The narrative surrounding China has undergone a rapid and dramatic shift, transforming it from an unstoppable force to a vulnerable giant. This shift can be attributed to a combination of recent events, policy decisions, and long-standing economic problems. While many focus on the erratic leadership of Xi Jinping, it is important to recognize that China’s economic challenges have been brewing for some time. These challenges stem from both personal limitations and deep-rooted ideological biases within the ruling party.
To fully grasp the current situation, it is essential to consider the long-term perspective. Following Deng Xiaoping’s rise to power in 1978 and the introduction of market-based reforms, China experienced a remarkable economic surge, with its real gross domestic product increasing more than sevenfold. This surge, however, was facilitated by China’s initial technological backwardness and its ability to rapidly adopt foreign-developed technologies. Nonetheless, the speed of China’s convergence was exceptional.
Unfortunately, since the late 2000s, China’s dynamism has waned. The International Monetary Fund estimates that total factor productivity, a measure of resource efficiency, has grown only half as fast since 2008 as it did in the previous decade. While these estimates should be approached with caution, there has undoubtedly been a notable slowdown in technological progress.
Moreover, China’s demographic landscape no longer supports rapid growth. Its working-age population reached its peak around 2015 and has been declining ever since. While some attribute China’s decline in dynamism to Xi’s leadership, it is an oversimplification. The slowdown began before Xi assumed power, and the complexities of long-term growth rates defy easy explanation.
Nevertheless, slower growth does not necessarily equate to an economic crisis. Japan, often considered a cautionary tale, has managed to fare reasonably well since its early 1990s slowdown. So why does China appear so ominous?
At the core, China faces the paradox of thrift, which posits that excessive consumer saving can dampen an economy. If businesses are unwilling to borrow and invest the surplus savings, it can lead to an economic downturn. This downturn, in turn, reduces investment, creating a vicious cycle. China’s exceptionally high national savings rate contributes to this predicament. Potential causes include a low birthrate, as individuals lack confidence in relying on their children for retirement support, and an inadequate social safety net that undermines trust in public assistance.
As long as China experienced rapid economic growth, businesses could find avenues to invest the surplus savings. However, that kind of growth has become a thing of the past. Consequently, China finds itself with an abundance of savings but limited investment opportunities. Desperate efforts have been made to mask this issue, from running significant trade surpluses (which posed protectionist risks) to inflating a real estate bubble (which is now bursting).
The obvious solution lies in boosting consumer spending, redistributing state-owned enterprise profits to workers, strengthening the safety net, and implementing direct cash transfers similar to the measures taken in the United States. However, such actions are hindered by ideological reasons. China’s leadership exhibits a mix of hostility towards the private sector (as increased consumer spending might dilute the party’s control), unrealistic ambitions (prioritizing future investments over present enjoyment), and a puritanical opposition to a robust social safety net. Xi condemns “welfarism” that could erode the work ethic.
As a result, China finds itself in a state of policy paralysis, resorting to half-hearted attempts at investment-led stimulus similar to its past strategies. While it would be premature to write off China, a genuine superpower with immense capacity to rebound, the next few years may bring challenging times.
In conclusion, the narrative shift surrounding China reflects a complex interplay of recent events, policy decisions, and long-standing economic challenges. It is crucial to take into account both the long-term perspective and the ideological biases shaping China’s response. While the future remains uncertain, it is clear that China’s current circumstances present formidable hurdles.
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