Introduction

In 2022, due to the Zero Covid policy, China’s GDP growth was just 3%, and, in 2023, it was 5.2% (NBS, 2024, 2024a). The growth rate predicted by the World Bank for 2024 is 4.5% (World Bank, 2023c). Even though these rates are higher than that predicted for global economic growth in 2023, of just 2.1% (World Bank, 2023a), they would be signaling a slowdown concerning China’s historically high growth regime expressed on the recorded average of 8.8% between 1989 and 2022 (NBS, 2024). The reduction of China’s GDP growth, the high levels of debt (from the government, families and companies), youth unemployment (21.3%), the crisis in the real estate sector (and large companies such as Evergrande in 2021) and in segments of the financial sector – such as the shadow bank Zhongrong International Trust (Melin, 2023) – are pointed out as evidence of a deflationary crisis in the real estate bubble of large proportions1, signaling major structural problems.

Like everything that refers to China, the tone in the Western media (which consciously or unconsciously reflects the US geopolitical positioning concerning China)2 is almost always exaggerated and is accompanied by somewhat definitive predictions about its evolution. For many, China would be heading toward Japanization, that is, toward a stagnant or low growth trajectory (e.g. Kihara, 2023; Wigglesworth, 2023). Different strands of explanations for the discontinuity of China’s economic growth rate co-exist. Some attribute it to underconsumption, in which unoccupied houses and apartments and excess capacity would be its greatest manifestation (as in Wolf, 2023), or, as in Paul Krugman’s formulation (2023), to the “paradox of thrift” – driven by an increase in families with few children (which historically in China supported the elderly) and without a good pension system, spending little and saving a lot. Such excess savings would have been channeled in recent years into a speculative real estate boom. Other formulations emphasize high indebtedness (of families and especially of subnational governments) and financial speculation – as in the “balance sheet recession” formulation, originally developed by Richard Koo for Japan, and now with reservations used to explain the Chinese slowdown (Koo, 2023; The Economist, 2023). Some highlight a “profit squeeze” derived from wage increases above productivity growth – which occurred in the last decade – or the fall in the profit rate resulting from the increase in the capital/product ratio (Gaulard, 2018). Paul Krugmam (2023), echoing here an IMF analysis of the decline in total factor productivity that would have occurred after 2008, observes that productivity gains declined to the extent that the growth path based on the incorporation of imported technology would have been exhausted.

We argue that the slowdown in Chinese growth corresponds in part to a desired trajectory of structural change towards dynamics with greater protagonism of domestic consumption and a more balanced economy from a social and environmental3 point of view focused on innovation. But it also responds to structural trends and distributive and institutional conflicts of an economy that, although administered and led by the State through its planning system and large state-owned companies (Medeiros, 2022), has the vast majority of wage labor and a preponderant portion of its GDP in the private sector (Zhang, 2019) and has undergone strong credit expansion, financial leverage, and speculative real estate investment in recent years (Cintra and Pinto, 2017).

Shifting growth drivers: end of the low road?

Let us briefly look at the different phases of Chinese growth from a demand-led growth perspective,4 seeking to distinguish structural transformations, political and institutional decisions, and conjunctural issues.

Graph 1 displays the evolution of GDP growth since 1978.

Graph 1
GDP growth rate (1978-2023)
Source: NBS (2024).

As can be seen from the graph, the great spurt in Chinese growth occurred at the beginning of the 1990s, remaining at very high rates until 2008 when a slowdown began. From the point of view of GDP components (Graph 2), the main structural change was the substantial reduction in the share of exports.

Graph 2
Evolution of GDP components (1978-2022)
Source: NBS (2024). Note: Changes in inventories are not accounted for.

In the years of high growth between 1991 and 2008, exports strongly increased their share of GDP, but after 2008 the share of exports in GDP fell substantially. Among the factors driving economic growth, this was the main structural change5, although other changes attracted attention. Imports also reduced their share (even if not at the same pace). Household consumption, after a downward trend since the 1980s, recovered between 2011 and 2016 and investment increased substantially. There was, however, a change in its composition. In effect, real estate investment expanded at a faster rate, as can be seen in Graph 3.

