi has led lower-level officials to aggressively refute this notion. The government’s rejection of the theory has rested on several grounds, the first of which being that the theory is merely a narrative of Western conspiracy. In addition, China has continuously referred to its demographic and economic challenges as “growing pains” on its path toward modernization. For example, they often emphasize that aging populations are a problem for many developed countries, and China’s aging population does not mean declining productivity because their human capital quality is significantly increasing in addition to its existing population scale advantage granting it high growth potential. Thus, overall, top leaders are aware of the challenges and criticisms, but they are in denial or still quite optimistic about sustaining a sufficient level of performance.

Future Outlook

Forward looking, the concept of a peaking China may continue to be a topic of international debate, but domestically, what matters most is the slope of the country’s decline. As of now, we see no alienation of the elites and population against the leader as it takes time for bad circumstances and negative trends to seep into the population. In the near future, it seems unlikely that a change in policy will happen to inflict dramatic structural changes that turn the direction of China’s development, especially if the next Politburo is still only composed of Xi’s faction.

In terms of the economy, although China’s current economic strategy does show signs of change, signaling that it is not impossible for China to modify its trajectory. This transition from investment-dependent to consumption-driven will be highly costly given the need to adjust the core structural components of the economy. For example, the overwhelming and inefficient distribution of resources geared towards supporting state-owned enterprises as well as long-standing structural issues such as declining productivity and an aging population continue to act as drags on growth and will require significant effort and determination to revert. In describing the plans to address these challenges, these costs are what the state completely excludes from discussion. Furthermore, the loss of faith as well as the general lack of profitability experienced by the private sector is largely ignored by the state and may continue to hinder economic growth and innovation in particular. The ability to innovate and diffuse the technology which largely requires contributions from the private sector will prove to be increasingly important as technological advancements and monopolies increasingly shape great power competitions.

Many lessons from the Soviet Union are relevant and important to consider when considering China’s future outlooks. Firstly, granted China’s currently lagging economic performance, an important lesson for China to draw from the Soviet Union’s collapse is the danger of losing legitimacy in the scenario that in addition to poor economic performance, the party can as well no longer control the narrative and information in the country. Like the Soviet Union, China may be able to maintain a relatively stable state through tight political control despite its economic decline for an extended period of time, but whether or not the political party can continue to control the narrative as the impacts of decline begin to seep into the population is a more important consideration. In a time where new technologies continue to open new channels to information, how internal dissent should be managed is a critical question for China moving forward. Secondly, the Soviet Union was able to retain its original level of power for a long period of time because it discovered valuable oil resources. This critical natural resource that was also rather scarce was able to support the Soviet Union in times when economic and political circumstances were generally in decline. Thus, whether China may be able to find a resource or capacity that is both scarce and of high demand may largely impact the slope of China’s development.

Despite these risks, however, China currently continues to be a major global actor. Its substantial investments in clean energy technologies and infrastructure ensure that it will continue to wield significant influence in international trade and development. However, whether such dominant position is sustainable in the long term will depend on China’s ability to manage its internal challenges and avoid the political and economic traps that have ensnared other rising powers.