With an annual GDP of more than $6 trillion, China’s economy is second only to that of the United States. And with a white-hot annual growth rate of about 10 percent, the country is looking to catch up within a decade or two.
But will it? Since 2008, China has been able to maintain its high GDP growth only through investment in infrastructure and real estate projects—a debt-fueled building binge that has created asset bubbles and crowded out consumer spending. Correcting that imbalance in economic activity could require a long period of reduced growth. “China’s GDP growth rate is going to slow significantly, perhaps to as low as 3 percent for a decade or so, because of this unsustainable increase in debt,” says Michael Pettis, a professor of finance at Peking University’s Guanghua School of Management and a senior associate at the Carnegie Endowment for International Peace.
If China genuinely rebalances to become a more consumption-driven economy, its growth would be more sustainable, and the United States and other countries would benefit from increased Chinese consumer demand. “The risk for China is that it waits too long to adjust,” says Pettis.
But adjusting, it turns out, carries its own set of risks.