Is China Coming Down to Earth?

Few Chinese leaders are as revered as Deng Xiaoping. His late-1970s modernization drive led to an unrivaled run of high-speed growth. Chinese President Xi Jinping, who has big reform ambitions of his own, often evokes the memory of the paramount leader, who died in 1997. In 2012, shortly before he assumed the top government job, Xi signaled his own liberalization agenda by retracing Deng’s famous tour in 1992 of southern Guangdong province to promote economic reform. Last August, in a speech marking the 110th anniversary of the revolutionary leader’s birth, Xi, like his predecessors, recycled Deng-era slogans such as “socialism with Chinese characteristics.”

Deng’s legacy as the architect of Chinese modernity rides on a record of 10 percent average annual growth from 1980 through 2012. Xi oversees an economy that’s decelerating and that grew 7.4 percent in 2014, the weakest performance since 1990, when it grew 3.8 percent. The International Monetary Fund predicts that Chinese expansion will steadily decline to 6.8 percent this year and 6.3 percent in 2016, when archrival India is expected to eclipse China at 6.5 percent. All of which raises a question unthinkable a few years ago: Is the China growth miracle winding down for good?

China’s transformation from an agrarian backwater to a $9.2 trillion economy with globally competitive companies, including Xiaomi, Huawei, Baosteel, and Alibaba, has been remarkable. And plenty of countries would be thrilled with 6 percent growth. Yet China is also home to income inequality on par with that of Nigeria and Mexico, a rapidly aging populace, and a world-class environmental crisis. Years of politically driven investment with diminishing returns have led to too much debt and industrial overcapacity, as well as ghost cities with unfinished hotels and absurd ambitions.

The total debt of the world’s No. 2 economy is roughly $18 trillion, or about 200 percent of GDP.

As impressive as China’s rise has been, history has shown that all growth miracles come to an end at some point. Harvard economists Lant Pritchett and Larry Summers, in a research paper last fall, crunched historical data from around the world and found that countries with long periods of elevated growth eventually converge with the long-term global average of about 2 percent. Call it the reversion-to-the-mean argument. “Why will growth slow?” they wrote. “Mainly, because that is what rapid growth does.”

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