China Stalls

China faces serious headwinds, and it is possible that its economic challenges have begun to sap the energy behind its global rise. One headwind is not China's fault: By their very nature, developing economies tend to grasp the low-hanging fruit early in their growth. As their economies grow larger and more complex, and as businesses begin to maximize efficiencies and streamline processes, economic growth inevitably slows. It is easy to grow swiftly from a low base, and it is nearly impossible to do so from a high one. +

Another headwind for China is its demographic outlook. China's adoption of the one-child policy in 1979 created a demographic dividend. In 1975, the United Nations estimated that for every 10 Chinese of working age, there were 8 who were too old or too young to work; by 2010, the number who were not expected to work was half that. Now, with Chinese fertility stubbornly low and the population aging, the trends are reversing. According to current estimates, by 2075, every 10 Chinese workers will be supporting 10 dependents, and by 2093, that number will rise to 13.

In addition, China's population peaked in 2021 at 1.4 billion people. It is set to sink to under a billion in 2070 and continue drifting down to 639 million by 2100. While these are still very large numbers by any measure, shrinking populations depress markets for everything from real estate to manufactured goods. +

The other headwinds are many: a burst real estate bubble, sagging productivity growth, growing tensions + with the United States that restrict technology inputs, and a leadership that seems less willing than its predecessors to let entrepreneurs roam free. Government statistics are enjoying less trust amid suspicions that conditions are worse than the government is willing to admit. Businesspeople are concerned that the Chinese banking system is not only full of nonperforming loans but has also lost much of its dynamism. Local governments in China have been especially affected by deteriorating economic conditions, and they are cutting spending on infrastructure projects and other important initiatives.

While China has steadily expanded for four decades, it is worth considering what a steadily contracting China might look like in the future. In part, it would enjoy less soft power. China has earned widespread admiration for producing sharp economic growth uninterrupted by social upheaval. Economic stagnation maintained through authoritarian control is a less remarkable feat, and while it is not currently the Chinese calling card, it could be. +

If some in the United States have their way, the movement of manufacturing out of China and into countries that are closer to the United States—whether ideologically or geographically—would drop Chinese growth further. Whether one calls it “de-risking” or “decoupling,” a reduced U.S. export market for China, combined with restrictions on technology that China can import from the United States and its partners, would change conditions in China significantly. Arguably, that would advance U.S. interests at China's expense, although how the United States would pursue it and how China would respond are open questions.

Whichever way the United States pursues de-risking, it would likely put a further damper on foreign direct investment in China because it would create uncertainty about the prospects of exporting to the United States, the world's largest market. While that alone would not force a contraction in the Chinese economy, it would contribute to it.

A contracting China would also spread less cash around the world. By 2017, China had become the world's largest official creditor, with its loans exceeding the combined value of those of the World Bank, International Monetary Fund, and all 22 wealthy governments that constitute the Paris Club. The Belt and Road Initiative seized imaginations because of expectations about its scope and scale. Not only has the initiation of program projects slowed, but overall Chinese lending to developing countries has slowed as well. According to data from Boston University, China financed $87.0 billion of overseas development projects in 2016; by 2021, the total had dropped to $3.7 billion. The university also notes that over the last decade, Chinese lending to Africa has increasingly come from Chinese commercial banks rather than policy banks. The resultant loans are concentrated less on infrastructure and more in revenue-producing industries such as mining and financial services. They also have less favorable terms of repayment and can complicate sovereign debt burdens. In the last five years, Sri Lanka and Zambia have defaulted on past loans from China, and countries such as Pakistan have enacted draconian budget cuts to meet their Chinese debt burdens. Increasingly, China is appearing in the role of extractor rather than developer of resources in target countries.

China asserts that it spends $230 billion per year on defense; some in the U.S. government assert that the true number is $700 billion. While Westerners can debate the size of the Chinese military buildup, there is little question that the Chinese military footprint is currently expanding in Asia and around the world. + China has the world's largest navy, with more than 370 ships and submarines, and it is fielding a nuclear-capable refueled bomber. The Chinese navy paid 27 naval port calls in 2023, demonstrating its capacity to operate far from Chinese shores. In addition, China sent more than 2,000 troops abroad on peacekeeping missions, building goodwill and exhibiting a capability to deploy and operate far from Chinese shores. China is also rapidly expanding its military technology base, with advancements ranging from aircraft carriers to advanced fighter jets and autonomous systems.

An economic slowdown would constrain China's military growth. Facing a traditional choice between guns and butter, + China's leaders would have to be even more selective about what military capabilities they are willing invest in, what contingencies they will prepare for, and what locations they will protect. A tightening fiscal environment will narrow the choices China's leaders have to exercise national power. +

Despite its challenges, China is currently more economically, diplomatically, and even militarily dominant than Russia. Yet, over time, it may begin to fall behind India, which has already surpassed China in population and is exhibiting stronger economic growth (albeit from a lower base). + India has attracted significant investment from the Arabian Peninsula, which has historic ties to the subcontinent. A growing India could hem in China's rise in Asia, and it could squeeze out Chinese relationships in parts of the Middle East. Since the United States views India as a more benign power, the United States may abet India's rise in a way that constrains China and gives the United States a relative advantage.