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.
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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).
Can China reverse its slide?
What has gone wrong? Can China reverse its slide? And how should
the rest of the world, the U.S. 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.
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.
Country’s problems are systemic
But while the actions of
Xi Jinping, China’s president, have
indeed been erratic, I am in the camp of economists like Michael Pettis of the
Carnegie Endowment who see the country’s problems as more systemic.
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 percent 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 percent. 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 percent of GDP, which just isn’t possible given falling growth.
The looming issue has been obvious for a decade or more
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.
So is China down and out? Is Posen right in asserting that this
is “the end of China’s economic miracle”?
Resistant to reforms
I would not count on it. As Adam Smith once remarked, “There is
a great deal of ruin in a nation.” China is already a superpower, and its
current stumbles are not likely to end that status. Furthermore, while China’s
government has been weirdly resistant to reforms that might make its growth
sustainable, we can’t assume that this resistance will continue indefinitely.
And what do China’s problems mean for the United States? The
Biden administration has taken a very hard line on China — much harder in
practice than Donald Trump, who talked tough but mostly flailed around
ineffectually. The
U.S. government is now promoting semiconductor production to
reduce dependence on China, trying to block exports of advanced silicon chips
and, most recently, banning some
high-tech investments in China.
Have these actions become unnecessary now that China’s path to
global dominance seems to be disappearing?
Doesn’t change that calculation
No. You don’t have to be a xenophobe to be worried about the
possible future actions of a superpower whose leadership seems to be growing
more autocratic and more erratic with each passing year. Trying to reduce that
superpower’s ability to do harm makes sense, even if it makes many people
nervous. And the possibility that China may not be as much of a
superpower as
many expected doesn’t change that calculation.
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.
If anything, China’s problems may reinforce the case for
precautionary action. China’s rulers have long relied on economic achievement
to give them legitimacy. Now they’re facing trouble on the home front, most
immediately in the form of rapidly rising youth unemployment. How will they
respond?
Ideally, as I said, they will push through
long-needed reforms that put more income in the hands of families, so that rising consumption can
take the place of unsustainable investment. But you don’t have to study much
history to be aware that autocratic regimes sometimes respond to domestic difficulties
by trying to distract the population with foreign adventurism.
I am not saying that will happen. But realistically, China’s
domestic problems make it more, not less, of a danger to global security.
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