Bradley Perrett | Lowy Institute research shows how big China's economy could become

It shows the evolving size of the Chinese economy relative to the US - China's actual performance up to now and two possible paths for the future.

Taken from a report by Lowy Institute researchers, it's deeply meaningful because China's ability to get its way politically and militarily rest on how big its economy is relative to others.

The larger its economy, the more important it is as a market for other countries - and therefore the more strength it has in pushing them to do as it wishes. The larger its economy, the more powerful the armed forces it can afford - and the more likely it is to win a war or frighten rivals into just giving up.

For the past few years, many Australians must have been wondering how China has suddenly become a big problem. Most of the answer is in the graph.

Focus on the left side of it, where the solid line shows the performance we've seen so far. In 2000, China's economy wasn't even 20 per cent as big as that of the US. Now it's about three-quarters as big; it's relative strength has quadrupled.

Similar diagrams would show its strengthening position relative to other countries. It's been growing faster than all of them.

Other factors magnify the relevance of that. Beijing has been spending its ballooning defence budget very efficiently, using an excellent strategy for warding off the US navy and air force.

So a graph showing China's rising military strength in East Asia would be even more dramatic than the economic one.

Also, China now shows it will aggressively exploit its power, rather than live harmoniously with the rest of the world. That became obvious in 2013-14, though it should have been expected long before.

Add the three factors together - money, strategy and aggression - and suddenly China is a worry.

But what about the future? That was the focus of Lowy researchers Roland Rajah and Alyssa Leng, whose report was published in March and deserves more attention than it has received.

Working in the notoriously difficult business of long-term economic forecasting, they find that China's annual gross domestic product growth will slow drastically, averaging only 2-3 per cent a year from now until 2050.

If correct, the conclusion is monumentally important, because economic growth works just like compound interest. Even a modest change in the annual rate accumulates to make a vast difference over several decades.

For 30 years up to about 2010, China's economy achieved a lightning average growth rate of about 10 per cent a year. Then it slowed, averaging 7.3 per cent up to 2019, compared with 2.6 per cent for Australia and 2.2 per cent for the US.

Economists have agreed that China will slow further, but their typical estimate out to 2050 has been 3.5-4 per cent a year. Political and strategic analysts have preferred to assume 5-6 per cent.

Let's suppose it turns out to be 5 per cent, then take into account expected US growth, and see how China's relative position changes. The result, shown on the graph, is horrendous for anyone worried about the ability of east Asia, Australia and New Zealand to resist Beijing's dominance in the long term: by 2050, China's economy would be 2.3 times as big as that of the US, the only country that might balance it.

Unless China turned nice, Australia would be in a desperate situation. At best, it would rely on solid unity among democracies in trying to contain Beijing.

But if Raja and Leng are right, the problem will be much more manageable, though still alarming. According to their forecast, also shown on the graph, China will still overtake the US but never stand head and shoulders above it.

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How can this be so?

China's economy has grown for familiar reasons: it has used more resources (more labour, more capital) and done so more efficiently (that is, it has increased productivity).

But all that is running into strong headwinds.

First, fertility in China fell below replacement level about three decades ago, so the workforce is shrinking.

The country can keep adding private capital, but doing so produces ever-smaller returns. And massive government investment will have to contract, because it has been verging on excessive.

An example is the magnificent high-speed rail network. It now totals 40,000 kilometres of line, yet even more is planned.

China commissioned its most productive high-speed rail lines more than a decade ago; those it has built since then have been progressively less useful. By now, the value of any more must be pretty marginal.

As for gains in productivity, that contribution to growth has weakened and, experience of other developing countries suggests, should weaken further, Rajah and Leng say.

But all that does not mean countries fearing dominance by China can put their feet up. Even if the Raja-Leng projections turn out to be spot on, China's strength relative to the US will still rise by about 50 per cent in the next decade or two.

The uncertainty of long-range economic forecasting will be another reason for caution, even if lots more economists come to expect slow Chinese growth. Governments, including the one in Beijing, can improve policies and get things moving. *

Finally, economics is not everything. Some military cataclysm - most plausibly, over Taiwan - could suddenly thrust China to overlordship in east Asia.

Where does that leave us? Still nervous, still needing to reinforce our defences as fast as possible - but closely watching China's economic statistics for signs of permanent slowdown.