Reprinted from The New York Times 8-29-2023
ILLUSTRATION BY SAM WHITNEY/THE NEW YORK TIMES; IMAGE BY THEERAKIT/GETTY IMAGES
Incongruously, Yi Fuxian, one of the world’s experts on China’s demographic plight, specializes in pre-eclampsia — a complication of pregnancy — and works in Wisconsin. His day job is as a senior scientist in obstetrics and gynecology at the University of Wisconsin, Madison. In his native China, though, he’s far better known for his off-hours specialty, which is warning the Chinese people about the serious consequences of their baby bust.
I interviewed Yi last week after seeing a spate of news stories and analyses about the slowdown of the Chinese economy. “It’s no surprise,” he told me. He said China’s long-term demographic problems don’t fully explain its current financial difficulties, but they do tend to make those short-term problems worse.
In the second quarter, China’s economic output was just 0.8 percent higher than in the first quarter, according to the National Bureau of Statistics. “Exports tumbled, a real estate slump deepened, and some debt-ridden local governments had to cut spending after running low on money,” The Times’s Keith Bradsher wrote.
On Aug. 21, Li Yuan reported in The Times that she spoke to more than a dozen business owners and consumers and their mood was dark. “They worry that it’s the beginning of something they don’t dare to imagine and fear that the government doesn’t have solutions,” she wrote. “The bad news just keeps coming.”
It’s long been assumed that it was only a matter of time before China had the world’s biggest economy, surpassing that of the United States. That may well still happen. But right now, China is growing more slowly than the United States. There’s at least a chance that China’s economy will never surpass the U.S. economy in size, going by market exchange rates.
This chart requires some explanation: According to the International Monetary Fund, China’s economy surpassed the U.S. economy in 2017 if output is measured on the basis of purchasing power parity, which takes into account that things cost less in China. The U.S. economy was still 40 percent bigger than China’s as of last year when comparing gross domestic products using actual exchange rates rather than ones that equalize purchasing power, according to the I.M.F.’s data.
China has exhausted the easy gains from moving workers from farms to factories. Its attempt to sustain growth through real estate investment has led to overbuilding and overindebtedness. It is also becoming geopolitically isolated. This month, for example, President Biden signed an executive order banning high-tech investments in China that could enhance China’s military capabilities.
Adam Posen, the president of the Peterson Institute for International Economics, described China as suffering from a case of economic long Covid. In an article in the September-October issue of Foreign Affairs, he wrote:
Like a patient suffering from that chronic condition, China’s body economic has not regained its vitality and remains sluggish even now that the acute phase — three years of exceedingly strict and costly “zero Covid” lockdown measures — has ended. The condition is systemic, and the only reliable cure — credibly assuring ordinary Chinese people and companies that there are limits on the government’s intrusion into economic life — cannot be delivered.
In another article in the same issue, Ian Johnson also blamed the autocratic leadership of Xi Jinping, China’s president. Johnson, who has contributed to The Times and other publications and is now a senior fellow at the Council on Foreign Relations, wrote that China’s economic problems “are part of a broader process of political ossification and ideological hardening.” The Chinese call the sense of national stasis neijuan, which he translated as “life twisting inward without real progress.”
Ray Dalio, the billionaire founder of the hedge fund Bridgewater Associates, is more positive on China’s outlook but wrote in a recent LinkedIn post that the country needs a “beautiful deleveraging” to deal with overindebtedness. To spread out the burden, he wrote, there should be a combination of defaults and restructurings, which are deflationary, with money printing, which is inflationary but makes debt more affordable.
An open question is whether Xi is willing to do what’s needed. As Bloomberg’s Rebecca Choong Wilkins and Colum Murphy reported on Aug. 20, Cai Fang, an adviser to the central bank, recently urged direct stimulus to consumers. But the authors noted that “Xi in the past has warned against the trap of ‘welfarism,’ which senior officials say can lead to ‘laziness.’”
Back to Yi. He follows the crisis news, but he’s focused more on the long term, in which demographics play a bigger part.
One of seven children, Yi was born in Hunan, a mountainous province in southern China, according to a profile in the University of Wisconsin alumni magazine. He studied clinical medicine before earning a doctorate in pharmacology. He moved to the United States in 1999. He and his wife have three children, more than they would have been allowed under China’s ill-considered and since repealed one-child policy.
Yi’s book, “Big Country With an Empty Nest,” was banned by the Chinese government when it appeared in 2007 because it expressed skepticism about the one-child policy. By 2013, Chinese authorities had begun to come around to his views. A new edition was picked as one of the 10 best books of the month by Xinhua, the official news agency. In 2016 he was invited to speak at the prestigious Boao Forum for Asia.
Just before the forum, he told The Times that he thought China’s economy would never get bigger than that of the United States. That, he said, angered officials in the National Health and Family Planning Commission. Although he completed his speech at the Boao Forum and gave 30 lectures at Chinese universities in the following two months, he said he has been on shaky ground ever since. He said he hasn’t attempted to return to China since 2017, fearing that if authorities let him in, they might not let him back out.
As parlous as China’s situation appears in the official statistics, Yi said things are actually worse. In 2019, he argued that China’s population had started declining in 2018, with a fertility rate of 1.1, whereas official projections were that the country’s fertility rate would stabilize at 1.8 and that the population would not begin to decline until 2031. The People’s Daily Online, the website of the Chinese Communist Party’s official newspaper, ranked Yi’s conclusion third in its “Top Ten Rumors in 2019.”
This year the authorities acknowledged that China’s population had begun to decline, although they said 2022 was the first year of decrease. They also acknowledged that the fertility rate had fallen to 1.0, far below the replacement level of 2.1. Yi argues that China’s population is 1.28 billion, instead of the 1.41 billion the China’s leaders are trying to make up for a shrinking work force by improving education, but that can backfire, Yi argued, pointing to Japan’s experience. “As Japan’s enrollment rate for tertiary education has soared — more than doubling since 1992 — the number of young people willing to work in manufacturing has declined,” he wrote in another Project Syndicate commentary.
“China’s decline will be gradual,” Yi wrote in yet another commentary. “It will remain the world’s second- or third-largest economy for decades to come. But the huge gap between its waning demographic and economic strength and its expanding political ambitions may make it highly vulnerable to strategic misjudgments. Memories of past glory or fear of lost status could lead it down the same dangerous path that Russia has taken in Ukraine.”