A Colossus with Feet of Clay or a Future Hegemon: The Truth About China’s Economy

The world is gradually becoming nonpolar.

A nonpolar world is something resembling, at best, a form of deterministic chaos. At worst, it’s a chaos that is undefined and non-deterministic. What we are witnessing today is not the “end of history” in the sense proposed by Fukuyama, but rather its beginning—as conceptualized by Wallerstein, the author of world-systems analysis.

According to the logic of the current global transformation, the key task is to shape a new geopolitical alter ego for the United States. At this moment, only China can potentially play that role.

However, the process of such institutionalization is complicated by the fact that the United States can no longer function as a global hegemon, while the People’s Republic of China (PRC) has not yet acquired the capacity to assume that position. And it remains unclear whether Beijing will acquire such capabilities in the foreseeable future.

Therefore, it is worth assessing the real condition of China’s economy and forming at least a short-term forecast for its development.

As of 2024, China’s GDP amounted to $18.4 trillion, compared to $29.18 trillion for the United States—meaning the Chinese economy currently represents 63 percent of the US economy in nominal terms.

However, several caveats must be taken into account.

The nominal growth of the US economy in recent years was largely driven by elevated post-pandemic inflation, which was much lower in the PRC.

Additionally, during Biden’s presidency, the yuan depreciated, which slowed the growth of China’s nominal GDP in dollar terms. The United States continues to outpace China in the “virtual” segment of GDP—namely, the service and finance sectors. At the same time, China’s industrial capacity has already surpassed that of the US.

Moreover, due to relatively low domestic prices, China significantly underreports its real GDP. This is a form of economic camouflage to avoid drawing the attention of geopolitical predators. According to various estimates, through this practice, China underestimates its GDP by 20–30 percent. In any case, in terms of purchasing power parity (PPP), China currently ranks first in the world, ahead of the United States.

The bifurcation point—when the US missed the rise of China—occurred in 2007, on the eve of the global financial crisis. At that time, China’s GDP was $3.55 trillion, equivalent to 24 percent of the US economy.

In 2010, this figure already reached 40 percent! In other words, in just two years, amid a global recession, China improved its indicator in terms of the ratio of its economy to the US potential from 24 to 40 percent, a 1.7-fold increase.

In 2019, this indicator was already 66 percent. And in 2021, after the end of the pandemic, it stood at 75 percent. It was then that the feeling arose for the first time that China would catch up with the US in terms of economic potential.

But during the three years of Biden’s presidency (2022–2024), due to certain factors (in particular, from the first quarter of 2022, the yuan devalued against the dollar from 6.31 to 7.18, or by almost 14 percent, worsening the nominal value of China’s GDP in dollars) the ratio between the Chinese and US economies in 2024 deteriorated to 63 percent, i.e., almost to the 2019 level.

However, the coming years will see a period of declining inflation in the US. Although it will be higher than China’s permanent deflation, this gap will narrow. There is also the factor of a “weak dollar,” when the yuan’s devaluation against the US currency (if the yuan devalues) will be significantly smaller.

As a historical retrospective, let’s take the final track of the Cold War, i.e., the time interval from 1979 to 1989.

In 1979, the Chinese economy accounted for 6.8 percent of the US economy. This was even less than in 1960, when this indicator was 11 percent. In other words, between 1960 and 1979, the ratio of China’s GDP to that of the US deteriorated for the PRC.

In 1989, this indicator stood at... 6.17 percent. In other words, although China was developing dynamically during that period, its potential relative to the US economy was stagnant.

Let’s take another look at the period of the “Bush’s great wars,” i.e., the interval from 2001 to 2009, when the US conducted large-scale military operations in Iraq and Afghanistan.

In 2001, China’s GDP was 12.66 percent of US GDP. In 2009, this figure reached 35.23 percent, i.e., it almost tripled.

From this, we can draw a very important conclusion. In the context of global leadership, China pulls ahead of the US during large-scale wars involving the US, global financial crises and pandemics.

Of course, China’s economy also suffers during global recessions and epidemics. But relative to the depth of the crisis in the US, the scale of economic destruction in the PRC is significantly smaller.

At the same time, China’s leadership is “stagnating” precisely when the world is in a bipolar mode, provided that China is not a member of the “leading duo.” Or amid a clearly established unipolar mode with the unquestionable leadership of the US. The first period fell on the historical interval of 1960–1989, the second lasted from 1989 to 2001.

It is time to analyze the current state of the Chinese economy.

In 2024, the PRC returned to its “cruising speed” of economic growth at 5 percent. Its economy is under the influence of various forces aimed at both stimulating growth and cooling it down.

Among the reasons for the slowdown in growth are a gradual decline in population, fairly sluggish domestic consumer demand and a slowdown in foreign investment inflows.

Positive factors include a steady recovery in exports and relatively cheap energy resources.

China has managed to avoid a crisis in the real estate sector and shift entrepreneurial drive to the digital economy, which now ranks first in terms of the number of new projects and startups.

China’s industry usually grows faster than the economy as a whole (in developed Western countries, the opposite is often true). This is also the case now. China’s industrial production increased by 6.1 percent in 2024. Even greater growth was seen in such industrial subsectors as equipment manufacturing (7.7 percent) and high-tech manufacturing (8.7 percent).

Particularly impressive is the development of those sectors of the economy that China considers to be either new drivers of growth, a tool for competing with the US or part of a new technological order.

