China’s Economic Deceleration and Its Potential Global Consequences

China’s economic growth is slowing down due to structural conditions that predate the pandemic, which means it can no longer produce the eye-watering rates of growth that sustained global excitement in previous decades. Long-term projections of potential economic growth rest on demographics, capital investment, and productivity.

China’s population aging and birthrates tumbling are inescapable, and the growth of capital investment in the economy must slow down, as evidenced by a rash of business and bank defaults, fiscal shortfalls for heavily indebted local governments, and falling returns on investment.

In addition, the growth of productivity has already fallen to low levels, just a fraction of past rates, but boosting productivity is possible, but only if economic performance is placed above political priorities and encouraged by policy reforms.

The Chinese government’s tolerance for the painful side effects of reform has waned over the past decade, opting for easier policy reforms, grappling with the so-called middle-income trap and facing the unsettling prospect of mounting political unrest.

However, the travails of an economy as large as China’s are not China’s alone, and the macroeconomic changes underway will affect not only China’s decarbonization efforts but also those of many other countries.

If Beijing does not embrace economic reforms and continues to rely on old-style energy- and emissions-intensive investment to drive growth, China will not be able to ramp up its climate goals in concert with its global counterparts.

China’s economy can take one of two paths forward, neither of which is likely to double per capita GDP by 2035. If leaders remain fixed on statism, the growth rate might rise somewhat for a year or two, but then it will fall to potentially two percent or lower in the second half of this decade.