A problem of the Chinese government's own making


There are ongoing signs that the Chinese economy is in deep trouble. And as with any significant downturn, especially one involving one of the world’s largest economies, the question eventually turns to why. Why is this happening to China now?


Today the New Yorker published an interview with economist Eswar Prasad, an expert on China’s economy who teaches at Cornell University. Prasad makes the case that China’s struggles are structural but also ideological.

The structural problems come from the fact that “China has an aging population and a labor force that is already beginning to shrink.” In fact, China is no longer the most populous country in the world, having been surpassed by India. On top of that there is a crisis of confidence that is impacting both Chinese consumers and foreign investors.

China took away its “zero covid” policy, but consumers and businesses seem quite nervous about the country’s economic prospects. Businesses—private businesses in particular—aren’t investing and consumers are not spending that much. All of this is now leading to another problem, which is deflation, or falling prices…

The difficulty that China faces right now is somewhat larger in scope, because even if you give people money to spend, if you make it cheaper to borrow, if you give them government handouts, people need to be confident about their future economic prospects so that they go out and spend rather than save. Right now, China could use its traditional policy tools, but I think the fundamental problem that the Chinese economy is beset by is really a lack of confidence, and we’ve seen this in a variety of measures.

Prasad doesn’t say this but it seems to me the lack of confidence is at least partly created by the experience people had of zero-COVID. Remember, Chinese people got a close up look at government disruptions to the economy and their personal lives for about two solid years. People were literally locked into their offices and apartment buildings, forced to take COVID tests, struggling to get food. Their were people throwing themselves out of windows because they were despondent. There were people who burned to death in apartment towers which had been locked down. And then when the government suddenly dropped all those restrictions the virus spread and probably killed 1-2 million people. All that to say, people would have to be crazy not to have lost a lot of confidence in Xi and the Communist Party after what they’ve been through.

And that brings us to the ideological part of this problem. Xi is a communist authoritarian who wants complete control over everything but that’s not working right now.

It is certainly the case that the command-and-control mentality of the Chinese government has made it somewhat harder for them to recognize problems as they arise and to tackle them in a frontal way. Additionally, state-owned enterprises, which still comprise a significant share of economic activity, are under the direct control of the government, as is much of the financial system, especially the state-owned banks. The government seems to believe that it can manage its way out of any problem…

There is certainly a sense that Xi tolerates private enterprise but sees state-owned enterprises as the bulwark of the economy. During the last year and a half, especially, that tightening has been very apparent. We have seen high-flying tech companies get cut down to size. We have also seen crackdowns on private funds in the medical and educational sectors. There is a very clear sense that, while the government is willing to tolerate private enterprise, it doesn’t want private entrepreneurs to become so successful or have their firms become so big that it makes it difficult for the government to control them.

This is a problem for the Chinese economy. Going back to where we started this conversation, China cannot grow anymore through investment or through an increase in the labor force, because both of those are not happening. It needs more productivity, and the reality is that private enterprises have been much better at generating innovation, which in turn generates more productivity. Small and medium enterprises are much better at generating employment growth. There is almost this cognitive dissonance: the government seems to understand that it needs the private sector in order to accomplish all of its economic objectives, but it’s not willing to be seen as encouraging to the private sector.

I’d add that, in the early part of this year, the government did change its tune. It started saying, “We are very much in favor of private enterprise.” The problem is that all the actions that they took during the previous eighteen months have essentially shattered the confidence or reduced the confidence of private businesses, and all the soothing words that they’ve heard from the government in the last three or four months have not been enough to assuage their concerns.

On the one hand you have Xi making billionaires disappear or run away and China raiding the offices of US companies doing business in China. But at the same time they are on a charm offensive claiming China is open for business. Well, you can’t have it both ways. Either China is open for business or China is hampering businesses to remind people of Communism with Chinese characteristics. You can’t have both at the same time.

Near the end of the interview, Isaac Chotiner asks if China’s struggles will have an impact on respect for it as an alternative to the US model:

Certainly if the Chinese economy were to take a big hit now, that would almost inevitably shift the balance of the debate toward the sense that market-oriented economies generate better economic outcomes.

I don’t wish ill on the Chinese people but I certainly do wish ill on their communist, authoritarian government in general and Xi Jinping in particular. Xi has been doing his best to present China as an alternative model to the US so the idea that he may be failing spectacularly at this moment is absolutely fantastic as far as I’m concerned. The world needs more democracies operating on free markets principles that respect the rights and abilities of individuals, not more communist states run by dictators treating everything and everyone as subservient to the state.

Dan Butcher

Dan Butcher (aka HP Pundit) is not a Democrat or Republican. He is a free thinking independent bringing you news and commentary with a dose of much needed common sense.

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