China’s jobless college graduates have become a source of embarrassment for Chinese leader Xi Jinping. The unemployment rate among young people in the country has reached an all-time high, showcasing China’s severe economic troubles domestically and internationally. In an attempt to hide these woes, Xi’s administration stopped releasing unemployment data. However, China’s economic problems cannot be concealed. The “China model” of combining liberalization and state control, which drove the country’s rapid growth, is now crumbling. Economists and Chinese policymakers have long warned about the inherent flaws in this model, but Xi focused more on consolidating his own power rather than enacting necessary reforms. The problems have now become so deep-rooted and the required fixes so costly that it may be too late for a turnaround.
Contrary to popular belief, China may not surpass the United States as the world’s dominant economy if current trends persist. In fact, it is already falling behind. However, the decline of China does not automatically guarantee the future of American global power. China may turn out to be a less formidable competitor than previously thought and offer a less attractive development model for other countries. On the other hand, economic failure could intensify Xi’s determination to challenge American dominance through alternative and potentially destabilizing means.
The downfall of the China model is largely a result of its initial success. When China began its free-market reforms in 1980, it was poorer than countries like Ghana and Pakistan on a per capita basis. Today, China boasts an $18 trillion economy that can develop advanced technologies like 5G networks and electric vehicles. The driving force behind this model is massive investments into various sectors such as factories, infrastructure, and real estate. While these investments initially boosted economic efficiency and growth, they ultimately led to wasteful excess and undermined the overall health of the economy.
China’s debt has skyrocketed as a result of this unproductive investment, growing at a faster pace than its economy. The communist regime relied on high growth rates to validate its legitimacy, so whenever growth rates dipped, authorities pumped credit into the system to revive them. This led to local governments accumulating a staggering $9 trillion in debt. Chinese leaders were well aware of the risks associated with this investment strategy and recognized the need to rebalance the economy by reducing reliance on investment and promoting domestic consumption. To achieve this, liberalizing the financial sector and loosening state control over private enterprises were necessary. However, Xi’s consolidation of power resulted in a stronger state influence and a retreat of the private sector.
The COVID-19 pandemic dealt a severe blow to China’s already struggling model. The strict lockdown measures implemented by the government further depressed incomes and stifled domestic consumption. As a result, the economy is now experiencing deflation, which could further discourage the investment and spending needed for recovery. The real estate sector, which was once a major contributor to economic growth, is now facing declining investment, sales, and prices. The largest private developer, Country Garden, is on the verge of default.
While China’s economy is not beyond repair, the necessary fixes will be costly and painful. The government will need to address bad debts, shut down unviable companies, and implement sweeping market reforms. However, the Chinese government has shown no interest in adopting these reforms and has only made superficial attempts to support the economy. Economists predict a somber outlook for growth in China. Daniel Rosen of Rhodium Group believes that unless significant changes are made, China’s growth will continue to decline.
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