Posted on 04/05/2024 9:02:35 PM PDT by SeekAndFind
IT is ChINA’S gravest economic test since the most far-reaching of Deng Xiaoping’s reforms began in the 1990s. Last year the country achieved growth of 5%, but the pillars of its decades-long miracle are wobbling. Its famously industrious workforce is shrinking, history’s wildest property boom has turned to bust and the global system of free trade that China used to get richer is disintegrating. As our reporting explains, President Xi Jinping’s response is to double down on an audacious plan to remake China’s economy. Blending techno-utopianism, central planning and an obsession with security, this sets out China’s ambition to dominate the industries of tomorrow. But its contradictions mean it will disappoint China’s people and anger the rest of the world.
Compared with 12 months ago, let alone the go-go years, the mood in China is dour. Although industrial production perked up in March, consumers are depressed, deflation lurks and many entrepreneurs are disillusioned. Behind the angst lie deeper fears about China’s vulnerabilities. It is forecast to lose 20% of its workforce by 2050. A crisis in the property industry, which drives a fifth of gdp, will take years to fix. It will hurt cash-strapped local governments that relied on land sales for revenues and flourishing real estate for growth. Relations with America are steadier, as a phone call between Mr Xi and President Joe Biden this week attested. But they remain fragile. Chinese officials are convinced that America will restrict more Chinese imports and penalise more Chinese firms, whoever wins the White House in November.
China’s response is a strategy built around what officials call “new productive forces”. This eschews the conventional path of a big consumer stimulus to reflate the economy (that’s the kind of ruse the decadent West resorts to). Instead Mr Xi wants state power to accelerate advanced manufacturing industries, which will in turn create high-productivity jobs, make China self-sufficient and secure it against American aggression. China will leapfrog steel and skyscrapers to a golden era of mass production of electric cars, batteries, biomanufacturing and the drone-based “low-altitude economy”.
The scope of this plan is breathtaking. We estimate annual investment in “new productive forces” has reached $1.6trn—a fifth of all investment and double what it was five years ago in nominal terms. This is equivalent to 43% of all business investment in America in 2023. Factory capacity in some industries could rise by over 75% by 2030. Some of this will be made by world-class firms keen to create value, but much will be prompted by subsidies and implicit or explicit state direction. Foreign companies are welcome, even though many have been burned in China before. Mr Xi’s ultimate aim is to invert the balance of power in the global economy. Not only will China escape dependence on Western technology, but it will control much of the key intellectual property in new industries and charge rents accordingly. Multinationals will come to China to learn, not teach.
However, Mr Xi’s plan is fundamentally misguided. One flaw is that it neglects consumers. Although their spending dwarfs property and the new productive forces, it accounts for just 37% of gdp, much lower than global norms. To restore confidence amid the property slump and thereby boost consumer spending requires stimulus. To induce consumers to save less requires better social security and health care, and reforms that open up public services to all urban migrants. Mr Xi’s reluctance to embrace this reflects his austere mindset. He detests the idea of bailing out speculative property firms or giving handouts to citizens. Young people should be less pampered and willing to “eat bitterness”, he said last year.
Another flaw is that weak domestic demand means some new production will have to be exported. The world has, regrettably, moved on from the free-trading 2000s—partly because of China’s own mercantilism. America will surely block advanced imports from China, or those made by Chinese firms elsewhere. Europe is in a panic about fleets of Chinese vehicles wiping out its carmakers. Chinese officials say they can redirect exports to the global south. But if emerging countries’ industrial development is undermined by a new “China shock”, they, too, will grow wary. China accounts for 31% of global manufacturing. In a protectionist age, how much higher can that figure go?
The last flaw is Mr Xi’s unrealistic view of entrepreneurs, the dynamos of the past 30 years. Investment in politically favoured industries is soaring, but the underlying mechanism of capitalist risk-taking has been damaged. Many bosses complain of Mr Xi’s unpredictable rule-making and fear purges or even arrest. Relative stockmarket valuations are at a 25-year low; foreign firms are wary; there are signs of capital flight and tycoons emigrating. Unless entrepreneurs are unshackled, innovation will suffer and resources will be wasted.
China could become like Japan in the 1990s, trapped by deflation and a property crash. Worse, its lopsided growth model could wreck international trade. If so, that could ratchet geopolitical tensions even higher. America and its allies should not cheer that scenario. If China was stagnating and discontented, it could be even more bellicose than if it were thriving..css-1g1r205{font-family:var(--ds-type-system-serif);font-size:var(--ds-type-scale-1);line-height:var(--ds-type-leading-lower);font-weight:700;color:var(--ds-color-london-5);}
If these flaws are obvious, why doesn’t China change course? One reason is that Mr Xi is not listening. For much of the past 30 years, China has been open to outside views on economic reform. Its technocrats studied global best practice and welcomed vigorous technical debates. Under Mr Xi’s centralising rule, economic experts have been marginalised and the feedback leaders used to receive has turned into flattery. The other reason Mr Xi charges on is that national security now takes precedence over prosperity. China must be prepared for the struggle ahead with America, even if there is a price to pay. It is a profound change from the 1990s and its ill-effects will be felt in China and around the world.
Abortion was its bomb to its economy.
Limiting childbirth and Chinese desire for Male children along with abortion, is biting China in the keister. Now the work force is shrinking because of it.
Watch out! China will react at some point and that can’t be good.
Had it not been for the abortion of 500 million Chinese babies, their population and economy would still be growing rather than collapsing.
Their economy will decline like Japan. Remember in the ‘80s, Japan was supposed to overtake USA economically? Then they got old.
” Investment in politically favoured industries is soaring, but the underlying mechanism of capitalist risk-taking has been damaged. Many bosses complain of Mr Xi’s unpredictable rule-making and fear purges or even arrest. “
Who is the Economist kidding ?
China is a Communist dictatorship, but the rules are absolutely stable compared to the circus in the West, where every month there are more and more ludicrous and unsustainable mandates, prohibitions and exclusions - and that is just the energy and electrical systems !
Good article, thanks for posting.
Who to believe? A Chinese communist? Or a British socialist economist?
Quite a pickle.
You’re in fantasy land.
First time I've heard anything like this phrase used in a mainline economic journal or essay.
The Chinese were always mercantilists and we were always suckers. Yet the MS(Econ)M was not allowed to tell us.
Yes, and their penchant for being economic predators is coming back to bite them now.
I say good.
This is just from today.
This is from 2 days ago.
Whatever their sins, China doesn’t suddenly mandate replacement of 25 percent of electrical grid transformers when they are working perfectly fine. And the energy savings will be minuscule.
Only in the West do we do this to ourselves.
They do crazier stuff.
Name some that relate to business regulation.
That just appear out of the blue - like the transformer mandate in January. Or that Colorado mineral extraction cancellation.
Or banning LNG exports. After telling the EU that the USA will backstop their gas supplies.
Just read that there is a bridge being built in South America that will increase immigration to the US like crazy and that it is thought China is behind it.
China is building bridges and roads at the Darien Gap in Panama to expedite invaders coming up from south America.
Hold on to those old “inefficient” transformers. Don’t scrap them.
In case of an EMP attack, finding replacement transformers might be tricky, since China makes almost all of them.
Their economy's dependence on women in the workforce is the real long-term destroyer of its society. Abortion is just a symptom.
All industrialized nations (China, Japan, US, Europe) need to figure out a way to get their native women to marry in their early 20s and make at least 3 babies.
Or civilization is through.
By whatever means necessary. Even going full "Handmaids Tale".
China's "social credit" system may give them an advantage if they choose to use it.
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