Aug 25th 2022

China's Growth Sacrifice 


 

NEW HAVEN – Since the days of Deng Xiaoping, economic growth has mattered more than anything for China’s leaders. The 10% annualized hyper-growth from 1980 to 2010 was widely seen as the antidote to the relative stasis of the Mao era, when the economy grew by only about 6%. But under President Xi Jinping, the pendulum has swung back, with 6.6% average growth from 2013 to 2021 much closer to the trajectory under Mao than under Deng.

Some of the slowdown was inevitable, partly reflecting the law of large numbers: Small economies are better able to sustain rapid growth rates. As China’s economy grew – from 2% of world GDP in 1980 at the time of the Deng takeoff to 15% when Xi assumed power in 2012 – an arithmetic slowdown became only a matter of time. The surprise was that it took so long to occur.

It is possible to quantify the foregone Chinese output from the slowdown. Had annual real GDP growth remained on the 10% trajectory under Xi, rather than slowing by nearly 3.5 percentage points since 2012, the Chinese economy today would be a little more than 40% larger than it is.

Yet the China slowdown is far more than an arithmetic event. Three powerful forces are also at work – a structural transformation of the economy, payback for past excesses, and a profound shift in the ideological underpinnings of Chinese governance.

The structural explanation puts an optimistic spin on the slowdown by framing it as the byproduct of a strategy aimed to improve the quality of economic growth. By staying the course of hyper-growth for too long, China became increasingly afflicted with the “four uns” of former Premier Wen Jiabao – an economy that was unstable, unbalanced, uncoordinated, and (ultimately) unsustainable. Rebalancing was the only way out – especially if it led to greener, consumer-led, and services-intensive growth that addressed the twin goals of balance and sustainability. If slower growth was the price, it was well worth paying it. 

For a while, the structural slowdown appeared to be on track. Services-led growth boosted job creation and urbanization provided a powerful impetus to real incomes. Even though consumption was still lagging due to a weak social safety net that spawned excess precautionary saving, there was good reason to believe in the likelihood of a structural transformation. But the case for a structural slowdown was not without its downside – especially a worrisome weakening in Chinese total factor productivity growth, as well as stiff demographic headwinds from the one-child family-planning policy in effect between 1980 and 2015.

But there is good reason to believe that China’s slowdown may also be more of an unavoidable payback for the excesses of the hyper-growth era. This line of reasoning was, in fact, telegraphed in 2016 by a high-profile interview with an “authoritative person” published on the front page of the Communist Party’s organ, People’s Daily, which warned of the potential Japanization of an increasingly debt-intensive, bubble-supported Chinese economy. An overly leveraged Chinese property sector fits this script, as does the debt-fueled expansion of state-owned enterprises since the 2008-09 global financial crisis. For China, this became the case for deleveraging, well worth the short-term price to avoid the longer-term stagnation of Japan-like lost decades.

Finally, a major reversal in the ideological underpinnings of governance is also at play. As the revolutionary founder of a new Chinese state, Mao emphasized ideology over development. For Deng and his successors, it was the opposite: De-emphasis of ideology was viewed as necessary to boost economic growth through market-based “reform and opening up.”

Then came Xi. Initially, there was hope that his so-called “Third Plenum Reforms” of 2013 would usher in a new era of strong economic performance. But the new ideological campaigns carried out under the general rubric of Xi Jinping Thought, including a regulatory clampdown on once-dynamic Internet platform companies and associated restrictions on online gaming, music, and private tutoring, as well as a zero-COVID policy that has led to never-ending lockdowns, have all but dashed those hopes.

Equally important has been Xi’s fixation on national rejuvenation, an outgrowth of his so-called Chinese Dream that has led to a far more muscular Chinese foreign policy, in sharp contrast to Deng’s more passive “hide and bide” stance. Not by coincidence, this has fueled the trade and tech wars with the United States, given rise to China’s “unlimited partnership” with Russia, and stoked tension over Taiwan – all of which point to the unwinding of globalization, which had long benefited China more than any other country.

My mistake was to give China too much credit for devising a structural antidote to Wen’s “four uns.” That led me to place too much weight on the benign forces of rebalancing as a rationale for higher quality economic growth. I worried a lot about Japanization risks, but mainly as symptoms of a failed rebalancing. That led me to double down on rebalancing, arguing that structural transformation was China’s only real option.

My biggest mistake was to minimize the consequences of Xi Jinping Thought. Xi’s focus on ideology speaks much more to the resurrection of Mao’s legacy than to continuity with the Deng era. Under Xi, China’s new era is more about the supremacy of the Party, with an associated emphasis on power, control, and ideological constraints on the economy.

Unlike the China of Mao, when there wasn’t much growth to sacrifice, there is far more at stake today for the world’s second-largest economy. With the upcoming 20th Party Congress likely to usher in an unprecedented third five-year term for Xi, there is good reason to believe that China’s growth sacrifice has only just begun.


