China’s economic miracle is by now a well-known story. Her unprecedented surge of economic growth lifted 800 million people out of poverty and catapulted the country into a peer rival of the United States on the geopolitical stage. China’s bloodied path of economic development, shepherded by an authoritarian one-party regime, traversing through revolution and war, famines, and market reforms arrived at a stage where it could credibly claim to be building an economic powerhouse. Its growth story has now hit a roadblock, urgently needing a gear shift.
As compared to the dizzying rate of growth it once manged, the growth numbers in China have been tepid for a while now. An air of negativity is palpable. Manufacturing has shrunk, exports have declined, and youth unemployment has reached record levels (breaching an all-time high of 21.3 percent in June for those aged between 16 to 24). China’s National Bureau of Statistics announced it would cease collecting data on youth unemployment. Reportage from China tells its own story: large sections of youth, unsure of a brighter future, are gripped by despondency and ennui. The economy meanwhile is temporarily sliding into deflation.
Real estate is the most important financial asset for ordinary Chinese and real estate related industries constitute a big chunk of the total output in China. A crisis in the sector has been unfolding for a few years and the news turned grimmer. The largest private property developer, Country Garden Holding, has close to 3000 construction projects across China and is nearing default.
Post the 2007-08 global financial crisis, the share of exports as a percentage of GDP dropped, and the real estate sector had to be propped up to achieve high GDP targets. Soon a bubble was brewing. The tycoon Wang Jianlin once called it “the biggest bubble in history.” A hot real estate sector is of course nothing new for economies across the world, it was Beijing’s decision to deliberately pop the bubble that makes China’s case sui generis. “Houses are for living in, not speculating with” Xi intoned.
This multipronged economic downturn, screaming for attention, has prompted broadly two schools of analysis, each offering differing diagnoses and prescriptions. One relies on an ideological critique of the regime and the other highlights the structural fault lines of the Chinese economy. To meaningfully understand the travails facing the Chinese economy, it is worth sketching out their arguments and chalk out their differences.
The ideological critique, instinctively appealing to any Lockean liberal identifies the party-state’s overbearing interference in the private sector as the root of the malaise. The pitfalls of an authoritarian model have finally caught up; the CCP is now following the path well-trodden by other arbitrary governments that have little sanctity for private property and individual freedoms. Authoritarian states lose the ability to command the economy and insulate it from macroeconomic shocks. From the broadened ambit of its counterespionage laws to raiding foreign businesses to withholding basic economic data – it has all led to creating a high-risk business climate in the country. In such a scenario, to focus extensively on one sector, such as real estate, is to miss the wood for the trees. All sweeteners and stimulus measures cannot win back the trust of the business community once they have been chastised by the whims and fancies of the party state.
This narrative draws heavily on Xi Jinping, who broke the “no politics, no problem” modus vivendi in place since the 1980s, which promised to deliver material benefits to its citizens in return for keeping their noses strictly out of the affairs of the state. Xi purged his political rivals; humiliated tech giants, and his heavy-handed rule during the pandemic stifled commercial activity of even small businesses. China’s repressive “zero COVID” policy that jolted the economy and led to immense suffering for ordinary individuals was the last straw. The business sector and the Chinese household scarred by the capricious governance of the regime and are now opting for short-term liquidity over long-term investments.
In such a climate, sector-specific solutions and other business sweeteners are temporary balms to soothe an economy suffering from a chronic disease. The risk-taking dynamism of the private sector is now past its expiry date. That a widely anticipated economic rebound has not materialized despite the state lifting all restrictions is read as a vindication of liberal economics. Forecasters predicting better growth numbers in the coming quarters are yet to come to terms with the long shadow of the authoritarian state.
The structural critique school has been beating the drum on China’s flawed growth model for a while now and traces the fault line to the time of the global financial crisis of 2007-08. While in the United States and Europe, there was overconsumption, financial excesses, and high indebtedness, China witnessed underconsumption and overinvestment. These global imbalances went to the root of the financial crisis. Post the crisis, China stimulated its economy through debt-financed investment, especially in the real estate sector which allowed it to temporarily avoid a recession. They argue that China’s years of rapid growth did not lead to a commensurate rise in workers’ and peasants’ demand. Beijing’s consumption repression growth model took money away from households and redistributed it to the export and state sectors.
The two main drivers of China’s high growth – investment and exports – were vulnerable. As an economy matures, investment in infrastructure becomes excessive relative to its stage of development. There are only that many roads, railways, bridges, and airports that a country can build (domestic investment in infrastructural development was about 44% of GDP each year on average between 2008 and 2021). There comes a time when investments in infrastructure start to become unproductive, and China is well past that threshold. The growth model that suited China’s needs when it opened its economy is not conducive to a more mature economy. Calls to lower interest rates, injecting more liquidity, and weakening its currency are no magic wands. A demand-side problem cannot be addressed by more twisted supply-side Keynesianism.
China, they argue, needs to increase the consumption capacity of the labouring classes by redistributing income away from enterprises to households. Such a rebalancing can be postponed but not ignored for perpetuity. And as Klein and Pettis wrote in their timely book ‘Trade Wars Are Class Wars’ this rebalancing is beneficial not just for China but for the global economy.
Why hasn’t the regime pursued this path? Some argue this is because Xi and his comrades are “suspicious of US-styled consumption”; their priority is relentless industrial development and are girding for a potential conflict. But it’s important to bear in mind that there are also no channels through which households can register their voice in an oligarchic political economy. Previous attempts at redistributive policies, most notably during the Hu Jintao era, were thwarted partially because workers, peasants, and middle-class households found no institutional space. The regime simply has no mechanism to deliver these reforms that are compatible with a Leninist party state.
The differences in the two analyses can be discerned. For the structural critique, the strident authoritarianism under Xi is not the cause of its economic travails but its morbid symptoms; the regime has a propensity to intervene, not necessarily out of an authoritarian proclivity, but to achieve the high growth rates it sets for itself. Yet while the ideological critique explicitly argues that China’s growth story cannot be bolstered until the party loosens its iron grip, even the structural critique’s prescription would require modest political liberalization to provide a voice to those who will benefit from such redistributive reform. Currently, Xi’s talk of a common prosperity program, commonly read as a move to reduce income inequality, is instead focused on asserting the dominance of the state over capital and streamlining the private sector to meet national goals.
China is not the first and will not be the last country to experience a boom-and-bust cycle, intrinsic as they are to capitalist development. Whether China can reform and rebalance the economy to usher in another era of lasting growth, much like Britain in the late 18th century and the United States in the early 20th century, or succumb to sustained stagflation, in the manner of Japan in the late 20th century remains to be seen. While China’s demographic challenges are rightfully posited to argue that it will “grow older before it grows rich” China’s top position in electric-vehicle and renewable energy industries are reminder of her capacity to dominate the global market.
The English economist J.A. Hobson in his book Imperialism (1902) envisioned different roadmaps for the 20th century depending on the trajectory China undertakes. The import of Hobson’s wisdom is even more pronounced in the 21st century. China has been the main engine of global growth in recent decades, a feat achieved by becoming the highest carbon-emitting country. In the age of the climate crisis, it is imperative for a hospitable planet that China’s future growth be less carbon intensive. Whether one roots for its success or hopes for its failure, as the country reaches a crucial juncture in its economic history, China stands in a privileged position to shape our common destiny.