China Quietly Abandons Goal of Overtaking U.S. Economy

Chinese leader Xi Jinping appeared to revise his long-term economic outlook as he opened a major political event over the weekend and hinted at modest growth that could mean China will not outperform the US

Beijing’s two-stage plan to establish a “modern socialist country great in every respect” by 2049, the People’s Republic of China’s centenary, envisages first increasing public prosperity and doubling the national economy by 2035.

To achieve that, economists believed China would need to sustain annual gross domestic product (GDP) growth of at least 5 percent, a once-realistic trajectory that would have seen it overtake the US economy in terms of GDP — in Worth $23 trillion versus China’s $17.73 trillion in 2021, according to World Bank figures.

This first milestone, known as the “fundamental achievement of socialist modernization,” was proclaimed in 2020 and was scheduled to last 15 years. But on Sunday, as Xi opened the twice-decade National Congress of the Chinese Communist Party (CCP), the goal seemed less ambitious.

China gives up GDP target

Two years ago, Xi said it was “quite possible” to double national GDP and GDP per capita by 2035. However, his most recent statement left out the former.

“By 2035, our overall development goal is to significantly increase economic strength, scientific and technological capability, and comprehensive national power; significantly increase GDP per capita to match that of a mid-sized industrialized country,” he said.

China is giving up its goal of overtaking the US economy
Two years ago, China’s leader Xi Jinping said it was “quite possible” to double national GDP and GDP per capita by 2035. But he has now hinted at modest growth that could mean China fails to surpass the United States.
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Chicago-based economic analyst Houze Song noted in Xi’s work report at the 20th

The original target for 2035 included both measurements. “In contrast, the 20th work report only mentions new milestones in per capita income, not [GDP],” he said.

Song noted that the target for 2035 was drafted before China’s 2020 census was released in spring 2021. He said news week: “I believe there are two main reasons for abandoning the 2035 GDP target. First, Beijing has realized that its population will shrink faster than expected, making it harder to achieve high growth.”

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“In addition, the GDP target has become less binding in recent years. It was abandoned in 2020, and this year Beijing doesn’t seem to make much of missing the 5.5 percent growth target,” said Song, who is a research fellow at the Paulson Institute think tank and author of the MacroPolo Econ Substack.

China’s economy is losing its engine

China’s decennial census revealed a declining birth rate and a shrinking labor force. It led to a renewed urgency to break the so-called “middle-income trap” of growing old before you get rich.

Births among China’s 1.4 billion people – most of the world – were expected to fall to new lows in 2022 and potentially fall below 2021’s 10.6 million babies, the fewest since the 1950s , which were registered according to official data.

The working-age population, which peaked in 2014, would fall by about 35 million people by the middle of this decade, official demographers said. The looming demographic crisis directly affects the country’s medium to long-term productivity.

Addressing the issue over the weekend, Xi told party delegates the government will “optimize our population development strategy by introducing a political system to support fertility rates and reduce the costs of childbirth, parenthood and education.”

Beijing imposed a restrictive one-child policy between 1980 and 2015 before allowing two children, a shift that lasted six years before expanding to a three-child policy in May 2021.

However, by July all restrictions had been abolished. In their place, officials introduced incentives including tax deductions, housing benefits and financial rewards for having more children.

Xi Jinping revises China's long-term economic target
Chinese President Xi Jinping speaks during the opening ceremony of the 20th National Congress of the Chinese Communist Party at the Great Hall of the People October 16, 2022 in Beijing. Xi is widely expected to secure a third term in power after the week-long event ends.
Kevin Frayer/Getty Images

China’s zero-COVID fights

Many point out that Xi’s highly centralized approach to domestic governance, including his economic policies to prop up state-owned enterprises, is dampening private sector growth. In recent years, its decision to double down on “Dynamic Zero COVID” – its signature public health strategy – has hurt productivity, forced small and medium-sized businesses to close and increased youth unemployment.

