China is too big for a Soviet-style collapse, but it’s on shaky ground | Chinese economy

Economic point of view

With its growth slowing, China’s future is uncertain. We should be grateful if the change isn’t sudden

Sun Aug 20 2023 06.04 EDT

The Chinese economy is going through a rough patch. Growth is slowing and its real estate bubble has well and truly burst. Unemployment increases.

So what, you say? Every country experiences difficult times when the excesses of the past catch up with it. Eventually, the economic cycle turns and the recovery begins. China is the second largest economy in the world and has grown tremendously over the past four decades. It plays a central role in the global economy and has invested heavily in advanced manufacturing and AI. Admittedly, he has problems but he will emerge relatively unscathed.

But there are countries that never recover. The Soviet Union was a command economy that collapsed rapidly in the late 1980s. In retrospect, it was easy to see why the terminal crisis would occur, but that was not the case when the Kremlin deployed missiles SS20 across Eastern Europe a few years earlier.

Here is the alternative view. The Chinese economic miracle is over. What happened last week – the weak currency, falling prices, financial strains evident in the residential housing sector – are all signs of a deeper malaise that will force the ruling Communist Party to undertake structural economic changes that require a loosening of rigid political control. The Chinese leader, Xi Jinping, is a self-proclaimed strongman who will not be willing to make any concessions to freedom and democracy. Sooner or later, China will follow the path of the Soviet Union.

It sounds far-fetched, which it is, to some extent. The Soviet Union was a much smaller economy than China and was much less integrated into global supply chains. China matters to the global economy as the Soviet Union never did.

As Dhaval Joshi of BCA Research points out, China has generated 41% of global growth over the past 10 years, nearly double the 22% contribution of the United States and eclipsing the 9% contribution of the zone. euro.

“In other words, out of the 2.6% real growth rate of the world economy over the past 10 years, China generated 1.1 percentage points, while the United States and the area euro only generated 0.6 points and 0.2 points respectively.”

China has been such a big slug of global growth because its economy was growing at around 8-9% a year. His growth rate is now half, which means his contribution will also have halved to around 0.5 points. Moreover, its growth rate is expected to decline further in the coming years. Some economists believe its trend growth rate will be around 2% by the end of the decade, similar to that of the United States.

These forecasts may all be extremely premature. Beijing’s goal is to have slower but better balanced and more sustainable growth, and the logic of this is that policymakers should avoid cutting interest rates, increasing government spending and bail out an overstretched housing sector at the first sign of trouble. The bullish case for China is that its model of limited economic freedom coupled with political repression has worked since the Deng reforms of the late 1970s and will continue to work in the future with some recalibration.

When he took power in the Soviet Union in 1985, Mikhail Gorbachev had a dual approach: “glasnost” was the desire for openness and transparency, while “perestroika” was the restructuring of the economy to put an end to a long period of stagnation. The collapse of the Soviet Union was the result of more progress being made on glasnost than on perestroika, something Chinese leaders have learned. They pushed for restructuring but were far less interested in glasnost.

So far, prioritizing economic growth over democracy has been beneficial for China, but despite Beijing policymakers’ insistence that all will continue to be well, there is evidence to suggest Those who downgrade China’s growth outlook are right. It’s not just that the strong recovery expected after the lifting of pandemic lockdown restrictions faltered, as the economy was already showing signs of sluggishness even before Covid-19 arrived.

Writing in Foreign Affairs, Adam Posen, president of the Petersen Institute for International Economics, said China has been suffering from “long economic Covid” since the middle of the last decade.

Since 2015, bank deposits as a percentage of Chinese GDP have increased by 50%. Private sector consumption of durable goods is down about a third from the start of 2015 and has continued to decline since the economy reopened rather than rising due to pent-up demand. Private investment has fallen by two-thirds since the first quarter of 2015, including a 25% drop since the start of the pandemic.

“These trends reflect the long-term economic decisions of people as a whole, and they strongly suggest that in China, people and businesses are increasingly worried about losing access to their assets and are prioritizing cash. short-term rather than investments,” Posen said. These fears, he adds, have been exacerbated by the severity and relentless nature of China’s lockdown.

China had serious problems even before Covid. It had an aging population and – despite four decades of rapid growth – was still only a middle-income country. Its growth rate has been inflated by often wasteful public investment and subsidies to unprofitable businesses that would otherwise have collapsed.

That said, a look around the world suggests that authoritarian regimes can retain power even when growth is weak or inflation high. Change in China, if it happens, could 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 crisis.