Graph 3
Investment in real estate (% GDP)
Source: Own calculations with data from NBS (2024). Note: Investment in real estate as % of GDP was derived by calculating the proportion of real estate investment over “total investment in fixed assets” and then assuming this proportion to be the same for real estate investment over “gross fixed capital formation” as a component of the Gross Domestic Product by the expenditure approach. It should be noted that there are substantial discrepancies between the series “total investment in fixed assets” and “gross fixed capital formation”.

This evolution of the Chinese economy that took place from 2008 onwards had as its main components a strong growth in investment, mainly in the real estate sector, and an increase in the population’s consumption resulting from both the increase in real wages and social transfers. Both movements resulted from structural transformations of the Chinese economy and society and the government’s strategy of progressively increasing the domestic sources of economic growth. It should be noted, however, that even though real wages have grown in the last two decades – a significant structural change as discussed below – and household consumption has occupied a central role in the government’s rhetoric of rebalancing the economy, the increase in household consumption in GDP was restricted to the period 2011-2016, reflecting a wage growth superior to productivity growth between 2011 and 2015 and the consequent increase in the wage share during these years (Graph 4). Since then, wages appear to have grown roughly in tandem with productivity, expressed in the stability of the share of wages and household consumption in GDP.

Graph 4
Labor share (1992–2021, % of GDP at current prices)
Source: Own calculations based on the flow of funds accounts (NBS, 2024).

It is in this context that the social accumulation strategy6 called “the new normal” was announced by Xi Jinping in 2013,7 and the new technological direction focused on endogenous technology to be followed by the country, Made in China 2025, was presented in 2015 (Medeiros, 2022; Majerowicz, 2022a). In the same period of 2015/2016, the first financial crisis occurred with strong capital flight. Following in this direction, in 2020, the government announced in the Five-Year Plan (2021-5) the “dual circulation” strategy (Souza, 2023) referred to as a new strategy, but which reiterates a greater role for domestic demand, the strategic role of high technology exports, and the domestic supply of strategic inputs and technologies, especially given the current technological dispute with the US.

This new social accumulation strategy was already underway and aimed to resolve several tensions from the previous growth regime. These occurred in a context of structural changes that accompanied changes in the sources of growth, leading to a loss in the share of industrial products and especially the share of manufacturing employment, the relative expansion of the tertiary sector (Hou; Gelb; Calabrese, 2017) and the increase in real wages and labor costs. The rise in real wages (Rozelle et al., 2020) and the growth of labor conflicts were a prominent phenomenon in the 2000s and the first half of the 2010s. As Dic Lo (2022) noted, the formation of “Big Labor” in China occurred not only in the increase in real wages, but also in minimum wage policies, labor legislation, collective bargaining, unionization,8 and the expansion of a welfare system9.

Li et al. (2012) documented the evolution of Chinese wages between 1978 and 2010, highlighting that in 1978 Chinese wages were only 3% of wages in the United States and lower than those in the Philippines and Thailand. These wages have grown substantially since the end of the 1990s for the urban formal sector and, since the mid-2000s, also for rural migrant workers (Majerowicz, 2022b). Wage growth was asserted independently of productive sector, qualification, and region (Li et al. al., 2012). As a result, in 2010, Chinese wages were similar to those in the Philippines and Thailand and higher than those in India and Indonesia (Li et al., 2012),

Considering the manufacturing sector, in twenty years, hourly wages increased more than tenfold in the urban formal sector – reaching US$6.35 in 2022 (Graph 5). Although in a slower growth trajectory, hourly wages for rural migrant workers almost quadrupled since the Global Financial Crisis, representing US$3.14 in 2022. Consequently, in 2022, Chinese hourly wages in manufacturing were not only higher than those in India and Indonesia, but also in the Philippines, Thailand, Vietnam, Mexico, and, in the case of Chinese urban formal workers, Brazil (Graph 6).10 Chinese manufacturing wages for urban formal workers and rural migrant workers represented 20.2% and 10.0% of US wages, respectively, in 2022. According to Li et al. (2012), the rise in labor costs measured in current dollars signaled the end of cheap labor in China. Certainly, this perception reflects China’s changing position vis-à-vis the capitalist periphery, even though Chinese manufacturing wages remain low compared to central countries.