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Despite the political pageantry surrounding the convention, some 200 million people across China experienced some form of restricted movement over the past week — citywide or neighborhood lockdowns, as well as a continuation of the country’s mandatory quarantine policy for domestic and international travelers.

Given the city’s previous tendency to stick to the central government’s rhythm, it was briefly expected that the rest of China would follow Hong Kong’s relaxation of COVID regulations in September.

However, it quickly became clear that Zero COVID’s strong ideological ties to Xi’s personal achievements meant the zero-tolerance approach could be called nothing but a complete success and had to remain so in the future, China’s president said so in his speech.

On Monday, China’s National Bureau of Statistics abruptly delayed the release of third-quarter GDP numbers and other fiscal data without explanation, a move that would have surprised economists and likely unsettled investors, who will look to transparency and regularity as key indicators of confidence in the second-largest economy of the world.

China observers following Xi’s two-hour speech on Sunday noted that he referred to “economy” 22 times, up from 102 times at the 18th party congress in 2012, when he became CCP general secretary. “Market” was mentioned three times compared to 24 a decade ago, while “safety” rose from 36 to 50 mentions.

Previous annual growth rates in China underpinned the economic forecast that justified the original 2035 target, but Beijing also faces more immediate policy choices, said Philip Hsu, a visiting fellow at the Brooking Institution’s Center for East Asia Policy Studies.

“Apparently, China’s economy is not in good shape and is likely to remain so at least until the second half of next year. I think this is one of the main reasons why the target of doubling national GDP by 2035 is no longer mentioned in the working report this time,” he said news week.

“The delay in releasing Q3 data, which is expected to look mediocre at best, is likely an attempt to avert embarrassment to the convention.

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“My guess is that both Xi and [Chinese Premier] Li Keqiang understands that as long as the main problem of the economic slowdown — the structural pathology of the real estate sector — remains unresolved, it will be difficult to return to the growth rate of years ago,” said Hsu, who is also director of the Center for China Studies at the National Taiwan University.

“The zero-COVID policy is helping to slow it down, but it is not the main factor. The rapidly declining consumption and investment, which mainly result from the zero-COVID policy, can be recovered relatively easily once the policy is relaxed to a certain extent,” he said.

“But of course, Xi’s assertion in the congress that the zero-COVID policy should continue cannot be trivialized. While local governments have tried various measures to pump credit into the real estate sector, confidence and prices have not improved much, and it is questionable how long the cash injections will be sustained given the rapidly growing local debt almost everywhere in China can,” Hsu noted.

China revises long-term economic target
President Xi Jinping of China, bottom left, speaks during the opening ceremony of the 20th National Congress of the Chinese Communist Party at the Great Hall of the People October 16, 2022 in Beijing, China. Xi Jinping is widely expected to secure a third term in power after the week-long event ends.
Kevin Frayer/Getty Images

China’s semiconductor uncertainty

Separately, Beijing has yet to officially respond to the Commerce Department’s Oct. 14 announcement of semiconductor export restrictions to China, a blacklist that cuts Chinese firms off from America’s high-end chip technology.

Jake Sullivan, the national security adviser, said the restrictions were “contingent on simple national security concerns.”

“These technologies are used to develop and deploy advanced military systems, including weapons of mass destruction, hypersonic missiles, autonomous systems and mass surveillance,” he said.

It was still unclear whether the Chinese statistical office’s decision to postpone its quarterly report was related to the new US measures announced on the eve of the national congress.

Although the full effects of the sanctions will not be felt for some time – exporters have been given a grace period to put their affairs in order – there have already been early signs of disruption.

What is unique about the recent round of export controls is their impact not only on hardware but also on human capital. US citizens or green card holders must apply for a license from the Department of Commerce to work for Chinese chip factories or face prosecution by the Department of Justice.

The restrictions are expected to prompt an exodus of US talent from an industry vital to China’s long-term ambitions to be a leader in science and technology. Beijing warned that high-tech decoupling would likely hit American companies just as hard.

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