China surpassing the United States to become the world’s largest economy has been a focal point for policymakers and economists for decades. The question looms: what will happen when the US — one of the most dynamic, productive economies — is overtaken by an authoritarian regime with a workforce of 750 million?

Predictions regarding when exactly China might eclipse the US economy have proliferated since the 2008-2009 financial crisis, which significantly hampered growth in the United States and Europe for many years. Before what became known as the Great Recession, China experienced double-digit annual gross domestic product (GDP) growth for at least five years. In the decade following the crisis, China’s economy continued to expand by 6%-9% annually. That is, until COVID-19 struck.

As if the pandemic — which led to strict lockdown measures that brought the economy to its knees — wasn’t enough, the Asian powerhouse also faced a real estate crash. At its peak, the property market was responsible for a third of China’s economy. However, rules introduced by Beijing in 2020 put limits on how much debt property developers could take on. Many firms went bankrupt, leaving an estimated 20 million unfinished or delayed homes unsold.

Around the same time, declining trade relations with the West also weakened growth in the world’s second-largest economy. Having encouraged China’s ascendancy for decades, by the late 2010s, the US shifted to containing Beijing’s economic and military ambitions, if only to delay the inevitable advance.

Has China’s Economy Peaked?

The apparent change of fortunes for the Chinese economy was so stark that a new term emerged about a year ago: “Peak China.” The theory was that the Chinese economy was now burdened by many structural issues, such as a heavy debt load, slowing productivity, low consumption, and an aging population. Those weaknesses, along with geopolitical tensions over Taiwan and a decoupling of trade by the West, sparked speculation that China’s impending economic supremacy may be delayed or never happen.

But Wang Wen from Renmin University of China’s Chongyang Institute for Financial Studies told DW that the notion of Peak China was a “myth,” adding that China’s total economic output reached almost 80% of the US output in 2021. Wang argued that as long as Beijing maintained “internal stability and external peace,” the Chinese economy would soon overtake the US. He cited the desire of millions of rural Chinese to move to urban areas, where earnings and quality of life were reportedly much higher.

“China’s urbanization rate is only 65%. If calculated at 80% in the future, it means that another 200 to 300 million people will enter urban areas, which will generate a huge increase in the real economy,” he said.

Other economists, however, believe that the issues that sparked the Peak China narrative were likely building for several years. “The Chinese economy grew so fast in the early 2000s because of high productivity,” Loren Brandt, an economy professor at the University of Toronto, told DW, adding that productivity was responsible for about 70% of GDP growth during China’s first three decades of reform, initiated in 1978.

“After the financial crisis, productivity growth just disappeared. It’s now maybe one-quarter of what it was before 2008,” the expert in the Chinese economy added.

China watchers had hoped that a key meeting of China’s Communist Party this week would propose major stimulus measures to tackle the numerous short-term economic headwinds. But they now think Beijing will instead target growth in certain sectors, like advanced and green technology, while also boosting pensions and the private sector.

Debt and Investment Challenges

China’s total debts have widened to more than 300% of GDP. A large chunk is owned by local governments. Foreign direct investment has fallen for 12 months in a row, dropping 28.2% in the first five months of 2024 alone. Despite huge investments to ramp up the production of new technologies, some of Beijing’s trade partners are restricting Chinese imports.

“Here is an economy that has invested enormously in [research and development], people, and first-class infrastructure. But it is not being leveraged in a way that’s helping to sustain growth in the economy,” Brandt told.

Beijing, under President Xi Jinping’s rule, has also moved toward more centralization of the economy through state ownership of industries. China’s leaders decided the next wave of growth would be built on the back of domestic consumption, allowing the country to be less reliant on foreign exports.

However, many social programs haven’t kept pace with China’s economic miracle. Consumers who can no longer rely on low-cost health care, education, and more than a basic state pension are wary of spending more of their savings. Their household wealth has dropped by up to 30% as a result of the property crash, Brandt said.

“[Decentralization] during the first two or three decades gave room for local governments to make decisions,” he added. “China benefited enormously from the autonomy, freedom, and incentives that they had, and the enormous dynamism from the private sector. These issues are going to be much harder to reverse, especially under the current leadership.”

