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Part V: “The State of Global Equilibrium” - Implications of China Economy Downturn


Part 5 of Limits to Growth, titled “The State of Global Equilibrium”, explores what a sustainable steady-state economy, with stabilized population and capital, could look like. With China’s economy currently in a pronounced downturn, the ideas around equilibrium take on heightened relevance for investors.

Limits to Growth uses the World3 computer simulation to show that continuing exponential growth will lead to “overshoot and collapse” of population and living standards. The standard run results in collapse from resource shortages and pollution around 2070. Technological solutions can delay the collapse but not prevent it entirely.

The authors argue that avoiding collapse requires deliberately moving towards a “state of global equilibrium.” This means curbing growth in population and capital stocks to stabilize them at sustainable levels. Exactly what these levels are depends on society’s preferences. But some basic conditions are:

- Birth rates equal death rates, and investment equals depreciation, keeping population and capital stocks constant.

- Growth-driving positive feedback loops are balanced by stabilizing negative feedback loops.

- The aim is a “dynamic equilibrium” which is sustainable for future generations.

- New technologies increase efficiency to allow a high standard of living at constant throughput.

- But sufficiently rapid global action is required to avoid overshoot and collapse first.

Relating this idea of equilibrium to China’s current economic difficulties shows that markets have not yet grasped several key concepts from Limits to Growth:

1. Exponential growth cannot continue indefinitely on a finite planet. China maximized fast catch-up growth, but the risks of overshoot are now materializing. Markets are still underestimating these ecological limits.

2. Equilibrium requires fundamental changes in goals and values, not just tinkering with economic policy. China's challenge is as much about changing development models and expectations as about near-term stimulus.

3. Technology is not an automatic savior. It must be combined with foresight and equitable distribution of benefits. China's fixation on high-tech industrial policy has created imbalances that equilibrium thinking warns against.

4. The delays in reaching limits mean crises emerge faster than preventative policies. China has been slow to shift towards sustainability, despite growing resource pressures and pollution.

5. Overshoot risks being self-reinforcing until collapse ensues. As challenges mount, China could enter a negative spiral. Investors assume resilience, but equilibrium thinking says radical action is required.

This report explores these concepts in detail, to illuminate investors’ blind spots on China’s predicament and the paradigm shift global sustainability requires.

China’s Growth Hitting Limits

China’s economic model delivered stunning growth for decades by maximizing resource-intensive industrialization and urbanization. This exponential growth dynamic allowed China to catch up rapidly, becoming the world’s second largest economy. However, the Limits to Growth analysis implies such rapid growth courting “overshoot and collapse” was inherently unsustainable on a finite planet.

China has attained upper-middle income status, with per capita GDP exceeding $12,500. Continuing to grow at 6-7% annually from this high base is extremely resource-intensive, due to the law of diminishing returns. The World Bank estimates sustaining China’s growth now requires investment exceeding 40% of GDP – prodigious capital investment that is generating diminishing returns and rising debt.

The extensive growth model is showing clear strains. Debt has ballooned to over 280% of GDP, and overcapacity is visible in steel, cement, real estate and other sectors. Demographics are now unfavorable, with the labor force set to shrink. And despite heavy investment, TFP growth has slumped to 1% annually. As Limits to Growth projected, diminishing returns on capital are kicking in as exponential growth hits limits.

Meanwhile, Chinese resource consumption and carbon emissions have grown to half the global total, straining planetary boundaries. Air and water pollution impose estimated costs of 4-7% of GDP. Water scarcity looms as aquifers are depleted. Limits to Growth warned of precisely these ecological overshoot risks from exponential growth.

Regime priorities have also shifted, with Xi emphasizing security, stability and inequality reduction over maximum growth. The trade-off between growth and these goals will intensify given biophysical constraints. Slowing growth could even stall if inequality and security fears mount.

In sum, China’s remarkable catch-up growth is encountering limits from debt, demographics, diminishing returns, environmental degradation and changing political priorities. This entwines China in the global overshoot dynamic Limits to Growth described, despite its unique development model. Markets have been very slow to grasp the gravity of these structural limits presaging an end to hyper-growth. The default assumption remains that Beijing can revive growth against the headwinds. But equilibrium thinking suggests the catch-up era is ending, and sustaining growth will require systemic reform.

Growth Obsession Versus Equilibrium Values

The Limits to Growth concepts of overshoot and equilibrium center on values and goals, not just technology and economics. Continuing exponential growth reflects the dominant global value of GDP expansion with ever-higher consumption and living standards. The overarching priority is boosting production and consumption. This growth obsession has become engrained in China’s development model and psyche over decades of catch-up growth.

Limits to Growth argues this growth fetish is unsustainable on a planet of finite resources. But the transition to an equilibrium economy “must be founded on a basic change of values and goals at individual, national and world levels.” This requires reorienting values from growth to sustainability. Material living standards may not rise further, but quality of life can still improve through immaterial dimensions like leisure, health, culture and community. Critically, “growth must not be deliberately limited but should be left to seek its own levels” for the transition to succeed.

This diagnosis poses an existential challenge to China’s growth-obsessed development model. Policies to achieve growth targets have systemically shaped choices at the expense of environmental sustainability. Other values like leisure, spiritual development, ecology, and equity have been badly neglected. The social fabric has frayed amid dislocation and stark inequality.

Limits to Growth underlines that equilibrium requires more than just restraining growth – it necessitates redirecting the entire economy to new goals. Policymakers cannot just fix immediate problems with infrastructure stimulus and easing financing conditions. They have to rethink the entire model around a balanced, equitable, sustainable vision of human progress.

