China's Economic Peak Is Behind It: Credit Stalls, Deflation Looms
China's share of global GDP peaked in 2021 and has fallen since; credit growth has dropped from 18% to 5%, real growth may be just 1.5%-2%, and the US has now outperformed for five straight years. The supply-chain-dominance narrative is falsified by 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 US
Dmitri sets the tone with official data: China's share of global GDP peaked at 18.5% in 2021 and has declined every year since; the US rose from 24% to about 26%. From this he concludes that not only is it nearly impossible for China to replace the US as the world's largest economy, but America's economic advantage may keep widening over the next decade. Logan agrees completely and steers the discussion toward a framework of ‘decay, not collapse.’
— Dmitri AlperovitchThe root of China's slowdown is that credit expansion is over
Logan attributes China's slowdown to the end of extraordinary credit expansion. In the eight years after the financial crisis, China added credit equal to one-third of global GDP; credit growth fell from an average of 18% in 2007-2016 to 9% after 2017, and is now slightly above 5%. Once credit stops, borrowers can no longer refinance and investment decelerates. Officials still report 5.2% growth for 2023 and 5% for 2024 and 2025, but he estimates real growth since 2022 at only 1.5%-2%, already below the US.
— Logan WrightScoring by purchasing power parity amounts to rewarding deflation
To the common rebuttal that China has already surpassed the US on PPP, Logan says PPP comparisons still make sense for developing countries but do not hold between the world's two largest economies: scoring by PPP amounts to rewarding China for manufacturing deflation — the lower domestic prices are, the stronger the economy looks, yet deflation is precisely the problem. He also stresses that debt is repaid in nominal 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 do work, but argues they are no panacea for a giant macro imbalance. The impossible trinity dictates that free capital flow, exchange-rate stability and monetary-policy independence can be achieved at most two at a time. The function of capital controls is to slow outflows, suppress rapid cross-border volatility, and channel outflows into channels the government can see — Huawei and BYD can go abroad in a big way, while the overseas M&A of private firms like HNA in 2016 was halted; these are two sides of the same screening mechanism.
— Logan WrightCredit is still subsidising old industries, not shifting to new ones
Logan rebuts the claim that credit is shifting toward higher-productivity new industries: central bank data show the share of loans issued at or below the Loan Prime Rate has risen from the low 20s percent to 59%, showing banks are continuously subsidising. The share of special revenue bonds going to so-called strategic industries rose only from about 2% in 2021 to 6% in 2025, with the vast majority still flowing to traditional sectors. Using the 2023 input-output tables, EVs, batteries, AI and solar together come to about 6.3% of GDP, while the decline in property and infrastructure investment is roughly six times the increment from these new industries.
— Logan WrightEurope is the last buyer of China's excess capacity
Logan judges that if Europe turns protectionist, China is ‘really finished’: the US market has already narrowed and room for transshipment is limited, and the developing world cannot absorb China's excess capacity while maintaining its own growth. He warns that the US focus on the bilateral deficit alone is wrong — the deficit is determined by the savings-investment gap, and tariffs merely redistribute it; failing to address the underlying imbalance will only spawn more transshipment trade.
— Logan WrightWithout tax reform, domestic demand cannot get up off the floor
Logan compares the present to Kosygin's reforms in the Soviet Union: Brezhnev chose a turn to the scientific-technological revolution over pushing reform and preserving ideology. For China to convert savings into consumption, the real lever is tax policy — extracting resources from high-net-worth individuals, state-owned enterprises and private firms shut out of the financial system. But he thinks it nearly unimaginable that Xi Jinping would go on television and declare that ‘the fiscal and financial system of the past 15 years no longer applies’; Beijing sticks to the 5% growth narrative partly to undermine export controls and deter Western investment in alternative supply chains.
— Logan WrightChina in 2035 will look like Japan today
Logan predicts that absent a dramatic policy shift, China's economy in 2035 will look more like Japan's: persistent deflation, persistent external surpluses, downward pressure on the exchange rate and low interest rates. The hardest constraint is demography — China's actual average age at death is 73, and the baby boom at the founding of the PRC will bring a population decline of 50-60 million over the next decade, about 3%-4% of the total; even holding the birth rate at last year's low of 7.92 million would not stop it. He also notes the fiscal deficit is already close to $2 trillion a year, 9.5% of GDP, leaving far fewer resources to draw on than in the past. Finally he says that if China really did win on export share, it would only provoke a stronger political backlash — ‘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 continuously since | 0:05 |
| US share of global GDP | About 26%, up from 24% in 2021 | 0:05 |
| Average Chinese credit growth | 18% in 2007-2016; 9% since 2017; about 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%, previously in the low 20s percent | 18:35 |
| Share of special revenue bonds to strategic industries | From about 2% in 2021 to about 6% in 2025 | 20:37 |
| New strategic industries as a share of GDP | About 6.3% | 21:39 |
| China's fiscal deficit | About $2 trillion/year, about 9.5% of GDP | 25:43 |
| Evergrande's total debt | $310 billion, roughly equal to Finland's GDP at the time | 32:55 |
Glossary
- PPP / Purchasing Power Parity
- A method of comparing two currencies by the purchasing power of a basket of goods, often used for comparisons among developing countries.
- Impossible Trinity
- Free capital flow, exchange-rate stability and monetary-policy independence: at most two of the three can be satisfied at once.
- Loan Prime Rate (LPR)
- The benchmark rate in China's loan market, currently about 3%.
- Special Revenue Bonds
- Bonds issued by Chinese local governments to finance specific projects, whose revenue must cover principal and interest.
- Total Factor Productivity (TFP)
- Output growth attributable to technology and allocative efficiency after stripping out capital and labour inputs.
- Demand-side Controls
- Countering a supplier by restricting import demand rather than only policing the other side's supply capacity.
How to listen
Investors and researchers making macro judgments on the US and China, and corporate decision-makers who treat China as a market or a supply-chain source; especially suited to anyone wanting to test the ‘China's new industries = growth engine’ narrative.
The first 3 minutes of guest introduction and article preamble can be skipped; start from the data comparison at 1:16.