China’s ‘Lost Decade’ Is Even Worse Than You Think

Turns out, economists worried about a Japan-like “lost decade” in China were both wrong—and right.

By “wrong” we mean that Asia’s largest economy today might not suffer the painful deflationary funk the region’s previous top power did. Or, depending on your view, still is given the comatose state of wages and Japan Inc.’s waning international influence.

By “right” we mean the cost of President Xi Jinping’s disastrous battle with Covid-19 variants Beijing clearly doesn’t understand. It’s helping relegate China to a roughly 4.5% growth rate for this decade—and 3% in the next one. This estimate from Oxford Economics means China won’t be catching up with the U.S. anytime soon in terms of living standards.

In fact, Adam Slater at Oxford suggests that South Korea, Taiwan and other major Asian export economies can probably stop looking over their shoulders, too. The odds of Chinese blowing past developing Asia in per capita income terms anytime soon may be dropping, too.

Xi’s ongoing Covid lockdowns are but the most glaring headwind hitting mainland growth prospects. Even though Omicron and other highly transmissible variants are undeterred by shutting down massive municipalities, Chinese officials can’t seem to help themselves. In recent days, the central city of Chengdu, population 21 million, was added to the shutdown list.

With roughly 60 million people stuck at home wondering what gives, China’s 0.4% growth rate in the April-June period year-in-year starts to look overly optimistic. That operations in the southern Chinese tech hub of Shenzhen are in doubt puts global supply chains fanning inflation are greater risk.

Yet the 10 years of slow growth to come will also owe much to the lost decade of reform over which Xi has presided since 2012. With China’s strongest leader in generations about to secure a norm-breaking third term as Communist Party leader, it might seem Xi’s been a successful modernizer.

Clearly, his efforts to internationalize the yuan, increase foreign access to Chinese bourses and “Made in China 2025” scheme matter. But the ways in which control freak Xi has made China opaquer, dragged it backward in free speech and press freedom and neutered tech billionaires like Alibaba Group founder Jack Ma are blowing the endgame.

Of course, the only thing coming to an end is optimism that Xi would be a bold and courageous economic change-agent.

In Slater’s view, the 4.5% growth average over this decade may be the good times—things drop to about 3% annually between 2030 and 2040. Reasons why include worse-than-estimated demographic challenges as an aging China makes the nation’s debt trajectory more troubling.

But headwinds to come include already-slowing productivity rates relative to the experience of other emerging economies. It’s often said that the Chinese might get old before they get rich. Turns out, China also might grow old before it gets sufficiently productive and innovative.

Another: the risk of technological decoupling from the U.S. economy. For all the hyperbole about President Joe Biden being easier on China than this trade-war-obsessed predecessor, this White House is upping the pressure on Beijing in calculated ways—including delisting risks at New York exchanges.

Written between the lines in bold font are the ways in which Xi failed to build a more vibrant and self-contained private sector.

Back in 2012, when Xi pledged to let market forces play a “decisive” role, there was great optimism for another Zhu Rongji era of epochal change. Zhu, China’s 1998-2003 premier, launched arguably the most impactful period of mainland reform since the days of Deng Xiaoping.

Along with guiding China into the World Trade Organization, Zhu took on the state sector. His policies shut down more than 60,000 inefficient companies and reduced the number of public jobs by more than 40 million.

Under Xi, the empire—state-owned enterprises—is striking back. The state sector is feeling emboldened again at a moment when China’s tech innovators are going silent, worried about poking Xi’s regulatory state.

This arrangement raises concerns about the efficacy of Xi’s huge investments in the future of artificial intelligence, biotechnology, electric vehicles, renewable energy, semiconductors and other key sectors. If the state calls all the shots, what’s the point?

An overarching narrative is that as long as Xi keeps growth well above 5% everything will work out fine. But as Japan proves, countries can’t grow their way out of debt—or timidity—when it comes to upgrading growth models. Only clear and wise policy changes can alter China’s Inc.’s trajectory.

In Xi’s case, the trauma of summer 2015 continues to haunt reform calculations. Back then, a 30% plunge in Shanghai shares shook markets around the globe and saw Xi’s government pivot to financial rescue mode.

After that, efforts to trim national government and municipal debt lacked ambition and teeth. More recent efforts to curb runaway property-sector debt and leverage also fell by the wayside as Covid disruptions fueled default risks.

Ten years of stop-start-stop efforts to modernize the economy leave China ill-prepared for the downshift to 4.5% growth this decade and 3% next. Make that the outside world relying on Chinese growth, too.