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China’s Great Leap Backward

China’s ongoing economic slowdown is partly the result of its failure to implement crucial structural reforms that would have enabled it to escape the middle-income trap. While previous Chinese leaders saw economic prosperity as the key to maintaining popular support, Xi Jinping has prioritized political control over growth.

CAMBRIDGE – Ten years ago this November, the 18th Central Committee of the Communist Party of China (CPC) held its Third Plenum, outlining a series of far-reaching reforms designed to sustain China’s rapid economic growth. Around that time, a naive extrapolation based on the difference in growth rates between China and the United States suggested that China’s GDP would overtake America’s by 2021. Some speculated that this could happen as early as 2019.

These predictions have been far off the mark. With the US economy outperforming expectations and the Chinese economy slowing, Goldman Sachs and others now estimate that China’s GDP may not catch up with that of the US until 2035, if ever. And even if it does, it would likely be only temporary. China’s GDP is now projected to peak around mid-century, after which its shrinking labor force will offset any productivity gains.

To be sure, in purchasing-power-parity terms, China already overtook the US in 2017. But for many purposes, such as estimating military capabilities or determining International Monetary Fund quotas, it is more useful to compare national GDPs at current exchange rates.