China is entering an era of much slower economic growth, raising a daunting prospect: it may never get rich.
Whether the world's second-largest economy chugs ahead at 3-4% annually or flirts, as some economists expect, with Japan-like "lost decades" of stagnation, it looks set to disappoint its leaders, its youth, and much of the world.
Policymakers hoped to narrow China's development gap with the United States. Young Chinese went to universities to study for advanced-economy jobs. Africa and Latin America count on China buying their commodities.
"It is unlikely that the Chinese economy will surpass that of the United States within the next decade or two," said Desmond Lachman, a senior fellow at the American Enterprise Institute.
He expects growth to slow to 3%, which "will feel like an economic recession" when youth unemployment is already above 20%. "This is not good for the rest of the world economy" either, he added.
When Japan began to stagnate in the 1990s, it had already exceeded the average GDP per capita of high-income economies and was nearing U.S. levels. China, however, is only just above the middle-income point.
But China's annual growth averaged around 7% last decade, and more than 10% in the 2000s.
Prompted by such loss in momentum, economists no longer ascribe weak household consumption and private-sector investment to the pandemic's effects, blaming structural ills instead.
These include the burst of a bubble in the property sector, which accounts for a quarter of output; one of the deepest imbalances between investment and consumption; a mountain of local government debt; and the Communist Party's tight grip over society, including private businesses.
And China's workforce and consumer base are shrinking while the cohort of retirees is expanding.
"The demographic problem, hard landing of the property sector, heavy local government debt burden, pessimism of the private sector as well as China-U.S. tensions do not allow us to hold an optimistic view towards mid- to long-term growth," said Wang Jun, chief economist at Huatai Asset Management.
China's National Development and Reform Commission (NDRC) did not reply to Reuters questions on growth prospects, structural weaknesses and reform plans.
WAYS OUT
NDRC head Zheng Shanjie, in a July 4 article in the official "Qiushi" magazine, made a rare reference to the middle-income trap, saying China needed to "accelerate the construction of a modern industrial system" to avoid it.
Zheng was referring to developing nations' struggle to transition from mid- to high-income levels due to rising costs and declining competitiveness.
Economists cite China's electric vehicle boom as evidence of progress, but much of its industrial complex is not upgrading at the same speed. Overseas car sales account for only 1.7% of exports.
"Many observers will look at some of the companies and say, wow, China can come up with all these fantastic products, so the future should be bright. My question is: Do we have enough of those companies?" said Richard Koo, chief economist at the Nomura Research Institute.
Policymakers have said they want household consumption to drive growth, without hinting at concrete steps.
Juan Orts, China economist at Fathom Consulting, said boosting consumer demand might redirect resources away from supporting manufacturing exporters, which partly explains hesitance towards such reforms.
"We don't think authorities will commit to that path," said Orts, describing it as "the way out" of economic doldrums.
Rather, China took steps the other way.
President Xi Jinping's "common prosperity" drive against inequality has encouraged salary reductions in finance and other sectors. Deteriorating city finances prompted pay cuts for civil servants, feeding a deflationary spiral.
Zhao, a manager at a Beijing-based bank, feels she will never get rich, her salary remaining unchanged through several promotions. Instead of working hard, she said, she plans to retire in her 40s to a smaller, cheaper city.
"I missed the golden era for banks," Zhao said on the condition of partial anonymity as she was not authorised to speak to the media.
Many economists have called for better public healthcare, higher pensions and unemployment benefits, and other building blocks for a social safety net to give consumers confidence to save less.
Central bank adviser Cai Fang called this month for consumption stimulus, including changes to China's residence permits, or hukou, which deny public services to millions of rural migrants in the cities they work in.
Zhu Ning, deputy dean at the Shanghai Advanced Institute of Finance, said improving social welfare could make growth rates of 3-4% more sustainable.
'LAST CHANCE'
Koo said China's problems are more challenging than Japan's a generation ago, giving policymakers room for error should they seize the "last chance" to reach developed-world living standards.
China, in his assessment, has a "balance sheet recession", with consumers and businesses repaying debt instead of borrowing and investing.
This, he said, is how depressions start and the only cure is "speedy, substantial and sustained" fiscal stimulus, which he did not see as forthcoming given China's debt concerns.
Beyond that, he said stimulus must be productive, and complemented by changes that allow the private sector to emerge from under the shadow of the state, including through better relations with source countries of foreign investment.
But China would need to reverse course.
Infrastructure investment in recent years has generated more debt than growth.
As major economies try to reduce dependence on China, Beijing remains locked in tit-for-tat trade battles, the latest over metals used in semiconductors.
"Every time the U.S. announces some anti-China policy, the Chinese government comes up with an equivalent one. But the Americans are not in the middle income trap. China is," Koo said.
"If Chinese people do not reach their Chinese dreams, perhaps you will have 1.4 billion not very happy people over there, which might be rather destabilising."
