China's Peak Is Behind It: Credit Has Stalled, Deflation Is Coming
China's share of global GDP peaked in 2021 and has fallen every year since; credit growth has dropped from 18% to 5%, and real growth may be just 1.5%-2%. The US has now outgrown China five years running. The supply-chain-dominance narrative doesn't survive the data — the future looks more like Japanese-style deflation.
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The argument · tap a timestamp to hear it
China has already missed its window to overtake the United States
Dmitri sets the frame with official data: China's share of global GDP peaked at 18.5% in 2021 and has declined every year since, while the US share rose from 24% to roughly 26%. From this he asserts that not only is there almost no chance China displaces the US as the world's largest economy, but the American economic advantage may keep widening over the next decade. Logan agrees fully, and steers the conversation toward a framework of decay rather than collapse.
— Dmitri AlperovitchChina's slowdown traces back to the end of credit expansion
Logan attributes the slowdown to the end of an extraordinary credit expansion. In the eight years after the financial crisis, China added credit equivalent to a third of global GDP. Credit growth has fallen from an average of 18% over 2007-2016 to 9% after 2017, and now sits slightly above 5%. Once credit stops, borrowers can no longer refinance, and investment decelerates with it. Official figures still report 5.2% growth in 2023 and 5% for 2024 and 2025, but his own estimate is that real growth since 2022 has been only 1.5%-2% — already below the US.
— Logan WrightScoring China on PPP amounts to rewarding deflation
Against the common rebuttal that China already surpassed the US on a purchasing-power-parity basis, Logan says PPP comparisons still mean something for developing countries but do not hold up between the world's two largest economies: scoring on PPP rewards China for manufacturing deflation — the lower domestic prices go, the stronger the economy looks, when deflation is precisely the problem. He also stresses that debt is repaid nominally in local currency, so nominal GDP is what matters; and the exchange rate is not an exogenous variable but an external signal of China's policy capacity.
— Logan WrightCapital controls are not a cure, they only buy time
Logan concedes that China's capital controls genuinely work, but argues they are no panacea for enormous macro imbalances. The impossible trinity dictates that free capital movement, a stable exchange rate, and independent monetary policy can at most be achieved two at a time. What capital controls do is slow outflows, suppress rapid cross-border swings, and channel outflows toward routes the government can see — Huawei and BYD being able to expand abroad in force, while the overseas acquisitions of private firms like HNA were halted in 2016, are the two faces of that same screening mechanism.
— Logan WrightCredit is still subsidizing old industries, not rotating into new ones
Logan rejects the claim that credit is rotating into higher-productivity emerging industries: central bank data show that the share of loans issued at or below the loan prime rate has risen from the low-to-mid 20s% to 59%, evidence that banks are subsidizing continuously. The share of special-purpose bonds directed to so-called strategic industries rose only from about 2% to 6% between 2021 and 2025, with the vast majority still flowing to traditional sectors. Using the 2023 input-output tables, he estimates electric vehicles, batteries, AI, and solar together at roughly 6.3% of GDP — while the decline in property and infrastructure investment is about six times the increment from those new industries.
— Logan WrightEurope is the last remaining buyer of China's excess capacity
Logan judges that if Europe turns protectionist, China is "really finished": the US market has already narrowed and offers limited room for transshipment, and the developing world cannot absorb China's excess capacity while sustaining its own growth. He warns that America is wrong to fixate on bilateral deficits — the deficit is determined by the savings-investment gap, and tariffs merely redistribute it; failing to address the underlying imbalance only breeds more transshipment trade.
— Logan WrightWithout touching taxation, domestic demand will not lift off
Logan draws a parallel to the Soviet Kosygin reforms: faced with a choice between pushing reform through and preserving ideology, Brezhnev turned to the scientific-technological revolution instead. For China to convert savings into consumption, the real lever is tax policy — extracting resources from high-net-worth individuals, state-owned enterprises, and the private firms the financial system excludes. But he considers it nearly unimaginable that Xi Jinping would go on television and announce that "the fiscal and financial system of the past 15 years will no longer apply going forward." Beijing's insistence on the 5% growth narrative is partly meant to break down export controls and deter Western investment in alternative supply chains.
— Logan WrightChina in 2035 will look like Japan does today
Logan predicts that absent a dramatic policy shift, China's economy in 2035 will resemble Japan's: persistent deflation, persistent external surpluses, downward pressure on the currency, and low interest rates. The hardest constraint is demographics — the actual average age at death in China is 73, and the baby boom of the early People's Republic will bring a decline of 50-60 million people over the next decade, roughly 3%-4% of the total population; even holding births at last year's low of 7.92 million would not stop it. He also notes that the fiscal deficit is already approaching $2 trillion a year, or 9.5% of GDP, leaving far fewer resources to deploy than in the past. Finally, he says that if China really does win on export share, it will provoke a stronger political backlash in return — "winning is losing."
— Logan WrightIn their own words · checked verbatim
According to China's own economic data, which is chronically underreported, China peaked as a proportion of the global economy in 2021 at 18.5% of global GDP and has declined ever since.
Dmitri Alperovitch0:05
China saw basically an expansion of around a third of global GDP in new credit in just eight years. And we've never seen anything like this.
Logan Wright2:11
China's financial system is a bunch of assets without markets for them.
Logan Wright9:21
it's not crisis or collapse, it's decay that you're seeing in terms of this pressure.
Logan Wright25:43
It doesn't have to be called a quote unquote financial crisis, but it has all the same consequences of a financial crisis.
Logan Wright33:55
The average age at which people die is 73 in China. And so there was a baby boom basically right after the end of the Civil War.
Logan Wright40:04
the dilemma that Xi faces, the dilemma that China faces is if you win, you lose.
Logan Wright44:07
Figures
| China's peak share of global GDP | 18.5% (2021), declining ever since | 0:05 |
| US share of global GDP | roughly 26%, up from 24% in 2021 | 0:05 |
| Average China credit growth | 18% over 2007-2016; 9% since 2017; around 5% now | 2:11 |
| China's official vs. real growth | official: 5.2% in 2023, 5% in 2024/2025; real: 1.5%-2% since 2022 | 3:13 |
| Share of loans at or below LPR | 59%, up from the low-to-mid 20s% | 18:35 |
| Share of special-purpose bonds going to strategic industries | from about 2% in 2021 to about 6% in 2025 | 20:37 |
| New strategic industries as a share of GDP | roughly 6.3% | 21:39 |
| China's fiscal deficit | roughly $2 trillion/year, about 9.5% of GDP | 25:43 |
| Evergrande's total debt | $310 billion, roughly equivalent to Finland's GDP at the time | 32:55 |
Glossary
- PPP (Purchasing Power Parity)
- A method of comparing two currencies' purchasing power by pricing a common basket of goods, commonly used for comparisons involving developing countries.
- Impossible Trinity
- Free capital movement, a stable exchange rate, and independent monetary policy can at most be satisfied two at a time.
- Loan Prime Rate (LPR)
- The benchmark rate for China's loan market, currently around 3%.
- Special Revenue Bonds
- Bonds issued by Chinese local governments to finance specific projects, where project revenue is required to cover principal and interest.
- Total Factor Productivity (TFP)
- The growth in output that comes from technology and allocative efficiency once capital and labor inputs are stripped out.
- Demand-side Controls
- Countering a supplier by restricting import demand, rather than only controlling the other side's supply capacity.
How to listen
Investors and researchers who make macro calls on the US and China, and executives who treat China as a market or a supply source — especially anyone wanting to test the claim that China's new industries are its growth engine.
The first 3 minutes are guest introduction and article framing; start at 1:16 with the data comparison.