In 2023, American economy Greatly exceeded expectations. The widely anticipated recession never materialized. Many economists (though not me) have argued that To reduce inflation It takes years High unemployment; Instead, we have experienced hyperinflation, inflation falling rapidly without discernible cost.
But the story is very different in the world's largest economy (or second largest, depending on size). Some analysts had expected China's economy to grow after lifting strict “zero covid” measures taken by China to control the epidemic. In contrast, China underperforms in almost all economic indicators except official GDP, which grew by 5.2%.
But there is widespread skepticism about that figure. Democracies like the United States rarely politicize their economic statistics, but authoritarian regimes often do.
In other respects, the Chinese economy appears to be faltering. Even official statistics suggest that China is experiencing Japanese-style deflation and high youth unemployment. It is not a full-blown crisis, at least not yet, but there is reason to believe that China is entering an era of stagnation and disillusionment.
Why is China's economy, which a few years ago seemed poised to rule the world, in trouble?
Part of the answer is poor leadership. President Xi Jinping is beginning to look like a poor economic manager, whose propensity for arbitrary interventions (as any autocrat tends to do) has stifled private enterprise.
But even if Xi is a better leader than him, China will be in trouble.
It has long been clear that China's economic model is becoming unsustainable. As Stewart Patterson points out, consumer spending as a percentage of GDP is very low, probably for a number of reasons. Financial repression (paying low interest on savings and providing cheap loans to willing borrowers) that keeps household income low and diverts it to government-controlled investments, weakens the social safety net, forces households to hoard savings to meet potential emergencies, and so on. .
Since consumers are buying so little relative to the productive capacity of the Chinese economy, how can the country generate enough demand to keep that capacity in use? As Michael Pettis points out, the key answer is to encourage investment rates above 40% of GDP. The problem is, it's hard to invest that much money without very little return.
It's true that if you catch up with Western economies that have fast-growing workforces and high productivity growth, as China did in the early 2000s, very high investment rates are sustainable. But China's working-age population peaked in 2010 and has been declining since then. While China has demonstrated impressive technological capabilities in some areas, its overall productivity has stagnated.
In short, it is not a country where 40% of GDP can be invested. Something has to give.
Now, these issues have been very clear for at least a decade. Why are they intensifying only now? International economists like to quote Dornbusch's law: “A crisis takes longer than you think, and then it happens much faster than you think.” What happened in China's case is that the government was able to cover up the problem of insufficient consumer spending for years by promoting a gigantic housing bubble. Indeed, China's real estate sector has become incredibly large by international standards.
But the bubbles eventually burst.
To outside observers, what China needs to do is simple: End financial repression to allow more of the economy's income to flow into households and strengthen the social safety net so consumers don't feel the need to hoard money. By doing so, you can reduce your fixed investment costs.
But there are powerful actors who benefit from financial repression, particularly state-owned enterprises. When it comes to strengthening the safety net, the leader of this communist regime sounds a bit like the governor of Mississippi, denouncing “welfare” that creates “lazy people.”
So how worried should we be about China? In some ways, China's current economy is reminiscent of Japan's after the bubble burst in the 1980s. It avoided mass unemployment, did not lose social and political cohesion, and real GDP for working adults rose by 50% over the next three decades, not far behind America's growth.
My biggest concern is that China will not respond either. How cooperative is China when faced with economic problems? Will it try to boost its economy through increased exports, which could clash with Western efforts to develop green technologies? Most frightening of all, will he try to divert attention from internal difficulties by embarking on a military adventure?
So let's not be so proud that China's economic meltdown can become everyone's problem.