For example, the production of electric vehicles increased by 38.7 percent, integrated circuits by 22.2 percent and industrial robots by 14.2 percent.

Here we can mention Nikola Tesla, who defined the competitive development of civilization by the energy it consumes and the number of industrial complexes, represented today by robots.

The service sector in China is growing less slowly — at the level of GDP growth, i.e., 5 percent.

However, there are some positive developments for China here as well. For example, the IT services sector grew by 10.9 percent and transportation by 7 percent.

Investments in the fixed capital of the Chinese economy are indeed controversial. In total, they increased by only 3 percent last year, reaching $716 billion. In the first half of 2024, another indicator of investment activity — foreign direct investment (FDI) — declined by 29 percent compared to the same period last year.

Nonetheless, China has found other tools to attract investor funds — the issuance of special infrastructure bonds guaranteed by the central government or local authorities.

These are issued in the Dim Sum bond system, i.e., bonds issued outside China and denominated in renminbi (RMB). There are also issues of “panda bonds” on China’s domestic financial market.

As a result, while overall investment growth is slowing down, we are seeing significant growth in certain sectors. For instance, investment in consumer goods production increased by 14.7 percent last year, in equipment production by 9 percent and in the extraction of raw materials, mainly rare earth minerals, by almost 8 percent. Investment in infrastructure increased by 5 percent and in high-tech manufacturing by 8 percent. The largest amount of investment is attracted to the production of machinery and tools, with growth of almost 16 percent.

China is an export-oriented economy, and the contribution of the net positive trade balance to GDP growth is significant. However, the impact of exports on the Chinese economy, which is home to 1.4 billion people, including the world’s largest 400-million middle class and nearly a billion-strong economically active population, is usually overestimated.

The volume of exports and imports in 2024 was almost $6 trillion, with growth rates matching GDP dynamics, i.e., 5 percent.

The ratio of exports and imports to GDP in China is 32–33 percent. For comparison, in 2019, Ukraine’s foreign trade turnover was 56 percent, meaning that the Ukrainian economy’s dependence on foreign markets was one and a half times greater than that of China.

China’s exports of goods and services amounted to $3.58 trillion last year, or less than 20 percent of GDP. Its growth rate in yuan terms is more than 7 percent.

China is no longer the world’s consumer goods factory. Electromechanical goods account for 60 percent of Chinese exports, and exports of high-tech goods (industrial robots, 3D printers) grew by 40 percent over the year.

Another stereotype is that the US is the main market for Chinese goods. Supplies to the US market account for only 2.5 percent of China’s GDP. Beijing’s largest trading partner is the ASEAN, representing ten Asian countries.

China is trying to strengthen its role in global value chains that are forming within the framework of the new sixth technological paradigm. New export goods include electric vehicles, chips and semiconductors, solar power plants and wind turbines.

The volume of cross-border e-commerce in the PRC has reached $360 billion per year, an increase of almost 40 percent.

Currently, out of $100 of FDI, $60 is attracted to the Chinese service sector and $40 to industry. It can be argued that China is trying to use state investment incentives to keep industrial production under control and attract foreign investment in the service sector and e-commerce. The main investors here are Spain, Germany and Singapore.

China’s key problem at the moment is not Trump’s tariffs but the slowdown in demographic growth and the aging population. The modern economy is primarily a consumer economy that depends on the growth of effective demand.

The economically active population in China currently stands at 61 percent, while people aged over 65 comprise 16 percent. However, the PRC does not have a classic social system in the form of a universal pension scheme (pensions are partially paid in cities). Consequently, the aging population increases the financial burden on young families who support their elderly parents and reduces overall effective demand.

Therefore, China may have to reconsider its established principles in this area—particularly by introducing universal pension payments and stimulating domestic effective demand through social policy instruments.

Or by rolling out a “one family, two children” program, as opposed to the former “one family, one child” program.

In general, the latest population and economy census showed that as of 2023, there were 33.270 million legal entities in the secondary and tertiary sectors of the economy (manufacturing and services), which is 52.7 percent more than in 2018 (i.e., over a five-year period). 2018 was the year of the country’s fourth national economic census. The number of people officially employed in these sectors was 428.984 million, which is 11.9 percent more than in the previous five-year period.

The number of self-employed entrepreneurial entities amounted to 87.995 million, which employed 179.564 million people. In total, more than 607 million people worked in the secondary and tertiary sectors of China’s economy, exceeding the combined population of the EU and the US.

This, incidentally, dispels another myth propagated by “anti-Chinese conspiracy theorists” regarding China artificially inflating its population figures.

Overall, it can be concluded that the PRC is not yet positioned to claim global hegemony but is already aiming for pan-Eurasian hegemony.

The main focus of its development is on new technologies and the sixth technological paradigm, while the primary spheres of economic potential application are the domestic market and Asian countries.

In terms of social policy and the development of a consumer economy, China is in a position comparable to where Western countries stood 50 years ago when they were constructing their own models of a welfare social market economy.

However, this is not a shortcoming of China but a consequence of its 50-year historical trajectory transitioning its economy from a production-based to a consumption-based format. Meanwhile, the Western model of a social consumption economy is in crisis, with Western countries undergoing a sluggish and hesitant transition to a new production-based economic format.

Thus, economically speaking, China is “going to the fair,” while Western economies are already “returning” from it.

 

Read this article in Ukrainian and russian.