Two years ago China was riding high. Decades of miraculous growth had transformed a desperately poor nation into an economic superpower, with a gross domestic product that by some measures was larger than America’s. China’s aggressive response to COVID was widely praised; its Belt and Road Initiative, a huge program of infrastructure investments around the world, was clearly a bid for global influence, maybe even supremacy.

But now China is stumbling. Its “zero COVID” policy of locking cities down at the first indication of an outbreak proved untenable, but abandoning the policy hasn’t produced the expected economic surge. In fact, China is now experiencing deflation, inspiring comparisons with Japan’s slowdown in the 1990s (although Japan has actually done much better than legend has it).

What has gone wrong? Can China reverse its slide? And how should the rest of the world, the US in particular, respond?

Some analysts attribute China’s stumble to policies of its current leadership. An influential recent article by Adam Posen, president of the Peterson Institute for International Economics, suggests that China is suffering from “economic long COVID,” a decline in private-sector confidence brought on by arbitrary government intervention, which began before the pandemic but has intensified since.

But while the actions of Xi Jinping, China’s president, have indeed been erratic, I’m in the camp of economists like Michael Pettis of the Carnegie Endowment who see the country’s problems as more systemic.

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The basic point is that China, in various ways, suppresses private consumption, leaving the country with huge savings that need to be invested somehow. This wasn’t too hard 15 or 20 years ago, when Chinese GDP could grow as much as 10 per cent a year largely by catching up with Western technology: A rapidly growing economy can make good use of huge amounts of capital. But as China has grown richer, the scope for rapid productivity gains has narrowed, while the working-age population has stopped increasing and has begun to decline.

Inevitably, then, growth has slowed. The International Monetary Fund believes that over the medium term China can expect a growth rate of less than 4 per cent. That’s not bad — it’s something like twice the growth most observers expect for the United States. But China is still trying to invest more than 40 per cent of GDP, which just isn’t possible given falling growth.

This looming issue has been obvious for a decade or more, but China has been able to mask it largely by creating an immensely bloated real estate sector. This strategy, though, was unsustainable. Xi’s fumbles may have advanced the day of reckoning, but absent fundamental reform, China’s current predicament was only a matter of time.