The Unpredictable Road: China's Economic Troubles Amidst the COVID-19 Fallout

 

China's economic prosperity seemed unstoppable, but now it is like a kite without a string, drifting aimlessly. As China seeks to close the gap further with the United States, it faces the challenge that centralized economies excel at emulation but struggle with innovation. This presents a formidable obstacle as it seeks to maintain its growth trajectory.

Since its reintegration into the global economy in 1978, China's economic journey has been nothing short of remarkable. A triumphant narrative of farm reform, rapid industrialization, and a significant increase in per capita income unfolded, contributing to the upliftment of nearly 800 million people from the depths of extreme poverty. The Chinese economy, which produced merely a fraction of what the United States did in 1980, has since grown to reach approximately three-quarters of the American economic scale. This exceptional growth was primarily underpinned by an export-driven economic model and a pragmatic approach to economic policy that served as a beacon of success for developing nations worldwide.

However, the landscape took an unexpected turn when the Chinese government abandoned its "zero COVID-19" policy at the close of 2022. Rather than experiencing a swift resurgence, China's economy seemed to veer off course, encountering a series of obstacles and challenges. Observers, economists, and policymakers worldwide found themselves asking the crucial question: Whatever has gone wrong? This abrupt deviation from their previous strategy left China grappling with unforeseen economic disruptions and uncertainties, prompting concerns about the nation's ability to balance public health with economic stability. In the post-pandemic era, China's economic trajectory has become a matter of global interest and concern, given its prominent role in the world economy.

The latest economic data from China paints a worrisome picture. In the second quarter, the economy expanded at an annualized rate of just 3.2%, a figure that stands in stark contrast to the potentially robust growth rate of nearly 6% in the United States, as indicated by available published evidence. This disappointing growth performance is accompanied by a cascade of other concerning indicators. House prices have experienced a decline, sending shockwaves through the property market, particularly affecting property developers who often sell homes before construction. This downturn has, in turn, deterred potential homebuyers. Furthermore, consumer spending, business investments, and exports have all fallen short of expectations, casting a shadow over China's economic outlook. In a global landscape where many countries are grappling with the challenge of high inflation, China faces the unique problem of deflation, with consumer prices registering a decline in the year up to July. Some analysts have even raised the specter of China falling into a deflationary trap reminiscent of Japan's struggles in the 1990s.

However, characterizing China's predicament solely as a case of "Japanification" may be an understatement of the underlying issues. The situation is potentially more dire in China, primarily due to the disparity in living standards. While Japan's living standards reached approximately 60% of America's by 1990, China's currently lag far behind, standing at less than 20% of U.S. living standards. Unlike Japan, China is grappling with deeper challenges that extend beyond weak demand and a heavy debt burden. Many of these challenges stem from fundamental failures in its economic policymaking, which appear to be worsening as President Xi Jinping centralizes power. This shift in governance dynamics adds another layer of complexity to China's economic woes, making the path to recovery even more uncertain.

Just over a decade ago, China's economic experts were celebrated as masters of their craft, orchestrating an astonishing economic transformation that captured the world's attention. They not only oversaw China's meteoric rise as an economic juggernaut but also earned widespread praise for their pivotal role in stabilizing the global economy during the chaotic period of the 2007-2009 global financial crisis. In many ways, China was viewed as the knight in shining armor that saved the world's economy from potential collapse. Throughout the 2010s, whenever China's economy faced turbulent waters, these officials defied skeptics by implementing measures such as loosening credit, embarking on ambitious infrastructure projects, or reviving the property market.

Yet, this resilience came at a cost. With each economic challenge, both public and private debts continued to mount, sparking concerns about the sustainability of the housing boom and the necessity of the colossal infrastructure endeavors. Today, Chinese policymakers find themselves caught in a perplexing predicament. They are wary of furthering projects that might become white elephants or inflating the property bubble to unsustainable levels. Simultaneously, they are hemmed in by limitations on pursuing more desirable forms of economic stimulus, such as increasing pension spending or providing financial assistance to low-income households. These limitations stem from President Xi Jinping's reluctance to embrace extensive social welfare programs and the government's determination to uphold an official deficit capped at 3% of GDP.