In the late 2000s, the private sector made up close to two-thirds of the Chinese economy, but by the first half of last year, that share had dropped to 40%. The state-run and mixed-owned sector has grown much larger. While China now has the most firms listed in the Fortune magazine’s ranking of leading global corporations, those companies are much less profitable than their US counterparts, averaging profit margins of 4.4% compared to 11.3% for US multinationals.

The big fear is that all these factors could see China’s economy go the way of Japan. After World War II, Japan experienced an economic miracle, marked by decades of high growth that caused a massive stock market and real estate bubble. At its peak, Japan was predicted by some economists to overtake the US as the world’s largest economy. Then in 1992, the bubble burst, fortunes were lost, and the economy went into a tailspin. Japan has since failed to make up for several decades of lost growth.

Chinese economists, meanwhile, point to the country’s industrial production being larger than the US’s. Last year’s GDP growth at 5.2% was more than double the US growth rate. The Asian country’s economy already surpassed the US in 2016 when measured in purchasing power parity (PPP).

“In the past 45 years, China’s development has faced many economic problems,” Wang told DW. “But compared with the depression 30 years ago, the high debt 20 years ago, and the housing crash 10 years ago, the current problem is not the most serious.”

One of the most significant challenges facing China is its demographic situation. The one-child policy, which was enforced from 1979 to 2015, has resulted in a rapidly aging population and a shrinking workforce. The number of working-age people is decreasing, while the number of retirees is increasing, putting immense pressure on the social security system.

The fertility rate in China is now below the replacement level, and despite the relaxation of the one-child policy, the birth rate has not significantly increased. This demographic shift means fewer workers to drive economic growth and support the aging population, which could further slow China’s economic expansion.

Geopolitical tensions, particularly with the United States, pose another significant hurdle for China’s economic ambitions. The trade war initiated during the Trump administration saw tariffs imposed on hundreds of billions of dollars’ worth of Chinese goods. Although there have been some attempts to negotiate and ease tensions, the underlying issues remain unresolved.

Moreover, the US and its allies have been increasingly wary of China’s growing influence and have taken steps to curb Beijing’s technological and economic expansion. Restrictions on Chinese technology companies, such as Huawei, and efforts to decouple supply chains from China are part of a broader strategy to limit China’s rise.

Innovation and Technological Advancements

Despite these challenges, China continues to make significant strides in innovation and technology. The country has become a global leader in areas such as artificial intelligence, 5G technology, and renewable energy. China’s “Made in China 2025” initiative aims to move the country up the value chain by focusing on advanced manufacturing and technological innovation.

Investment in research and development has been a key driver of China’s technological advancements. The government has been actively supporting the development of high-tech industries and encouraging innovation through various policies and funding initiatives. This focus on technology could provide a new growth engine for the Chinese economy.

Urbanization has been a crucial driver of China’s economic growth over the past few decades. The migration of millions of people from rural areas to cities has fueled demand for housing, infrastructure, and services, boosting economic activity. As Wang Wen pointed out, there is still potential for further urbanization, with China’s urbanization rate currently at 65%.

If urbanization continues to progress, it could bring hundreds of millions more people into urban areas, generating significant economic growth. However, this process also comes with challenges, such as ensuring adequate infrastructure, managing environmental impacts, and providing social services for the growing urban population.

China’s rapid industrialization has come at a significant environmental cost. Air pollution, water scarcity, and soil contamination are major issues that the country faces. Recognizing the importance of environmental sustainability, the Chinese government has been implementing measures to address these challenges.

China has become a global leader in renewable energy, investing heavily in solar, wind, and hydropower. The country is also committed to reducing its carbon emissions and has set ambitious targets for achieving carbon neutrality by 2060. Balancing economic growth with environmental sustainability will be crucial for China’s long-term prosperity.

The question of whether China will overtake the US economy is complex and multifaceted. While China has made remarkable progress over the past few decades and has the potential to become the world’s largest economy, it faces numerous challenges that could impede its rise.

Structural issues such as heavy debt, slowing productivity, low consumption, and an aging population pose significant obstacles. Geopolitical tensions and trade wars with the United States and its allies further complicate China’s path to economic supremacy. However, China’s focus on technological innovation, urbanization, and environmental sustainability could provide new avenues for growth.

Ultimately, whether China will overtake the US economy depends on how effectively it addresses these challenges and leverages its strengths. The future of the global economy remains uncertain, and the dynamics between China and the United States will continue to shape the economic landscape for years to come.