Graph 5
Manufacturing hourly wages, current dollars (2002-2022)
Sources: Own calculations. NBS (2013, 2014, 2015, 2017, 2019, 2021, 2023, 2024; China Labor Statistical Yearbook, several editions), laodongqushi.com (2022), The World Bank (2024). Notes: 1) Urban formal workers’ hourly wages in manufacturing were calculated by dividing annual average wages in manufacturing in urban units by estimated annual working hours, and then converting to current US dollars; 2) Estimated annual working hours in manufacturing in urban units were obtained by applying Lett and Banister (2009) proposed methodology for 2002-2016; for 2018-2022, estimates were produced as the average of all NBS’ monthly available weekly worked hours for the reference year provided in laodongqushi (2022) multiplied by 48; for 2017, the estimate was calculated as a mean between 2016 and 2018; 3) Rural migrant workers’ hourly wages in manufacturing were calculated by dividing monthly wages in manufacturing by estimates of monthly worked hours in manufacturing, and then converting to current US dollars; 4) Average monthly worked hours in manufacturing for rural migrant workers were obtained from published data for 2012, 2013, and 2014; for all the other years, monthly worked hours were assumed to be the average between 2012, 2013, and 2014 (i.e. 221,5 hours).

Graph 6
Manufacturing hourly wages in selected countries as a percentage of US manufacturing wages, 2022
Source: Own calculations. NBS (2013, 2014, 2015, 2023, 2024) for Chinese data, BLS (2024) for US data; ILO (2024) for all others. Note: 1) Pakistan data refers to 2021; 2) US data refers to December 2022; 3) Estimates made based on ILO data were obtained by dividing monthly average manufacturing wages by mean weekly hours worked in manufacturing multiplied by four; 4) Chinese estimates are those provided in the previous graph.

The second structural transformation that began in the second decade was the reduction in world trade growth particularly the market share of Chinese exports in labor-intensive industries. Except for small private enterprises and the self-employed, this process occurred simultaneously with the absolute reduction in manufacturing employment from 2012-2013: by 2022 there was a decrease of 15.2 million jobs among urban formal workers and 12.8 million among rural migrant workers (Graph 7). It was clear that exports, which had been in sharp decline since 2010, would lose the role previously exercised over the rate of accumulation and that the path of accumulation based on low wages in activities with low technological density (“low road”, Nogueira and Qi, 2022) was exhausted.11

Graph 7
Manufacturing employment (in million persons)
Source: NBS (2013, 2014, 2015, 2017, 2019, 2021, 2023, 2024). Notes: 1) “Urban formal” refers to the Chinese statistical category of urban units; 2) “Informal” refers to the Chinese statistical categories of private enterprises and self-employed individuals in both urban and rural areas; 3) The series “rural migrant workers” likely overlaps with the other series.

The path to be followed (as widely highlighted in government documents) sought a pattern of growth with higher quality in technological, social, and environmental terms, with a focus on innovation and new digital technologies, a greater share of wages and household consumption, and with strong investments in renewable energy sources12. With the “tariff war” imposed by Donald Trump in 2018 and the expanded technological sanctions under the Biden administration, this direction was strengthened and particularly increased the priority of industrial policy in semiconductors and other information and communication technology products (Majerowicz, 2022a).

Excess capacity and real estate crisis

The issue of excess capacity in several industries was being discussed within the government by the National Development and Reform Commission (Xu and Liu, 2018). With the real estate and infrastructure boom, substantial excess capacity was created in almost every industry supplying the construction industry, such as steel, iron, aluminum, cement, and glass, both among state-owned and private companies. Likewise, excess capacity was created in the coal industry, the essential energy basis in China. The real estate boom took place in a context of progressive financial liberalization, such as the one that led to substantial capital outflows in 2015/6,13 and high credit expansion from both public and “shadow” banks. As the growth rate was much lower in the following decade due to the slowdown in the growth of exports and non-residential investments, the issue of excess capacity worsened. The “tariff war” imposed by Donald Trump and subsequently the zero Covid policy in 2021 reinforced this movement. The lower growth rate alongside the multiplication of financial instruments in speculative activities, especially real estate, increased the debt problems of families, companies, and subnational governments.14

