- March 1, 2021 ECONOMY
Getting to $30 Trillion: China Aims for Largest Economy by 2035
Much of the focus at this year’s upcoming National People’s Congress (NPC) will be on the final 14th Five-Year Plan (FYP). What could fly under the radar is the simultaneous release of China’s 2035 long-range plan, which has been released just once before 25 years ago.
It is tempting to simply dismiss the 2035 plan as aspirational. But it could turn out to be more consequential because it aims to rearrange the global pecking order that has endured for more than a century: make China the world’s largest economy in 15 years.
Although this goal was not explicit at all in the draft 2035 plan, implicit in its vision is a doubling of the Chinese economy to roughly $30 trillion (in 2020 US dollars) from 2020-2035. At that point, China would just edge out the United States in aggregate GDP, if assuming US average growth of 2% through 2035.
Of course Beijing would never publicly tout this goal, in part because of the optics and potential backlash. But more importantly, it is no guarantee that China will get to $30 trillion within that timeframe. China had just surpassed 70% of US GDP in 2020, only the second country to have done so after Japan hit that point in 1995. That also marked “peak Japan,” as the Japanese economy has now fallen to just a quarter of the US economy. In fact, simply climbing to this “70% of US GDP” threshold seems arduous and rare, since only two countries have done it in the last 100 years.
China is now exhibiting some of the similar symptoms that ailed Japan in the mid-1990s and 2000s, including rapidly declining growth from 10% to 6% over the last decade, property bubbles, stagnant productivity growth, and secular headwinds like an aging population. It is no surprise, then, that some analysts believe that China will repeat the Japanese economic malaise and end up never surpassing the US economy. Instead, it could stall out vis-a-vis the US economy in the coming decades after peaking at around 87% of US GDP by 2035, according to Capital Economics projections.
Avoiding Japan’s fate is the context in which the 14th FYP should be viewed, which is meant as the opening salvo to realizing the 2035 long-range vision. To do so, Beijing will likely have to make the difficult trade-off of sacrificing near-term growth, which will be concentrated in the upcoming FYP cycle through 2025, while laying the groundwork for more sustainable growth in the 2025-2035 decade.
Doubling the Chinese economy in 15 years requires growth to average at least 4.5% during this period. If this serves as a growth floor for China over the next five years, then it will be below the consensus of 5%+ growth over the 14th FYP, according to International Monetary Fund projections.
The main message of the 14th FYP, then, is likely one that downplays short-term growth in order to focus on efforts needed to sustain future growth. One of the clearest indicators of the prioritization of long-term structural adjustments will be the fate of the growth target in the FYP.
There is a chance that Beijing completely eschews a growth target, which would send the most unambiguous signal to date about shifting priorities. But the more likely scenario will be that instead of ditching the target wholesale, it will be effectively modified into a growth floor. This may not sound like much, but there will be a meaningful difference in how local governments interpret this change. That is, instead of striving to hit and exceed some unrealistic target, the key is simply about avoiding going through the growth floor.
In reality this will mean that the growth target won’t be binding. Many local governments have already set their growth targets at around 6%, in contrast to market expectation of above 8% growth for the national economy. To put this in perspective, after adjusting for the impact of the Covid-19 lockdown in 1Q2020, a 6% GDP target in 2021 effectively translates into a very modest 3% growth. Moreover, Beijing will send clear messages to local officials to disincentivize them from pursuing growth that diverges wildly from the national average.
Watering down the growth target to the point that it barely matters implies that Beijing does not intend to spend much energy on supporting growth. Instead, it will likely focus on tackling longstanding issues like cutting excessive investment in construction and curtailing local debt. Both of those actions will come at the expense of near-term growth.
Getting the entire country onboard with this shift will be no easy task. But Beijing seems to recognize that the avoidance of structural problems for so long will end up costing the country the mantle of the world’s largest economy. Achieving that goal simply requires more significant changes to the Chinese economy, which would actually make it easier to sustain the average growth rate necessary to get to $30 trillion.
At a minimum, Beijing is prepared to forgo immediate growth to set up for the longer haul.
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