The Chinese economy is experiencing serious difficulties

In 2023, the US economy has far exceeded expectations.

The widely predicted recession never happened.

Many economists (but not me) argued that reducing inflation would require years of high unemployment; Instead we experimented with a flawless disinflationinflation that falls rapidly without any visible cost.

But the story has been very different in the world’s largest economy (or second largest, depending on how you look at it).

Some analysts expected China’s economy to boom following the lifting of draconian “zero COVID” measures adopted to contain the pandemic.

Instead, China got it worse results in almost all economic indicators, with the exception of official GDP, which was reported to have grown by 5.2%.

But there is widespread skepticism about this figure.

Democratic nations like the United States rarely politicize their economic statistics, although they still ask me if Donald Trump returns to the presidency, but authoritarian regimes usually do.

And in other respects, China’s economy appears to be stumbling.

Even official statistics say China is experiencing Japanese-style deflation and high youth unemployment.

This is not a full-blown crisis, at least not yet, but there are reasons to believe that China is entering an era of crisis. stagnation and disappointment.

Why is the Chinese economy, which just a few years ago seemed destined for world domination, having problems?

Part of the answer is a bad leadership.

President Xi Jinping He is starting to look like a bad economic manager, whose propensity for arbitrary interventions – which autocrats often do – has stifled private initiative.

But China would have problems even if Xi were a better leader than him.

It has been clear for some time that the Chinese economic model is becoming a reality unsustainable.

As Stewart Paterson points out, consumer spending is very low as a percentage of GDP, probably for multiple reasons.

These include financial repression – paying low interest on savings and providing cheap loans to privileged borrowers – which curbs household income and diverts it into government-controlled investments, a weak social safety net that leaves families hoarding savings to deal with possible emergencies, and more.

With consumers buying so little, at least relative to the production capacity of the Chinese economy, how can the nation generate enough demand to keep that capacity in use?

The main response, as Michael Pettis points out, has been to promote extremely high investment rates, above 40% of GDP.

The problem is that it’s difficult to invest that much money without stumbling very diminishing returns.

It is true that very high investment rates can be sustainable if, as in China in the early 2000s, you have a rapidly growing workforce and high productivity growth as you catch up with Western economies.

But China’s working-age population peaked around 2010 and has been declining ever since.

While China has demonstrated impressive technological capability in some sectors, its productivity even the general seems stagnant.

In short, it is not a nation that can productively invest 40% of its GDP.

Something has to give.

Now, these problems have been quite evident for at least a decade.

Why are they getting worse now?

Well, international economists like to quote Dornbusch’s Law:

“The crisis takes a lot longer to arrive than you think, and then it happens a lot faster than you would have thought.”

In the case of China, the government managed to mask the problem of insufficient consumer spending for several years by promoting a giant real estate 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 seems simple:

end financial repression and allow more economic income to flow to families, and strengthen the social safety net so consumers don’t feel the need to hoard money.

And while you’re at it, you can reduce your spending on unsustainable investments.

But there are powerful actors, especially state-owned companies, who benefit from financial repression.

And when it comes to strengthening the safety net, the leader of this alleged communist regime looks a little like the governor of Mississippi, who denounces the “well being“which creates “lazy people”.

To what extent should we worry about China?

In some ways, China’s current economy resembles that of Japan after the bubble burst in the 1980s.

However, Japan ended up managing its decline well.

It avoided mass unemployment, never lost social and political cohesion, and real GDP per working-age adult increased by 50% over the next three decades, not far behind U.S. growth.

My big concern is that China does not respond in the same way.

To what extent will China be cohesive in the face of economic problems?

Will it seek to support its economy with increased exports that will clash head-on with Western efforts to promote green technologies?

And what is most scary,

Will he try to divert attention from his internal difficulties with military adventures?

So let’s not rejoice over China’s economic stumble, which could become a problem for everyone.

c.2024 The New York Times Company