Starting in the early 2000s, many predicted China would soon overtake the US. Similar predictions had been made for Japan (in 1979 in a book by Ezra Vogel) and for Russia (in 1961, by Paul Samuelson). The recipe for success had elements from those two previous experiences: a planned economy; a strong work ethic; enviable industrial processes; and technological catch-up. Progress in China was, indeed, rapid, notably in the 1990s and early 2000s. In 2021 China reached 77% of the US GDP level (at market exchange rates) but has gone into reverse since then (63% of the US level in 2025).
Why has that happened and what are the prospects now?
1 A credit boom turned to bust
Credit booms almost always turn to bust. The IMF has looked at 43 cases of credit booms in which the credit-to-GDP ratio increased by more than 30 percentage points over a five year period. Only five such periods ended without a major growth slowdown or a financial crisis in the immediate aftermath. In addition, all credit booms that began when the ratio was above 100% ended badly.
On that basis, China was in trouble in 2012: credit had increased by 30% of GDP over the previous five years and was already over 100% of GDP when the expansion started. There has been a major growth slowdown: from over 10% p.a. to around 6% (see chart) and a financial crisis, centred on the real estate market.
Sometimes such crises are quickly resolved – as in the US after the 2008/9 financial crisis. At other times the adjustment can be long and protracted – as in Japan after 1989. One ‘lost decade’ (the 1990s) was followed by another (the 2000s) and another (the 2010s). A Japanese-style protracted adjustment seems more likely to us. The main reason is that China’s predominantly state-controlled banks are likely to continue facilitating a restructuring of property-related debt. The extent of bad and doubtful debt is hard to gauge, given the lack of transparency of the financial system. But our hunch would be that we are not much more than half way through.
2. Corruption
China is still seen as an economy where corruption is high. According to Transparency International’s CPI (Corruption Perception Index), corruption is at a level which impedes economic growth (China has a score of 43 out of 100; below the 50 critical level).
Xi Jinping did, of course, embark on a major clampdown on corruption in 2012. It has undoubtedly had a degree of success in tackling tigers (senior officials) and ants and flies (lower-ranking members of China’s vast state bureaucracy). But in January 2025, Xi claimed that "Corruption is the biggest threat" to the CCP (Chinese Communist Party).
3. Demographics
China’s population will shrink over the coming decades, particularly the population of working age.
This is driven by the lagged effects of the one-child policy, an aging population and a significant decline in the fertility rate. This stands at less than 1.0, well below the 2.1 needed to maintain population size. It has notably failed to rise as the government has eased limits on the number of children (from 1 to 2 to 3, marked on the chart below).
The steady decline in the working-age population as a result of these developments will have significant implications for economic growth, the fiscal outlook and investment and productivity growth.