Is China’s troubled economy bad news for everyone?
Former Chinese premier Li Keqiang, who died last month at 68, will be mourned in the normal way in China, but many may also mourn for something else: a lost decade that might have been different.
We cannot know, but rightly or wrongly, Li’s death, like Xi Jinping’s leadership, symbolises the end of economic progress, of extrapolation, and of openness to private business and the outside world. Not coincidentally, this has been the year when economists are wondering whether China is going to follow Japan into a lost decade or two?
China specialist Evan Osnos has written recently in The New Yorker of contemporary China as hav-ing entered an “age of malaise”. He refers not just to the economy but to an array of sociopolitical and cultural changes. The circumstances of the Chinese economy, though, are key. While China will remain for the time being the world’s second biggest economy, its largest export nation, and the centre of so many supply chains, its power and its governance campaign with the Global South have rested on its rising economic heft and kudos. Both are now in the crosshairs of doubt.
The foreign policy approach towards China will need to be carefully calibrated
China’s economy may fare a little better now after the initial weak recovery following Covid, but the cyclical noise should not distract our attention away from some important underlying and systemic developments, the most immediate of which is the real estate bust. The much vaunted and oversized property sector is likely to contract for years to come.
Elsewhere, local governments, state enterprises and property developers are mired in a sea of debt problems. China is ageing faster than any other country on Earth. Productivity growth has stalled, and the government has stopped publishing data on youth unemployment (last recorded in June at over 20 per cent). Trust relations between private firms, entrepreneurs and the government, and between foreign firms and China have been eroded by political campaigns and laws encompassing, for example, anti-espionage, data and cybersecurity.
So, is China facing Japan-style stagnation? It is a curious question, when China’s scale is so big and boasts global leadership in telecommunications (Huawei), electric vehicles (BYD), batteries (CATL) and other technologies. Remember though that in the 1980s, Japan also boasted the world’s biggest banks, booming property, leadership in the emerging chip industry and many global brands such as Sony, Mitsubishi, Nomura and Toyota. Yet, in spite of Japan’s commercial success, its economic model was misaligned and unbalanced, and reform was blocked by vested political interests and rigid institutions.
China has all of these things, and a Leninist state that is even more resistant to the kind of political and institutional reforms that could lead to new, sustainable economic development. Like Japan then, it has a similar mercantilist development model, and pursues industrial policies that divert resources away from consumption and encourage misallocation of capital.
The similarities are not all exact. China’s debt problems don’t extend to private firms outside property. Property prices are not as wildly out of kilter. The government in Beijing has more policy leverage, owns and runs the banking stem, and sustains stringent controls on the export of capital.
“Japanification” though is a process, not an on-off switch, and the economy could move more that way if Beijing is unwilling or unable to embrace the kind of political and institutional changes needed to switch course.
Politicians will need to factor in significantly different economic realities as they consider future relations with China. An assertive and confident China, economically, might be able to throw its weight around the world with ease, but a China facing mounting domestic and international constraints may have other reasons to want to try the same. The foreign policy approach towards China will need to be carefully calibrated.
George Magnus, economist, associate at Oxford University’s China centre and at SOAS, author of Red Flags: Why Xi’s China is in Jeopardy
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