Following World War II, the idea of an “economic miracle” developed. This word was used to describe certain countries’ economies that had seen sustained high growth rates.
The first “economic miracle” occurred in West Germany (the Federal Republic of Germany). In 1950, the Times magazine coined the term “German economic miracle.” West Germany experienced an economic miracle that lasted two decades, from 1948 to 1968.
Japan’s economic miracle began in the mid-1950s and lasted until the 1973 energy crisis. During this period, Japan’s economy grew at about 10% per year, the fastest growth rate among developed countries at the time.
South Korea also experienced an economic miracle. President Park Chung-hee launched the first five-year plan in 1962, ushering in South Korea’s rapid economic expansion. By the late 1980s, economic development had halted.
The last known economic miracle was in China which surpassed all previous ones. It is thought to have begun with Deng Xiaoping’s reforms in the late 1970s and early 1980s. According to IMF figures, China’s GDP growth averaged over 10% each year between 1990 and 2017, with record increases of 14.2% in 1992 and 2007. China had less than 2% of global GDP in 1990, but more than 18% by the next decade.
China overtook Japan in GDP in 2010, becoming the world’s second-largest economy after the United States. When computing GDP using the yuan-to-dollar exchange rate, China maintains its position as the world’s second-largest economy. However, when measured by purchasing power parity, China overtook the United States in 2014 to become the world’s largest economy.
China’s real GDP growth rates in previous years as per the International Monetary Fund (IMF) data are 8.4% in 2021, 3.0% in 2022, and 5.2% in 2023. In 2022, the worldwide GDP growth rate was 3.1%, meaning that China’s economic growth lagged behind the global economy for the first time in almost four decades.
The end of China’s long period of economic miracle can be roughly dated to 2010 when the country last saw double-digit GDP growth (10.6%). Thus, China’s economic miracle lasted over three decades, substantially longer than that of Germany, Japan, and South Korea. Over the last decade, China’s yearly GDP growth rate has fluctuated between 6 and 8%. Basic reasoning implies that no economy can sustain double-digit growth indefinitely.
At the turn of the previous and current decade, evidence emerged that China was entering a new phase: economic turmoil. Several external factors are cited as destabilizing China’s economy: the escalation of US-China trade relations initiated by the US President Trump, the COVID-19 pandemic with mass lockdowns in the Chinese economy in 2021, rising international tensions around Taiwan, and China’s support for Russia over Ukraine.
There are internal factors too. While China’s leadership repeatedly claims that it is building “socialism with Chinese features,” an objective examination of its “economic base” yields a different result. China’s socioeconomic system can be defined as “state capitalism.” As a result, an unstable edifice has emerged: a capitalist economic foundation with a political superstructure that labels itself socialist. This instability contributes to economic volatility and inconsistency in the Chinese leadership’s economic policy.
To back this up, new data from China’s National Bureau of Statistics underscores the issues. Investment growth in fixed assets decreased to 3.4% in August 2024, down from 3.6% in July. Unemployment increased to 5.3% in August, the highest level since February 2024 (5.2% in July and 5.0% in June).
Industrial production growth has slowed for four months in a row (May-August), the longest pause since the autumn of 2021, when COVID-19 and lockdowns were blamed. The downturn is now due to imbalances that have built over China’s long era of capitalist development rather than foreign influences. According to Chinese media, reduced demand has slowed investment and output development. Soviet political economy textbooks provide a more direct explanation: the tension between production and limiting demand led to an economic crisis. This imbalance is equal to the excess value generated by workers and seized by employers. Despite his familiarity with Marxist political economy, President Xi Jinping faces limitations in confronting this paradox as the head of China’s political superstructure.
For years, China’s leadership promoted credit expansion to cover these imbalances, resulting in a rapid increase in debt. According to estimates from the IMF, World Bank, and Organisation for Economic Co-operation and Development (OECD), China’s overall debt including government, banks, non-financial firms, and families, has already surpassed 300% of GDP, putting it on par with the United States and the eurozone. However, official figures ignore debt incurred through shadow banking, which is common in China. Experts say the real debt level could be double the official figure or around 600% of GDP.
The Chinese government has set a goal of 5% GDP growth by 2024. However, the IMF predicts that China’s GDP will expand by only 4.6% in 2024. The IMF is fully aware of China’s economic difficulties, and its GDP growth predictions for the next few years are even more modest: 4.1% in 2025, 3.8% in 2026, 3.6% in 2027, 3.4% in 2028, and 3.3% in 2029.
