China's economy is in serious trouble

In 2023, the US economy was stronger than expected. The widely anticipated recession never materialized. Many economists (though not me) have argued that it would take years of high unemployment to bring down inflation; 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. On the contrary, China underperforms in almost all economic indicators except official GDP, which grew by 5.2 percent.

But there is widespread skepticism about that number. Democracies like the US rarely politicize their economic statistics (ask me again if Donald Trump will return to power), but authoritarian regimes often do.

and among other aspects, The Chinese economy seems 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 in trouble?Ready to dominate the world just a few years ago?

Part of the answer is a Bad leadership. President Xi Jinping He begins to look like a poor economic manager, prone to arbitrary interventions (as any autocrat tends to do).

But even if Xi is a better leader than him, China will be in trouble.

This has been clear for a long time China's economic model became unsustainable. As Stewart Patterson points out, consumer spending as a percentage of GDP is very low, probably for a number of reasons. This includes Financial repression (paying low interest on savings and providing cheap loans to willing borrowers) maintains Low family income And turns them into government-controlled investments, a fragile social safety net that allows families to accumulate 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 motivation Very high investment rates, more than 40 percent of GDP. The problem is, it's hard to invest that much money without experiencing drastically diminishing returns.

It's true that when you get closer to Western economies, like China in the early 2000s, with a fast-growing workforce and high productivity growth, very high investment rates tend to be sustainable. But still China's working-age population peaked in 2010 and is declining Since then. While China has demonstrated impressive technological prowess in some areas, its overall productivity appears to be stagnant.

In short, It is not a country that can produce 40 percent of GDP. 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 to arrive than you think, and then it happens much faster than you think.” What happened in China's case was that the government was able to cover up the problem of inappropriate 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, allow more of the economy's income to flow into households, and strengthen the social safety net so that 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. While strengthening the safety net, The leader of this communist regime sounds a bit like the governor of Mississippi, decrying “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 its bubble burst in the 1980s. It avoided mass unemployment, did not lose social and political cohesion, and real gross domestic product for working adults increased by 50 percent 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 by increasing 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 engaging in military adventure?

So Let's not rejoice at China's economic meltdown, which could become everyone's problem.

© The New York Times 2024