8 - Why Is China Slowing Down?

Summary

After 2012, the Chinese economy entered a phase of declining growth. The GDP growth rate of 6.1 percent in 2019 just before the COVID-19 pandemic was the lowest in nearly thirty years. What caused the slowdown? Is the country falling into the so-called middle-income trap? These questions are addressed in Chapter 8. The chapter first shows why the “middle income trap” does not really exist and that before reaching high-income status, a country’s growth rate is unrelated to its income level. It then shows that China’s slowdown was mainly caused by a precipitous decline in investment growth. This decline was initially caused by the sweeping anti-corruption and anti-pollution campaign during 2013–2015. It was worsened by the misguided contractionary macroeconomic policies in 2016 and 2017 due to a mistaken belief by policymakers and economic commentators that China had invested too much and the corporate sector had piled up too much debt. In other words, China’s downturn before COVID-19 was not inevitable, and its economy could have grown faster.