China, the country that dazzled everyone before the pandemic, today raises doubts about its future. As the landscape clears up, the country prepares to flood the world with electric cars and other sophisticated manufactures.
It has taken China 40 years to transform itself from an aging economy into a superpower that rivals the United States in technology and military might. Its meteoric rise since Deng Xiaoping liberalized the economy in 1979 is the closest thing to an immutable law of geopolitics, to the point of positioning China as the most plausible alternative to liberal democracy.
However, China no longer inspires the enthusiastic assessments of just two years ago and is the subject of pessimistic forecasts, sometimes as exaggerated as the praise once was. A decade ago it was predicted that China would overtake the US in GDP in the 1930s. Today many doubt that this will ever happen.
What can you expect from China? Why the change in diagnosis? Explanations vary depending on where the emphasis is placed. These are the most common:
China is an authoritarian regime. And Xi Jinping someone who thinks more about ideology than growth. The communist leader took advantage of the exceptionality of the pandemic to end the pro-market reforms and reintroduce centralization in agriculture. He distrusts the private sector and wants more presence of the party in the economy. If Deng did his best to ensure a collegial leadership, Xi has reinforced the cult of personality. This is the view of economist Adam Posen, author of “The End of the Chinese Economic Miracle”, Foreign Affairs August 2023 article.
This turn can also be read from the left, which attributes it to pragmatism. Historian Branko Milanovic claims that the price of growing above 6% in the past has been the increase in inequality. Xi does not rely on successful capitalists (Jack Ma, the founder of Alibaba, was silenced and started to have problems when he started speaking out) and at the same time strengthens the public sector. It prefers to grow less in exchange for more stability.
Another historian, Adam Tooze, explains it. The "success" in the initial management of the pandemic convinced Xi of the superiority of his model. In that period (2021 and 2022), he outlines before the UN his vision of a world order in which China leads the global South and the approval of a third mandate is guaranteed. But in the fall of 2022, the first protests for the confinements in Xinjiang and Shanghai appear. The policy of zero covid - possible in a disciplined society in an authoritarian regime - becomes unsustainable and the Communist Party abandons it for fear of popular unrest.
Chinese success is made of steel and cement. 68% of China has been built since 2010; 88% since 1990. It is estimated that the real estate and infrastructure sector accounts for around 30% of the economy. One of the factors that limit the country's ability to return to robust growth is precisely the enormous debt accumulated by companies in the sector and local administrations.
Savers by force. How have the Chinese managed to bury so much money in real estate? Economist Michael Pettis explains it best. Like other authoritarian societies, China has penalized consumption in favor of investment. The Chinese miracle was the result of directing most of the pie not to wages but to companies to boost exports. But then came the great financial crisis of 2008. Global demand collapsed. And the Chinese technocracy redirected all that investment to infrastructure and housing construction to sustain the country. China avoided the recession in this way. But it was trapped between so much cement and with investments that have become unproductive.
In the last decade, Chinese leaders have discussed the opportunity to give more weight to consumption. But getting the Chinese to spend is not easy. Conviction is needed (Xi would be a man anchored in the Maoist ideal of frugality). And you also have to convince the families. But the fear of unassisted old age makes them very cautious. China has begun to age at high speed. Japan started losing population in 2011. South Korea in 2020. China has had two years of population decline (by 2023, two million less).
China is in a complex situation. And this affects the rest of the world. China is the industrial superpower of the planet. Its weight in global manufacturing is 35% (12% in the USA, 6% in Japan, 4% in Germany) according to the economist Richard Baldwin published this week. It took almost a century for American industry to overtake Britain. China has done it in 20 years. In 1995, what sold the most was textiles. Now it's electronic. Decoupling from China (as politicians and economists in the West propose) seems like sarcasm. China is today overwhelmingly hegemonic in the electric car and the green transition economy.
Observers do not know whether Beijing will know how to maneuver the adjustment it now needs. Some fear that he will solve it with a military adventure. But he's more likely to do what he's done before. In other words, to flood the world with electric cars and sophisticated manufactures. This alone will be a serious problem for a West that talks about reindustrializing.
China has announced that growth in 2023 has been 5.2%. It's a modest number by Chinese standards but many observers see it as exaggerated. This is the last Chinese lesson: statistics, like politics, are inscrutable.