In the current decade, various engines of the global economy are gaining prominence. First and foremost, India is outpacing China in terms of GDP growth. Vietnam with a 5.8% GDP growth forecast for 2024 and Indonesia with 5.0% are also noteworthy.
The overseas Monetary Fund, as well as overseas investors, are feeling the impact of China’s economic problems. Until recently, China was a “magnet,” attracting cash from all over the world. However, Beijing maintained strict control over the influx of foreign cash, fearing that non-residents might acquire too much of China’s economy, potentially weakening its sovereignty. Beijing completely restricted many areas of the Chinese economy to outsiders, and imposed substantial restrictions on others, effectively limiting foreign investment to a minority share.
In 2016, China’s National Development and Reform Commission (NDRC) produced a so-called “negative list” of industries to which international (and, in some circumstances, even domestic) investors had limited or no access. These laws applied to four regions: Shanghai, Guangdong, Tianjin, and Fujian.
The list underwent an update and expansion in 2018, encompassing 151 sectors across the entire Chinese mainland. Four sectors were off-limits. The remaining 147 industries, including mining, agriculture, and manufacturing, were subject to a variety of limitations, the most important of which was obtaining Chinese government clearance. International enterprises could invest in sectors not on the list, but they received no preference over domestic enterprises.
Interestingly, Beijing attempted to persuade the IMF to grant the Chinese yuan reserve currency status. The IMF required that Beijing allow full Yuan convertibility, which essentially meant lifting restrictions on international investment. However, Beijing was able to gain reserve currency status for the yuan without allowing full convertibility.
Nonetheless, foreign capital found its way into the Chinese economy. Overall, the net influx of foreign money into China in 2018-2019 was $0.8 trillion, including direct, portfolio, and other investments. In 2020-2021 when COVID struck, this amount skyrocketed to $1.3 trillion. However, from 2022 to 2023, the net inflow of foreign capital was a symbolic $6 billion, which is inside the statistical error for China’s massive economy. Essentially, there was a balance between capital inflows and outflows. By the second half of last year, outflows had greatly exceeded inflows. Chinese outbound investments reached historic levels: in the second quarter of 2024, companies sent $71 billion abroad, up 80% from $39 billion in the same time the previous year. The net capital outflow in September of this year was around $75 billion, the largest amount since the end of 2016.
The accelerating capital flight trend is mostly driven by foreign investors’ concerns that China’s economic situation may deteriorate. They are particularly concerned about a “hard landing” caused by burst financial “bubbles,” a slowing of economic development, or even a shift into a negative growth zone.
In the summer of 2023, Chinese officials attempted to prevent capital outflows with an ambitious 24-point plan approved by China’s State Council and scheduled to be revealed in August 2023. The strategy aims to increase incentives and remove some existing barriers for foreign investors. However, its effectiveness has been nearly zero. State funds have made huge investments to sustain the falling stock market. Last month, the People’s Bank of China carefully cut the key interest rate by 10 basis points (to 3.45%).
To avoid scaring the public, experts monitoring China’s financial systems claim stock market “bubbles” are deflating rather than “bursting.” Since the market’s peak in 2021, the market capitalization of Chinese and Hong Kong equities has fallen by around $6.8 trillion, resulting in an outflow of funds from the country’s stock markets.
So where does the capital go in China as there is hardly any choice? Foreign and Chinese capital is migrating to the United States and rapidly rising countries such as India, Indonesia, and Vietnam. Some of it disappears into offshore jurisdictions. Incoming investments have become significantly less than outgoing ones. Foreign investment in China’s economy will fall to levels not seen since the late 1990s in 2024. Never before in the twenty-first century have they been this low.
Some experts point out that much of the foreign investment in China is not “new” money, but rather reinvestment of profits from existing foreign assets in the Chinese economy. There are virtually no new foreign investors entering the Chinese market today. Fear stems not only from the looming economic disaster but also from US sanctions. “Newcomers” are concerned about being caught up in Washington’s secondary sanctions regime.
Beginning November 1, 2024, the Chinese authorities will lower the list of prohibitions on foreign investment. The list of restricted regions for investment in the manufacturing sector will be removed. This is a momentous decision, one that the Chinese leadership has long been hesitant to make. The Chinese economy appears to be in a crisis state. Beijing is now forced to pick between two undesirable outcomes: the possibility of an economic crisis or the loss of national economic sovereignty. It appears that they have simply postponed the first threat while making the second more genuine.