Has China peaked? A stumbling economy and an ageing population are bad omens

As China launches itself with gusto into the Year of the Rabbit, there is increasing commentary that we may have seen peak China in 2022 when, in October, President Xi Jinping was anointed for a third term as leader of the Chinese Communist Party.

It might be time to revise the country’s rise.

Since Xi’s triumph, it’s all been bad news. China faced its second-worst economic performance since the death of Mao Zedong, a global downturn, and the ramifications of its disastrous sudden exit from its zero-COVID policy. This is taking place within an increasingly tense regional security environment, underscored by Japan’s recent commitment to a major military upgrade.

Downswings and roundabouts

The zero-COVID policy, which featured harsh lockdowns and constant testing, was a nightmare for Chinese citizens. Official death toll figures are in the tens of thousands — but according to a mass of anecdotal evidence regarding overworked crematoriums and overflowing hospitals, those are probably not the real numbers. Official data also does not include people who die at home, and doctors have said they are being discouraged from putting COVID on death certificates.

Things also look dire economically. On the back of its COVID policies, China’s ​​economy grew by only 3% in 2022, down from 8.1% the previous year, missing Beijing’s official growth target of 5.5% — already the lowest in decades. Apart from 2020, the first pandemic year when full-year GDP expanded by just 2.2%, the nation’s growth was the weakest since the last year of Mao’s rule in 1976. 

Still, many economists confidently predict the Chinese economy will rebound after the harsh initial wave of COVID infections, injuries and deaths — with a rider. 

“The change of this COVID policy will revive the economy,” European Bank president Christine Lagarde said. “That is positive for the rest of the world, but there will be more inflationary pressure.”

Inflation and interest rates are already a problem for the Albanese government, as Australians with mortgages get squeezed and many landlords pass these increases on to tenants. Any new inflationary pressures will only increase the headache for Canberra.

Not enough babies

Demographically, China faces a nightmare brought about by its one-child policy, with the government admitting its population was decreasing for the first time since the Great Famine in 1961. At the end of 2022, China was home to 1.41175 billion citizens, compared with 1.41260 billion a year earlier — a drop of 850,000 people. It’s the first time China has recorded fewer than 10 million babies a year since 1950. 

It’s a trend that will continue. Birthrates remain stubbornly low, despite the government’s serial relaxation of policies restricting the number of children couples can have. They are now allowed three, but a combination of factors — including rising cost of living, a lack of education, living costs, and nationwide barriers to job mobility — has led to a widespread population downturn. Chinese child-bearing-age women also grew up in one-child households, which have become engrained and normalised.

China faces the very real prospect of ageing before getting wealthy, all but ensuring its middle-income population is economically trapped. As there are fewer workers of the right age available to work in factories, companies are moving production to other low-wage countries such as Vietnam, India and Bangladesh. This trend has been exacerbated by countries and companies keen to cease or wind back their use of China as a manufacturing destination, known as decoupling. 

Effect on Australia

None of this is particularly good news for Australian exporters who for many decades have relied on Chinese growth for much of its prosperity, underpinned by resources exports to China. 

There is some upside though as, due to its recent bans and tariffs, China has demonstrated it can, perhaps inadvertently, force Australian exporters to look for new markets. China is also trying to diversify its imports away from its heavy reliance on Australia for iron ore, and in early January Rio Tinto said it had agreed on terms with joint venture partners, including giant Chinese steelmaker Baowu, to develop infrastructure for Guinea’s Simandou iron ore mine.

The better news in this context is the increasingly warm relations between Beijing and Canberra, with the latest sign of a thaw being the announcement last week that Chinese Commerce Minister Wang Wentao and Australian Trade Minister Don Farrell would soon talk via video conference about trade restrictions.

Defence talks

Into the mix of China’s malaise came Japan’s recent announcement that it would throw off its postwar pacificity and re-arm with some purpose.

Japan’s military budget will increase by 56%, from about 27.47 trillion yen over five years to about 43 trillion yen (an increase from about $304 billion to $476 billion). By comparison, Australia’s defence budget is $48.7 billion in 2022-23, or 1.96% of gross domestic product, and is budgeted to rise to $52.16 billion in 2023-24, $54.23 billion in 2024-25 and $56.55 billion in 2025-26.

That was confirmed — and the program publicly supported by the US — when Japanese Prime Minister Fumio Kishida recently visited Washington for talks with US President Joe Biden. This introduces a tough new dynamic to China’s regional security calculations and, understandably, Beijing is not happy.

“Since Kishida’s government updated its security strategy last month in contravention of its exclusively defence-oriented policy, its series of actions have increasingly raised alarms among its Asian neighbours, said local scholars, urging the government to change its relations with the United States from ‘subordination’ to ‘self-reliance’,“ said state news agency Xinhua.

For Australia, it’s the latest shoe to drop in the emerging regional security network that aims to try to contain China. Japan has said it wants to leverage the pre-existing Japan-Australia Joint Declaration on Security Cooperation to deepen cooperation, “second only to the Japan-US defence cooperation”, wrote Stephen Nagy, senior associate professor at the International Christian University in Tokyo, for the Australian Institute of International Affairs.

This includes deepening consultations at all levels including ministerial consultations, bilateral/multilateral training and exercises, and defence equipment and technology cooperation. It will also include joint military exercises and rotational troop deployment in Australia.

China will continue to build its economic influence in the region, a program that Australia has had difficulties both coming to terms with and attempting to counter — at least in terms of Papua New Guinea and the Pacific and its welter of small nations.

The rabbit is the 12th, last and luckiest animal in the Chinese zodiac. It’s a symbol of longevity, peace, and prosperity, meaning 2023 is expected to be a year of hope and peace. But the confluence of economic bad news and a regional arms build-up are sure to put this at risk.