Global powers face mega climate, economic dilemma

THE United States doesn't do crises well - 2008 and 2020 attest to that - but it does do recoveries well. China took a leap forward last year; this year is the US' turn. Their growth differential is likely to restabilise.

It is premature, though, to radically adjust expectations of when the US and China economies will converge. China is still likely to eclipse the size of the US economy, but that seems some way off. Uncertainty around these projections has materially increased.

China has three structural growth handicaps: a high level of debt for a middle-income economy, an ageing population and, in a geopolitically tense world, a reduced ability to drive economic growth through exports. None of these concerns diminished during the pandemic.

This crisis has in fact eroded one of China's historical advantages: its prudent household sector. Chinese households now use almost as much of their income to service debt as US households do.

The latest census, taken in 2020, shows China's population growing, but only just. It is on the cusp of an inexorable population peak followed by a long decline. Some suggest the population will peak by 2025 at the latest, well ahead of consensus expectations.

It's tempting to think that in a future technology-driven world, people will be a less-relevant economic input. But the idea doesn't hold water. Better technology, applied to an existing labour pool, raises average productivity. So population is likely to become a more, not less, powerful driver of economic size.

This can be seen globally as policymakers in many countries focus on Covid-19's impact on immigration and potential GDP growth. If people are becoming less relevant economic inputs for China, why has the People's Bank of China become unusually vocal about China's demographic challenges?

CHINA'S URBANISATION

One response to China's ageing is to increase the share of the population with access to urban residency. This is one of the best ways to improve incomes in China. At 63 per cent, China's urbanisation rate is much lower than the 80-90 per cent in many developed countries. The 14th Five-Year Plan, issued in March, targets just such an increase, and this is a source of growth the US can't tap.

A new constraint on China's urbanisation is its climate commitments. Urbanisation is climate-unfriendly. A BIS study maps data from 121 countries between 1971 and 2016 and finds carbon emissions rise with economic development, manufacturing activity and urbanisation. China seems to be facing a challenge issue with all three.

Some economies have decoupled growth from carbon emissions. Between 2005 and 2019, 32 grew their GDP while shrinking emissions, according to Breakthrough Institute. Many of those economies are small, but the list includes the US, Japan, Germany and the UK. So large economies can decouple.

None of the economies studied grew quickly, though, and certainly not as quickly as China needs to if it wants to eclipse the size of the US economy by 2030. Only Poland, Iceland and Singapore grew GDP by more than 50 per cent. China grew by close to 400 per cent over that period.

The reduction in emissions in some countries is more impressive, but narrowly based. Only seven reduced emissions by more than 30 per cent. China wants to cut emissions by 65 per cent compared with 2005 levels, on a per-unit-of-GDP basis.

The UN's International Panel on Climate Change suggests, to meet the Paris Agreement target of 1.5 degree Celsius warming, absolute carbon emissions need to fall by 45 per cent from 2010 levels by 2030 on a global basis, reaching 'net zero' around 2050.

China's new scaled-up cuts are notable, as are those of some large advanced economies, but they are insufficient to achieve the absolute carbon reductions required in a rapidly growing economy.

TRACK RECORDS AND GOALS

China's track record on delivering structural reform is enviable, but maintaining fast GDP growth and achieving its climate commitments may be difficult. If forced to choose, it's difficult to know which it would choose, but there seems to be a case for prioritising climate. For instance, abandoning climate goals could see China's exports caught in any future EU and US carbon border-adjustment taxes.

In a break from tradition, China's latest Five-Year Plan did not specify a GDP growth target. With population on the verge of stalling, it can still raise living standards over time with (much) slower economic growth. China has stressed quality of life, including air quality, over the rate of economic growth. President Xi Jin Ping has said that "clear waters and lush mountains are invaluable assets".The Chinese Academy of Social Sciences (CASS) has founded a research institute on Mr Xi's thought on ecological progress.

Economic size matters. At a broad level it affects business opportunities. In an era of strategic competition, it also confers, at the very least, a psychological advantage. The flurry of great-power climate commitments recently adopted are laudable goals, but China does seem to face the more challenging adjustment.

To reach their climate objectives, the US and other advanced economies will need to bend the relationship between economic growth and carbon emissions. China will need to break it. If it is genuinely switching to more sustainable growth, which will pay dividends in many ways, it will face choices, including putting economic parity with the US further into the future.

• The writer is chief economist of ANZ