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The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’
For all the worry about how America has become one big bet on AI, a similar but perhaps more alarming story is unfolding quietly in the other economic superpower. China’s vaunted AI prowess is concealing deep rot elsewhere in its economy.
Though many forecasters keep expecting China to surpass the US as the world’s leading economy, its growth peaked in 2021. Since then, China’s share of global GDP has fallen in nominal terms from 18 to 16.5 per cent, while the US share has risen to 26 per cent. China’s growth rate has dropped below the rest of the world, including the US. In real terms, independent estimates now put China’s growth in real terms closer to zero than to the official target of 4.5 to 5 per cent.
Even by the official numbers, AI is not providing a lift big enough to overcome other forces weighing on China, including its shrinking workforce, rising indebtedness, a broken property market, the revival of a meddlesome regulatory state and the resulting exodus of capital and people.
China’s population also peaked in 2021. Last year, births hit a record low, and deaths hit a record high. The working-age population is on pace to shrink by 75mn every decade this century. Historically, having fewer workers has always meant slower growth; countries with declining populations rarely sustain growth above 2 per cent. And for China, given the scale of its demographic bust, AI is unlikely to replace human workers fast enough to ease the economic blow.
Without the AI boost, China would be much worse off. After adding little in the 2010s, net exports now account for about a third of the country’s growth, driven mainly by AI-related goods. But this is a very large contribution to an otherwise weak domestic economy. Chinese hyperscalers are investing just $100bn in AI this year compared to $750bn by US rivals, yielding far less of a pop to growth. And though every country now hopes for an AI-driven productivity miracle, the expected boost in China is about a third of a percentage point by 2030, hardly enough to halt its decline.
The structural challenges are daunting. In the past five years, China’s augmented deficit (which includes off-budget spending) has reached nearly 15 per cent of GDP, higher than any other major country, pushing augmented government debt to 135 per cent of GDP. Unlike the US and most other countries, China has rapidly mounting debts in the private sector as well. Total debt amounts to nearly 350 per cent of GDP — higher than in the US despite China’s much lower per capita income.
The debt problem is partly a hangover of the great property bubble. Beijing responded to the global crisis of 2008 by pumping credit into real estate, which was the main contributor to growth in the last decade. Then the bubble popped, also in 2021. Property prices tumbled and are now at a 20-year low, in inflation-adjusted terms. In new but half-empty developments, including a faux Venice in the north-east, flats can be rented for $120 a month. As property wealth shrivels so does consumer confidence, and retail sales are falling.
The stock market reflects this distorted economy and has gone nowhere for years. Earnings are strong for firms that supply the AI stack and weak for consumer-facing companies. Meanwhile, the government has moved on from property to pumping credit into new manufacturing industries, in effect replacing one debt bubble with another.
In late 2020, China launched a stunning regulatory crackdown on its big tech firms. Now, after retreating for a couple of years, an index tracking regulatory pressure is surging again. Giving up on making money in China, multinationals are scaling back operations. Net foreign direct investment is negative. Last year a record $425bn in capital flowed out of Chinese financial markets.
People are leaving as well. The immigrant share of the population is stuck at just 0.1 per cent, a fraction of the share in India (which is just as populous). The number of western expats living in China has fallen markedly. It is historically unusual for a major power to have so little allure for foreigners and foreign money.
The growing hype around Chinese AI doesn’t change the fact that 2021 was peak China. Given its demographic challenges and heavy debts, Beijing can’t do much to prop up domestic growth. It has shifted instead to dumping manufactured exports, but the resulting backlash is spreading fast. And AI isn’t a fix for everything. Its impressive powers may be the answer to many problems, but they can’t reverse the forces driving China’s decline.
