The narrative about China has changed with astonishing speed, and it is no longer an unstoppable monster, but a pathetic and defenseless giant. How did it happen?
I have the feeling that much of what is written about China attaches too much importance to recent events and politics. Yes, Xi Jinping is an erratic leader. But China’s economic problems have been building for a long time. And while Xi’s inability to properly address these complications no doubt reflects his personal limitations, it also shows deep ideological biases within China’s ruling party.
Let’s start with the long-term perspective.
For three decades, after Deng Xiaoping came to power in 1978 and introduced market-based reforms, China experienced a huge boom, with its real gross domestic product more than sevenfold. To be fair, this prosperity was possible only because China started far behind technologically and was able to rapidly increase its productivity by adopting technologies already developed abroad. But the speed of Chinese convergence was extraordinary.
However, since the late 2000s, the country appears to have lost much of its dynamism. The IMF calculates that total factor productivity—an indicator of how efficiently resources are used—has grown since 2008 half as fast as in the previous decade. Although we shouldn’t take these calculations at face value, it is clear that the pace of technological progress has slowed.
And China no longer has the demographics to support rapid growth: its working-age population peaked around 2015 and has been declining ever since.
Many analysts attribute China’s loss of dynamism to Xi, who came to power in 2012 and has consistently been more hostile to private business than his predecessors. This seems too simplistic to me. Of course, Xi’s emphasis on state control and arbitrariness has not helped, but China’s slowdown began even before Xi came to power.
And, in general, no one is very good at explaining long-term growth rates. The great MIT economist Robert Solow quipped that attempts to explain why some countries grow more slowly than others always end in “a waste of amateur sociology.” There were probably deep reasons why China could not continue to grow as it had before 2008.
In any case, it is clear that China cannot sustain anything remotely resembling the high growth rates of the past.
However, slower growth does not have to translate into an economic crisis. As I’ve already noted, even Japan, often regarded as the latest sobering example, has performed fairly decently since its slowdown in the early 1990s. Why are things looking so bad in China?
At a basic level, China suffers from the thrift paradox, whereby an economy can suffer if consumers try to save too much. If businesses are not willing to borrow and then invest all the money consumers are trying to save, the consequence is an economic recession. Such a recession can reduce the amount that businesses are willing to invest, so an attempt to save more can, in effect, cause investment to decline.
And China has an incredibly high national savings rate. Because? There is no consensus, but an IMF study argues that the main ingredients are a low birth rate — so people don’t think they will be able to count on their children in retirement — and an inadequate social safety net, so nor does he believe that he will be able to count on public support.
While the economy was able to grow at an extremely fast rate, companies found useful ways to invest all those savings. But that kind of growth is a thing of the past.
The consequence is that China has a huge amount of savings all fixed up and without a good girlfriend. And the history of Chinese politics can be summed up in increasingly desperate efforts to mask this problem. For a while, the country sustained demand on the back of huge trade surpluses, but this carried the risk of a protectionist backlash. Later, China channeled excess savings into a colossal housing bubble, but this bubble has now been burst.
The obvious answer is to boost consumer spending; get state companies to share more of their profits with workers; strengthen the safety net; and, in the short term, the government could simply give people money, by sending checks, as the United States has done.
Why is this not happening? Various reports suggest that there are ideological reasons why China refuses to do the obvious. From what I understand, the country’s leadership suffers from a strange mix of hostility toward the private sector (just giving people the ability to spend more would dilute party control), unrealistic ambition (China is supposed to invest in the future , not enjoying life now) and a sort of puritanical opposition to a strong social safety net, with Xi condemning “welfareism” as it could erode the work ethic.
The result is political paralysis, and half-hearted efforts by China to push through the same kind of investment-based stimulus it has used in the past.
Should we write off China? Of course not. China is a full-fledged superpower, with enormous capacity to get down to business. Sooner or later, he will surely overcome the prejudices that are undermining his political response. But the next few years may be pretty nasty.
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