Can Beijing rescue the Chinese economy? No
one would have asked this question in September. Just a few short
months ago, analysts were competing to give us the earliest date that
China, with its double-digit growth, would overtake America to become
the world’s largest economy. Now,
the global narrative has changed as we see signs the Chinese economy
is faltering. There is, for example, overinvestment in infrastructure
and industrial capacity, an accumulation of local government debt, a
consequent buildup of questionable loans in the banking system, a
slowing of growth, a precarious property bubble, and persistent
inflation. And
the worst sign of all? In November and December, China’s foreign
reserves decreased by $92.7 billion, the result of Chinese businesses
and people smuggling money out of the country.
Many
analysts believe that, despite their severity, these problems are
temporary because the Chinese economy is in a supercycle upward. Yes,
China was in a three-decade upward supercycle for three principal
reasons. First, there were Deng Xiaoping’s transformational “reform and
opening up” policies. Second, Deng’s era of change coincided with the
end of the Cold War and the elimination of political barriers to
international commerce. Third, all of this was taking place while China
was benefiting from its “demographic dividend,” an extraordinary bulge
in the workforce.
Yet
this “sweet spot” is over, because the conditions that created it
either no longer exist or are disappearing fast. First, China is no
longer reforming. Hu Jintao, the current leader, is presiding over an
era marked by, on balance, the reversal of reform. He has, for instance,
favored state enterprises at the expense of domestic entrepreneurs and
tried to exclude foreign investors. As they say in Beijing, “the
Communist Party is now the economy.”
Second, China’s exports boomed in the
post-Cold War period when countries wanted to integrate China into the
international system and were indulgent, tolerating its mercantilist
policies. But we have left that time of uninterrupted growth, and
nations have in fact lost patience with Beijing. A year ago, it would
have been inconceivable that Pacific Basin countries would launch a
major trade round that excluded China, but that is exactly what
happened last November when President Obama announced the Trans-Pacific
Partnership negotiations. The terms of the deal will include
provisions, such as restrictions on state enterprises, designed to keep
the Chinese out.
Third,
China, which during the reform era had one of the best demographic
profiles of any nation, will soon have one of the worst. Perhaps as
early as next year the absolute size of the workforce will first peak
and then fall. Soon, one worker will support two parents and four
grandparents.
So
China’s economy is entering a down supercycle. It is in this adverse
context—not the favorable one we have seen since the beginning of
reform in 1978—that Chinese leaders will have to act. In other words,
they will no longer be propelled by trends; going forward, they will
have to succeed in spite of them.
In
order to succeed, Beijing will have to rebalance the economy away from
investment and towards personal consumption. In no country does
consumer spending play a smaller role in the economy. Low consumption
is the inevitable result of China’s growth model, not merely a
remediable feature of it, and consumption’s role will not grow
significantly until Beijing takes inherently risky steps to change the
model.
No
one in the Chinese capital, however, is willing to implement the
decisions that are necessary to put the economy on a sustainable basis.
Everyone knows what to do; they’re just not doing it.
Why?
China is in the midst of an historic political transition that could
last for years. Until new leaders get settled in, no one will take the
painful measures that everyone understands are necessary.
But by then, it will be too late.
High
growth in China for decades has masked structural flaws. Now that
growth is slowing, we are beginning to see fundamental problems. But
just as this is happening, the political system is losing its ability
to act.
So can Beijing officials rescue the Chinese economy?
The
answer to the question is they probably cannot, but worse, they’re not
even trying.
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