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China’s Economic Engine Is Running Out of Fuel

Western observers tend to focus on criticizing the rhetoric and decisions of China’s leaders. But pointing out the errors in the forecasts on which China bases its policies – which typically fail to account for unfavorable demographic trends – may be more constructive.

MADISON, WISCONSIN – Earlier this month, the ratings agency Moody’s cut its outlook on China’s sovereign credit rating to negative, citing risks from a deepening property crisis and a prolonged growth slowdown. In fact, Moody’s now predicts that annual economic growth will fall to 4% in 2024 and 2025, before slowing further, to 3.8%, on average, for the rest of the decade. Potential growth will decline to 3.5% by 2030. A major driver of this slowdown will be “weaker demographics.”

Not surprisingly, China’s leaders said they were “disappointed” with the downgrade, claiming that the economy still has “huge development resilience and potential” and will remain a powerful engine of global growth. But China’s assessment of its potential growth is based on deeply flawed forecasts.

On August 24, 2020, Chinese President Xi Jinping convened nine economists – including former World Bank Chief Economist Justin Yifu Lin – for a symposium that would guide the 14th Five-Year Plan for economic and social development. Based on that discussion, Xi declared that it was “completely possible” for China to double its GDP per capita over the next 16 years.