China’s Economy
China’s economy grew 5% last year, matching the government’s target, but in a lopsided fashion. Many people complained about worsening living standards as Beijing struggles to transfer its industrial and export gains to consumers.
The imbalance raises concerns that structural problems may deepen as China plans a similar growth this year. Add to that the threat of U.S. tariff hikes under Donald Trump.
Reversal Of The Reform Era
The era of reform in the 1980s and early 1990s is over. It rode largely on significant decentralisation of power and relative relaxation of societal control. A lot of it can be attributed to Deng Xiaoping and his successors Jiang Zemin and Hu Jintao.
“Under the current leader President Xi Jinping, there is a reversal on both fronts. Some of this is understandable because along with that economic growth came vast corruption and also weakening of the party’s control. And XI Jinping has tried to reimpose that by reining in China’s economy,” says former Foreign Secretary Vijay Gokhale.
Communist Party Losing Control?
There’s also a deeper sense that the Communist Party is losing control, and what we are therefore seeing is a securitization of the economy, he adds. Effectively, this means decision making in provincial governments and by heads of state-owned enterprises is constrained. They do not want to experiment anymore because it is simpler to lie flat rather than take a risk that might land you in prison.
The other impact is that when you curtail society and societal freedoms and start imposing controls right down to the village and working unit levels, you curtail entrepreneurship. As a result, businesses and individuals are not motivated to produce ideas or to innovate.
Structural Problems In China’s Economy
The double-digit growth that China enjoyed until 2015 or 2016 is over and will never return, according to Vijay Gokhale. Structural problems have crept in.
Excess industrial capacity has meant China is overproducing and the world cannot absorb what they are producing. Secondly, there’s low domestic consumption because the population for 30 years was told that goods had to be exported rather than domestically consumed.
And the third problem is a slowdown in infrastructure and the housing market crash. All of these have consequences for the economy. Overcapacity to some extent can be balanced by additional exports. But now there is increasingly a global backlash in some of the major countries to what they consider to be dumping of Chinese goods in their markets. And this backlash isn’t just coming from the West but also from Turkey, Brazil, Indonesia and India. So China can’t export its way out of the crisis.
Problems At Home
One way of dealing with that is increasing domestic consumption. But the problem here is people are told to consume at a time the economy is slowing.
Add to that the anxiety caused by a demographic collapse. The working population is going to be much smaller and social welfare measures are not in place. Savings have been significantly eroded because most Chinese have savings in the housing market and housing prices have crashed. So in effect the Chinese are cutting back on spending at a time the leadership wants them to spend more.
Also, China is a leading power in many new technologies. But the problem with new technologies is they have low employment potential. And if they cannot be exported due to sanctions or tariffs, they won’t contribute to the economy.
Decline Of BRI
The Belt and Road Initiative (BRI) model is essentially based on giving financing to foreign governments for purchase of Chinese goods and services. There are two reasons for its decline. After Covid, China’s growth slowed, slowing down its capacity to lend. And borrowing states in many cases have been unable to pay interest on time and some have even defaulted.
That made China’s policy banks not to lend more money to those defaulting economies, says Vijay Gokhale. And that in turn means China cannot sell its goods and services abroad under BRI in the way it could before 2019.
