September 29, 2023

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Why the Chinese economy won’t fix itself

Why the Chinese economy won’t fix itself
Chinese President Xi Jinping has managed to slow his country’s economy (Ellie Foreman-Peck/The Economist)

What went wrong? After rejoining the world economy in 1978, China became the most spectacularly developed country in history. Land reform, industrialization and increased income lifted almost 800 million people out of extreme poverty. The Chinese economy produced only one-tenth of what it did in 1980 America, now three-quarters as large. However, instead of recovering after the government abandoned its policy, “Zero covid” By the end of 2022, it goes from one crater to another.

The economy grew at an annual rate of just 3.2% in the second quarterA disappointment that seems even worse when one considers it, according to a leading assessment America It can grow by almost 6%. Home prices are falling and developers selling homes before they’re even built are hitting a wall and scaring away buyers. Consumer spending, business investment and exports have stagnated. While most of the world is struggling with inflation, it is very high. China Suffering from the opposite problem: Consumer prices fell year-to-date in July. Some analysts warn that China You can fall into a deflationary trap like that Japan In the 90s.

However, in a sense, Japanization is too bland to diagnose China’s ills. A chronic growth deficit can be worse China Because its population is poor. Quality of life Japan It was about 60% America In 1990; One China Today it is less than 20%. And unlike Japan, China It suffers from something deeper than weak demand and severe debt. Many of his problems stem from general failures in his economic policy, which worsen as president Xi Jinping Centralize power.

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A decade ago, Chinese technologists were seen as almost intellectuals.. First they presided over an economic miracle. then, China It was the only major economy to respond to the global financial crisis of 2007-09 with sufficient stimulus; Some commentators have gone so far as to say that China He saved the world economy. In the 2010s, whenever the economy faltered, officials defied predictions of disaster by making loans cheaper, building infrastructure or stimulating the housing market.

However, in each episode, public and private debt increased. Doubts grew about the sustainability of real estate growth and the real need for new infrastructure. Policy makers today are in a dilemma. Wisely, they don’t want white elephants yet or want to revive the real estate bubble. They cannot do enough of the more desirable types of stimulus, such as pension spending and helping poor households increase consumption. Xi It has refused “aidism” and the government wants an official deficit of only 3% of GDP.

as a consequence, The response to recession is modest. Policymakers are not even willing to cut interest rates that far. On August 21, they disappointed investors with a disappointing 0.1 percentage point cut in the one-year interest rate.

This weak response to falling growth and inflation is the latest in a series of policy mistakes.. The arrogance of China Its foreign policy and its mercantile policy have exacerbated the economic conflict America. In his own country, he did not adequately address the incentives for speculation in a system with such enormous obligations that housing and developers are systemically important. Starting in 2020, regulators hit the markets by cracking down on successful consumer technology companies. During the pandemic, officials bought time with lockdowns, but failed to vaccinate enough people for controlled evacuations and were later overwhelmed by the highly contagious Omicron variant.

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Why does the government keep making mistakes? One reason is that short-term growth is not a priority Chinese Communist Party (PCC). The signs point to that Xi believes that China Prepare for prolonged economic and possible military conflict with America. For this reason, today he emphasizes the quest for national greatness, emphasizes defense and resistance China. You’re willing to make material sacrifices to achieve those goals, and it has to be as “high quality” as you want it to be.

But even by criteria XiResults of PCC They are wrong. The collapse of the “Zero Covid” policy undermined its prestige Xi. Attacks on tech companies have scared entrepreneurs. Yes China As authorities refuse to boost consumption, falling into persistent deflation, debt rises in real terms and weighs heavily on the economy. Especially if he isn’t PCC Continue to raise the standard of living and you will weaken their grip on power and limit their ability to hold on. America.

So the mounting political failures seem less like a self-sacrificing new approach to national security than mere bad decision-making. They are consistent with the centralization of power through Xi And he replaced technicians with believers at the top. China It has endured debate over its economics, but today it misleads analysts. It recently stopped publishing poor data on youth unemployment and consumer confidence. There is still plenty of talent at the top of government, but it is naïve to expect the bureaucracy to generate rational analysis or innovative ideas as a message from the top that loyalty matters above all else. On the contrary, Decisions are increasingly governed by an ideology of left-wing distrust of wealthy businessmen and right-wing reluctance to give money to the idle poor..

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Problems are reality China Start at the top and they will last. As hawkish policymakers grapple with the economy’s growing challenges, they could get worse. The population is aging rapidly. America It has become increasingly hostile and is trying to suppress parts of the Chinese economy, such as chip manufacturing, that it considers strategically important. And I reach China to do AmericaClosing this gap will be more difficult because centralized economies are better at imitating than creating innovations.

Liberal predictions about China They have been largely delusional. In the 2000s, Western leaders mistakenly believed that trade, markets and development would drive democracy and individual freedom. But China is now testing the inverse relationship: if too much autocracy hurts the economy. After four decades of rapid growth, there is mounting evidence that it does. China Enters a period of disappointment.

© 2023, The Economist Newspaper Limited. All rights reserved.

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