From an institutional point of view, the maintenance of excess capacity for a longer period (than what normally occurs in the economic cycle) was due to initiatives by local governments, which have real estate investments (through land rental and taxes) their essential bases for collecting taxes and issuing debt.15 China’s peculiar power structure between the central government and subnational governments is a two-way street, leading to tensions, especially when the decision at the national level is to contain investments whose revenues form the collection base of subnational states.16

As a reaction to enterprise indebtedness and the speculative financial movement generated largely by “shadow banks”, in 2020, the Government established a strong financial regulation of the real estate sector with the so-called “three red lines”, intending to institute a ceiling on debt-to-equity, debt-to-asset and debt-to-cash ratios of companies.17 Due to the substantial participation of the real estate sector and its related industries in GDP, its contraction, particularly acute with the Evergrande crisis in 2021 and the stock elimination policies, has had an important impact on the GDP growth rate.18 Thus, the combination of events such as Covid 19, the prolonged lockdown, and the regulatory shock on the real estate sector19 explain the contraction that occurred. Other regulatory policies, such as more pronounced decarbonization targets, led, in turn, to a sharp reduction in investments in the coal industry, with impacts on energy availability.20

Towards a new pattern of economic development

Although these issues signal a complex situation and lower growth trajectory, they could hardly justify a stagnationist forecast for the Chinese economy. In general, the analyses that depart from the increase in financial leverage in China end up reproducing the diagnosis of the “balance sheet recession” discussed by Richard Koo regarding Japan in the 1990s. However, despite the similarity concerning segments of the real estate sector, there are striking differences between China and Japan pointed out by Koo (2023) himself. From our point of view, the main difference is that in China the share of public banks in real estate financing is much greater21, the balance of payments financial account is still regulated and, despite the excess capacity in the heavy industry associated with the real estate sector, the fact that the main companies are state-owned allows for greater sustainability of activities even though with a lower profit rate.

Concerning the ongoing changes in the Chinese accumulation regime induced mainly by the domestic components of effective demand22 and new technological priorities, it must be considered that although the urbanization process has slowed down, it is still underway23: the urban population in 2020 was 63.9% (NBS, 2024) and it is estimated that in 2030 it will be 70%24 and it will have almost 400 million more inhabitants compared to 2015 (Sun et al., 2017). Therefore, urbanization continues to be an essential mechanism for Chinese growth, exerting great demand on the heavy industry and also on the sector of durable consumer goods (Souza, 2023). It is this process that explains the substantial participation of the real estate sector in GDP. In addition to new urban housing25, the demand to be met is for health services, transport, and education for expanding urban families and especially for “semi-urbanized” migrant workers. Population aging has been accentuating this movement in demand. These service activities require more and more manufacturing investments associated with digitalization and decarbonization.26 Activities such as the Internet of Things and the replacement of vehicles with combustion engines by electric motors create strong demands on manufacturing and integrated services.

In fact, as a result of a strategy initiated in 2010, New Energy Vehicles (electric and hybrid) were considered a “strategic emerging industry” (Gomes, Pauls and ten Brink, 2023). In just a few years, China has become the world’s largest producer and largest market for electric vehicles especially the largest international producer and supplier of lithium batteries. Its main automakers have been conquering a growing share of the world market at the expense of Western automakers. As the country has particular prominence in green industries – with special emphasis on solar panels, batteries, and wind turbines, whose national and global markets are growing -, the expansion of a diversified energy structure and the renewal of vehicles and equipment in family homes, including new generations of intelligent equipment (internet of things), constitute paths already underway to meet both internal and external demand.

Despite the tariffs imposed by the US and their high initial impact and the technological sanctions inflicted by the Biden administration, there was no “decoupling” between the two countries. In recent years, China’s exports to the US have recovered their pre-Covid absolute values in current dollars due to the expansion of non-tariffed exports.27 However, the share of American imports from China declined with the Government’s efforts to divert the US economy’s suppliers to other countries. In response, China is diversifying its foreign markets while maintaining its position as a global manufacturing center.

