China officially surpassed Japan to become the world’s second largest economy in the second calendar quarter of this year. As measured by gross domestic product, the Chinese economy reached $1.335 trillion. Japan’s, on the other hand, was only $1.286 trillion.
Analysts believe it is only a matter of time before China overtakes the United States to claim the top spot. Some predict that will happen by 2030. Others think it will happen well before then. “This is just the beginning,” UBS’s Wang Tao told The New York Times. “China is still a developing country. So it has a lot of room to grow.”
That’s true, but only as a theoretical matter. China, in reality, has reached high tide, and there are many reasons why it will start falling back.
First, Beijing has produced outsized growth in the current downturn because of a massive stimulus plan. According to my calculations, Beijing poured $1.1 trillion, directly and through the state banks, into its $4.7 trillion economy last year.
That’s more money than China could absorb, and this has led to imbalances and dislocations that will be difficult to unwind. For instance, Beijing has created a massive property bubble. Just a few months ago, there were 64.5 million apartments that showed no electricity usage for six consecutive months, but Chinese developers are now building about 50 million more of them. That is technically creating GDP—but only until the inevitable crash occurs.
Second, Beijing has turned its back on its proven formula for success. President Hu Jintao has abandoned Deng Xiaoping’s policy of “reform and opening up” as he embraces a new economic paradigm of closing the country down. The central government, these days, is renationalizing ownership, restricting opportunities for foreign business, and building up its state-owned “national champions.” And economic reform? There’s not much of it. The best you can say is that Chinese technocrats are tinkering.
Third, China’s economy boomed because of the “demographic dividend,” an extraordinary bulge in its workforce caused by audacious population policies. That will soon become a heavy demographic tax as the number of workers begins to shrink in three to five years and as the country as a whole begins to get smaller, perhaps starting 2025. The years of easy growth are over.
Add in the world’s most degraded environment, staggering corruption, and an increasingly unhappy populace—just to name a few of the other problems—and you can see why China’s economy will stumble soon.
Beijing still retains significant control over the economy, and central technocrats can, through a hundred different techniques, manage outcomes. Yet their cures are worse than the disease. They cannot avoid the inevitable. And by postponing the adjustments that must occur, they are making the final reckoning worse.
Semi-command economies always work—until they do not. When they do not, they fall apart fast.
So look for Japan to once again become the world’s second largest economy. China has too many problems—and far too few good policies—to sustain its upward trajectory.
Gordon G. Chang is the author of “The Coming Collapse of China.” He writes a weekly column at Forbes.com.
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