This will involve reforming fiscal policy, financial regulation, industrial policy, social safety nets, municipal governance, innovation ecosystems and much more. Quick-fix stimulus policies will not suffice. Changing mindsets and values around "development" is paramount. This requires political economy changes beyond anything witnessed in reform era China so far.

Technology Silver Bullets Won’t Work

The Limits to Growth simulation finds that no amount of technological progress can enable perpetual exponential growth on a finite planet. Tech solutions like renewable energy, electric transport and online commerce can improve efficiency and delay overshoot. But they cannot remove its causes at the system level. Cheap energy and resources still get consumed ever faster, enabling more growth that eventually exceeds limits again.

This finding contradicts the common belief that technology breakthroughs will always arise to surmount limits to growth. It also exposes the flaw in counting on technology alone to bail China out. Xi Jinping has focused on technology modernization and digital transformation to restart growth and avoid the middle-income trap. But technology cannot repeal the laws of diminishing returns, and risks unbalanced over-investment.

Limits to Growth emphasized that tech fixes have side effects that must be addressed and properly integrated. Otherwise they create new systemic imbalances. China’s high-tech obsession has manifestly generated such imbalances. Investment has channelled excessively to advanced manufacturing at the expense of services and SMEs. Capital misallocation has been rampant. Tech giant monopolies have entrenched while inequality, financial risk and environmental degradation have worsened.

The solution cannot just be yet more state-driven industrial policy to update manufacturing and invest in leading-edge technologies from chips to quantum computing and AI. That will not resolve the institutional blockages and value imbalances at the root of China’s predicament. It fails to recognize the limits of a high-tech dependent strategy without fundamental reforms.

Technology must be combined with foresight about side effects, and aligned with new values and improvement of institutions, infrastructure and human capital. It is not a silver bullet to sustain infinite growth. Investors should thus beware narratives promising imminent tech solutions to growth downshifts. Rapid technology change is no panacea for remaking unsustainable systems.

Delayed Collapse from Slow-Acting Limits

Limits to Growth uses system dynamics concepts to show how “delays in the system” lead to collapse being sudden and unexpected, because limiting factors take years or decades to accumulate before tipping the system. Because the first warnings of problems only emerge well after their causes appear, society often leaves it too late to respond effectively before collapse becomes inevitable.

This danger appears salient for China now. Greenhouse gas emissions, water shortages, industrial pollution and shallow social ties have been worsening for decades. But the fallout has been slow, sporadic and uneven. Beijing addressed problems reactively with tactical crackdowns and controls, but left the systemic drivers unaddressed. Because the limits to growth have been bordering on distant risks rather than immediate dysfunction, they have been consistently downplayed.

With Xi’s Common Prosperity push against inequality, the zero-COVID policy, industrial policy shifts, and the property squeeze, it appears Beijing recognizes belatedly that existential limits are crystallizing. However, these shifts are fragmented reactions to near-term pressures, not a coordinated transition to sustainability and equilibrium. Collapse will not arrive suddenly, but limits are conspiring to steadily erode growth, while brittleness builds up.

For investors, the lesson is to not dismiss ESG-style risks as long-term issues. Feedbacks mean resource depletion and ecological damage become self-reinforcing over years and decades. Pollution abatement costs drag on productivity. Declining natural capital requires diversion of investment. Health and environmental burdens weigh on human capital. Before long, sustainability risks compound financial fragility.

China’s leaders were complacent about creeping risks for too long. Sudden policy shifts reveal the extent of unpreparedness. For investors, unaddressed social and ecological limits are prone to generating delayed crises sooner and harder than expected. China’s downturn offers a warning about latent fragility. Sustainability requires early action before risks compound – delayed reform leads to accelerated destabilization.

Collapse Averted Requires Systemic Solutions

A key finding of Limits to Growth is the risk of collapse becoming self-reinforcing once growth decelerates due to hitting multiple limits simultaneously across resources, pollution, debt etc. As challenges compound, society loses resilience and the capacity to respond effectively. But decisive collective action aligned around a systems perspective can still avert catastrophe. This demands solutions as comprehensive as the scale of limits arising from exponential growth.

There are signs China’s policy-makers grasp the systemic nature of the transformation now required. But iterative loosening and regulatory tweaks will not reboot growth on old models. System dynamics logic says only a fundamental overhaul of development goals, values and processes can restore equilibrium. Japan’s experience showed piecemeal stimulus is ineffective once imbalances from financialized overgrowth manifest across the entire economy.

For investors, China’s downturn is an overdue wake-up that business-as-usual forecasts no longer hold in a world approaching limits. The reality of slow-building constraints hitting together means resilience is fragile, and collapse self-perpetuating without major change. This risks contagion across the globalized economy. But transformation is still achievable if societies make choices soon to live sustainably within planetary boundaries, as Limits to Growth concludes. The stakes in averting destabilizing overshoot have not been higher.


Part 5 of Limits to Growth offers a blueprint for “state of global equilibrium” that sustains prosperity with stabilized population and capital stocks. China’s faltering catch-up growth model is contrary to this vision, but the ecological principles are universal. Investors should radically reassess assumptions that China can restart exponential growth amid debt, demographics and diminishing returns. Global overshoot makes limits more binding than markets appreciate. The course ahead requires systemic change towards radically different goals and values around development. Technology alone cannot offer salvation but must integrate with ecological balance. Incentives everywhere remain to deny risks and delay change, risking self-reinforcing overshoot. But pursuing equilibrium through wise collective choices that elevate sustainability remains viable, and vital.

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