Consequently, the response to the current economic slowdown has been rather lukewarm. Policymakers are hesitant to make substantial interest rate cuts, and their recent actions, like the modest 0.1 percentage point cut in the one-year lending rate in August, have left investors underwhelmed. This lackluster response to economic challenges is just one in a series of policy missteps. China's assertive foreign policy stance and its mercantilist industrial policies have heightened economic tensions with the United States. On the domestic front, the government has grappled with addressing speculative behavior in the housing market and a system in which property developers are considered too big to fail due to their substantial obligations. Additionally, regulatory crackdowns on consumer technology firms perceived as unruly and monopolistic have added to market uncertainties. The pandemic response, marked by lockdowns but insufficient vaccination efforts for a controlled exit, further underscored governance challenges.

These mistakes may be rooted in a shift in priorities for the Chinese Communist Party (CCP). It appears that short-term economic growth is no longer the paramount goal. President Xi Jinping seems to believe that China must ready itself for enduring economic and, potentially, military conflicts with the United States. Consequently, he now emphasizes China's pursuit of national greatness, security, and resilience. This shift implies a readiness to make sacrifices in the pursuit of these long-term objectives, even if it means sacrificing short-term growth. When emphasizing growth, it should be of a superior quality that aligns with China's long-term vision for the future.

Xi's Impact

In the eyes of Mr. Xi, the paramount leader of China, the Chinese Communist Party's (CCP) decisions should align with a vision of strength and stability. However, even when measured against his own criteria, it is evident that the recent course of actions taken by the CCP has been flawed and fraught with consequences. One significant setback was the abandonment of the "zero Covid-19" policy, which not only eroded Mr. Xi's prestige but also introduced uncertainty into a nation that prided itself on meticulous control. The abrupt shift in this policy not only created confusion but also undermined the government's image as a resolute authority.

Not only that, the aggressive stance taken against technology firms has sent shockwaves through China's entrepreneurial landscape. Rather than nurturing innovation, these actions have instilled fear and caution among entrepreneurs, stifling creativity and economic dynamism. Another worrisome prospect on the horizon is the potential for persistent deflation due to the authorities' reluctance to stimulate consumption. This could result in the real value of debts skyrocketing, casting a heavy shadow over the economy and limiting opportunities for growth.

Most critically, the CCP's ability to maintain its grip on power and to stand toe-to-toe with the United States depends on its capacity to raise living standards for its people. These recent policy missteps have put that objective in jeopardy, as they risk exacerbating social disparities and undermining the party's popularity among citizens.

Regrettably, these mounting policy failures seem less a calculated focus on national security and more a testament to a pattern of ill-advised decision-making. They coincide with Mr. Xi's consolidation of power and his replacement of technocrats with loyalists in top leadership positions. Where China once allowed room for debate about its economic strategies, it has now coerced analysts into presenting an artificially optimistic view. In recent times, the government has even halted the publication of less flattering data, concealing the extent of youth unemployment and consumer confidence issues. While China still possesses a reservoir of talent within its government, the expectation of rational analysis or innovative thinking is increasingly naive, given that loyalty is prioritized above all else.

This shift is underscored by an ideological blend that distrusts wealthy entrepreneurs on the left, while harboring a right-wing reluctance to support the economically disadvantaged. This fusion leaves little room for balanced policymaking.

The root of China's problems lies at the very top, and they are likely to persist, or even worsen, as policymakers grapple with a slew of mounting challenges. China's population is also rapidly aging, America is growing increasingly hostile, and it is attempting to strangle strategically significant sectors of China's economy, such as chipmaking. As China seeks to close the gap further with the United States, it faces the challenge that centralized economies excel at emulation but struggle with innovation. This presents a formidable obstacle as it seeks to maintain its growth trajectory.

In retrospect, the optimistic predictions by liberals about China's path have often fallen short. While in the 2000s, Western leaders believed that increased trade, markets, and growth would naturally lead to democracy and individual liberty, the current situation paints a different picture. China is now testing the reverse relationship, with evidence mounting that greater autocracy is detrimental to the economy.

After four decades of rapid growth, China appears to be entering a phase of disillusionment, where the realities of autocratic rule are casting a shadow over its economic prospects. The path ahead is fraught with challenges and uncertainties, and the world watches with keen interest as China navigates this critical juncture.

 

 

 

Notes

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