China’s economy is going through a rough patch. Growth is slowing and its property bubble has well and truly burst. Unemployment is rising.
So what, you might say? Every country has difficult periods when past excesses catch up with it. Eventually the economic cycle turns and recovery begins. China is the world’s second biggest economy and has grown at a stupendous pace over the past four decades. It plays a pivotal role in the global economy and has invested heavily in advanced manufacturing and AI. Sure, it has problems but it will emerge from them relatively unscathed.
But there are countries that never recover. The Soviet Union was a command economy that collapsed rapidly at the end of the 1980s. In retrospect, it was easy to see why the terminal crisis was going to happen, but it didn’t look that way when the Kremlin was deploying SS20 missiles across eastern Europe a few years earlier.
So here’s the alternative view. China’s economic miracle is over. What’s been happening in the past week – the weakness of the currency, the fall in prices, the financial stress evident in the residential housing sector – are all signs of a deeper malaise that will require the ruling Communist party to undertake structural economic changes that will demand a loosening of rigid political control. China’s leader, Xi Jinping, is a self-styled strongman who will not be prepared to make any concessions to freedom and democracy. Sooner or later, China will go the way of the Soviet Union.
This sounds far-fetched, which it is, to an extent. The Soviet Union was a far smaller economy than China and was far less integrated into global supply chains. China matters to the world economy in a way the Soviet Union never did.
As Dhaval Joshi of BCA Research points out, China has generated 41% of the world’s growth in the past 10 years, almost double the 22% contribution from the US, and dwarfing the 9% contribution from the euro area.
“Put another way, of the 2.6% real growth rate of the world economy through the past 10 years, China has generated 1.1 percentage points, while the US and euro area have generated just 0.6 points and 0.2 points respectively.”
China made up such a big slug of global growth because its economy was growing at about 8-9% a year. Its growth rate is now half that – which means its contribution will also have halved to about 0.5 points. What’s more, its growth rate is likely to fall further in the years to come. There are some economists who think its trend rate of growth will be about 2% by the end of the decade, similar to that of the US.
These forecasts may all be wildly premature. Beijing’s aim is to have slower but better balanced and more sustainable growth, and the logic of that is that policymakers should avoid slashing interest rates, boosting state spending and bailing out an overextended property sector at the first hint of trouble. The bullish case for China is that its model of limited economic freedom coupled with political repression have worked since the Deng reforms of the late 1970s and will continue to work in the future given some recalibration.
When he took power in the Soviet Union in 1985, Mikhail Gorbachev had a twin-tracked approach: “glasnost” was the drive for openness and transparency while “perestroika” was the restructuring of the economy to end a long period of stagnation. The Soviet Union’s collapse was the result of more progress being made on glasnost than perestroika, something China’s leaders learned from. They pushed ahead with restructuring but were much less interested in glasnost.
Until now, ranking economic growth over democracy has delivered for China, yet despite the insistence from Beijing’s policymakers that all will continue to be well, there is evidence to suggest those bearish of China’s growth prospects are right. It is not just that the expected strong recovery following the lifting of pandemic lockdown restrictions has fizzled out, because the economy was already displaying signs of sluggishness even before Covid-19 came along.
Writing in Foreign Affairs, Adam Posen, the president of the Petersen Institute for International Economics, said China had been suffering from “economic long Covid” since the middle of the last decade.
Since 2015, bank deposits as a share of China’s GDP have risen by 50%. Private-sector consumption of durable goods is down by about a third versus early 2015, and has continued to decline since the reopening of the economy rather than rise as a result of pent-up demand. Private investment is down by two-thirds since the first quarter of 2015, including a decrease of 25% since the pandemic started.
“Those trends reflect people’s long-term economic decisions in the aggregate, and they strongly suggest that in China, people and companies are increasingly fearful of losing access to their assets and are prioritising short-term liquidity over investment,” Posen says. These fears, he adds, have been heightened by the severity and unrelenting nature of China’s lockdown.
China had some serious problems even before Covid. It had an ageing population and – despite four decades of rapid growth – was still only a middle-income country. Its growth rate was inflated by often wasteful public investment and subsidies to uneconomic enterprises that would otherwise have collapsed.
All that said, a look around the world suggests authoritarian regimes can hold on to power even when growth is weak or inflation is high. Change in China, if it comes, may be gradual rather than rapid and, if so, we should be grateful. The sudden collapse of the Soviet Union was followed by a global boom. The sudden collapse of China would trigger a global slump.