China’s internationalization must be considered in this context. Since 2008, investment flows abroad have increased substantially and the country has now established itself as a major capital exporter, surpassing Japan as an international investor. Its extensive investments in the Belt and Road initiative (launched in 2012) are focused on infrastructure (Ribeiro, 2022; Cintra and Pinto, 2017), attempting to address the issue of excess capacity, and constitute a strong stimulus for investments in its heavy and ICT industries, especially in telecommunications infrastructure, thereby opening up a great stimulus for its foreign markets.

Alongside these industries, China has an expanding sector that never took hold in Japan and Korea: the military-industrial complex. Despite its military budget being 2% of GDP (lower, for example, than that of France), total military expenditure expressed in current dollars is only exceeded by that of the US. Historically, the Chinese military-industrial complex has established itself as an important magnet for GDP growth and above all for sophisticated technologies (Trebat; Medeiros, 2014; Syed, 2021). Both effects are expanding given the challenges raised by the technological dispute with the US.

Given the transformations brought about on the one hand by the rise in labor costs and on the other hand by tariffs on its industrial exports, China has been investing heavily in the robotization of factories (robots in use in China already exceed half of the world market), including domestic production replacing imports. This mechanization contradicts the central objective of job creation given the facts that, in the last decade, as previously shown, there has been a relative decline in industrial employment and, in recent years, an absolute decline in industrial employment (manufacturing and construction) driven by the reduction in formal employment, even though informal employment kept growing (Rozelle et al., 2020). However, in contemporary China, as in economies that rapidly industrialize, the expansion of employment occurs increasingly in service activities, both in those that require qualified work and work with a lower degree of schooling – which in China accounts for the great growth of the informal sector – and, among the latter, in the so-called “platform economies”.28

Concerning household consumption, the decisive issue is the expansion of the social security system and popular housing programs aimed at low-income populations.

Conclusion

It was argued in this essay that the recent slowdown in the growth rate of the Chinese economy is due to a set of circumstances associated both with the characteristics of the growth regime that began in 2008 and with external and internal structural changes. Among them, the slowdown in the growth rate of exports and the increase in the wage rate stood out, which, beyond being a cyclical phenomenon, corresponds to a significant structural and institutional change, ending or reducing the growth path based on low wages.

It was briefly discussed that in this transition process, China still has a broad urbanization process that is ongoing, and a large number of “semi-urbanized” migrant workers generate a wide demand for public and private investments and services. At the same time, thanks to its technological policy, China has gained prominence in new technologies, particularly in green technologies and digitalization.

This new structure of accumulation prioritized in the “new normal” will possibly lead to a moderate growth rate for the Chinese historical experience, but higher than that of the OECD, and possibly more socially and environmentally balanced than what was affirmed in recent years.

These transformations in China’s structure of accumulation also have important economic ramifications for the global economy. In advanced economies, particularly the US and the EU, China’s prominence in green technologies and digitalization has been seen as a central challenge to their cutting-edge technologies and industrial systems. If, initially, the Chinese challenge was met by a technological and trade war launched by the US, now the response of advanced economies has evolved to encompass a political agenda that seeks to restore planning, particularly through industrial policies.

In as much as peripheral economies are concerned, the structural change affecting the Chinese wage rate may have important impacts. While the offshoring of manufacturing from the high-wage economies to China essentially reduced the wage rate in the manufacturing sector, this movement had a double impact on peripheral economies. On the other hand, it benefited the primary exporting economies through a valorization of their terms of trade; on the other hand, it displaced the manufacturing production in those economies that possessed a less competitive manufacturing sector than China. Consequently, if wages remain experiencing a sustained growth trend in China, these effects may cease to occur, increasing the relative competitiveness of peripheral economies with some manufacturing production, at least in those subsectors and stages of production that are unskilled labor intensive. However, other manufacturing subsectors in those economies may continue to be under significant competitive threat from China’s industrial system, particularly those subsectors that were not the focus of advanced economies’ offshoring based on labor arbitrage and that relied more on other historical processes for their development and export performance in China. This is the case, for instance, of those manufacturing subsectors that currently suffer from excess capacity associated with the real estate sector boom, such as steel, and those related to green industries, which many peripheral countries are attempting to nourish.

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Notes

Author notes