Stephen S. Roach, a former chairman of Morgan Stanley Asia, is a faculty member at Yale University and the author of the forthcoming Accidental Conflict: America, China, and the Clash of False Narratives (Yale University Press, November 2022). 

Copyright: Project Syndicate, 2022.
www.project-syndicate.org 

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Dec 2nd 2023
EXTRACTS: "In a recent commentary for the Financial Times, Martin Wolf trots out the specter of a 'public-debt disaster,' that recurrent staple of bond-market chatter. The essence of his argument is that since debt-to-GDP ratios are high, and eminent authorities are alarmed, 'fiscal crises' in the form of debt defaults or inflation “loom. And that means something must be done.' ----- "If, as Wolf fears, 'real interest rates might be permanently higher than they used to be,' the culprit is monetary policy, and the real risk is not rich-country public-debt defaults or inflation. It is recession, bankruptcies, and unemployment, along with inflation." ---- "Wolf surely knows that the proper remedy is for rich-country central banks to bring interest rates back down. Yet he doesn’t want to say it. He seems to be caught up, possibly against his better judgment, in bond vigilantes’ evergreen campaign against the remnants of the welfare state."
Nov 27th 2023
EXTRACT: "The first Russia, comprising those living in Russia’s two biggest cities, Moscow and Saint Petersburg, can pretend there is no war at all." ---- "Then there is the other Russia, the one you find in small towns and villages scattered across the country’s massive territory. Here, the Ukraine war is a source of patriotic pride,"
Nov 27th 2023
EXTRACTS: "I interviewed Wilders in 2005 " ---- "Frankly, I thought he was a bore, with no political future, and did not quote him in my book. Like most people, I was struck by his rather weird hairstyle. Why would a grown man and member of parliament wish to dye his fine head of dark hair platinum blond?" ----- "His maternal grandmother was partly Indonesian" ----- "Eurasians, or Indos as they were called, were never fully accepted by the Indonesians or their Dutch colonial masters. They were born as outsiders." ---- "Ultra-nationalists often emerge from the periphery – Napoleon from Corsica, Stalin from Georgia, Hitler from Austria." ---- "Henry Brookman founded the far-right Dutch Center Party to oppose immigration, especially Muslim immigration. Brookman, too, had a Eurasian background, as did another right-wing politician, Rita Verdonk, who founded the Proud of the Netherlands Party in 2007." ---- "A politician who might fruitfully be compared to Wilders is former British Home Secretary Suella Braverman. As a child of immigrants – her parents are double outsiders, first as Indians in Africa and then as African-Indians in Britain – her animus toward immigrants and refugees “invading” the United Kingdom may seem puzzling. But in her case, too, a longing to belong may play a part in her politics."
Nov 19th 2023
EXTRACT: "The good news is that the San Francisco summit was indeed an improvement on last year’s meeting. Above all, both sides took the preparations far more seriously this time. It wasn’t just the high-level diplomatic engagement that resumed in the summer, with visits to Beijing by US Secretary of State Antony Blinken, US Treasury Secretary Janet Yellen, US Secretary of Commerce Gina Raimondo, and climate envoy John Kerry. Equally important was identifying in advance the key issues on which the two leaders could cooperate and eventually agree."
Nov 11th 2023
EXTRACT: "It would be naive to hope that the Russian government or US diplomatic outreach would prevent nuclear war in the event of a serious threat to Putin’s political survival. The risk that Russia’s Ukraine misadventure could culminate in nuclear nihilism demands nothing less than a systemic review of America’s options."
Nov 11th 2023
EXTRACT: " Hamas’s barbaric massacre of at least 1,400 Israelis on October 7, and Israel’s subsequent military campaign in Gaza to eradicate the group, has introduced four geopolitical scenarios bearing on the global economy and markets. As is often the case with such shocks, optimism may prove misguided."
Nov 10th 2023
EXTRACT: "The last two years have been catastrophic for investors in US Treasury bonds. By one measure, 2022 was the worst year for such investors since 1788. Bond prices are poised to fall again in 2023, making this the first time in US history that they declined for three consecutive years. But now the “smart money” is jumping back in."
Nov 6th 2023
EXTRACTS: "China’s economic slowdown could lead the CPC to embrace a militant form of Chinese nationalism in an effort to maintain public loyalty. This would spell trouble for Taiwan, the Asia-Pacific region as a whole, and China itself in the long run. Given the threat posed by China’s assertiveness, it is no surprise that Japan is increasing its defense budget and that other countries have decided to follow America’s lead and explore ways to support Asia’s liberal democracies." .... "The difference between China’s and Japan’s economic trajectories raises the question: Can a corrupt Leninist regime outperform a free society? Whatever the answer, China is facing an uphill battle."
Nov 2nd 2023
EXTRACT: "Of course, Putin owes his authoritarian mandate to Russians themselves. After the collapse of the Soviet Union, Russians – reeling from rapid, profound economic changes and the new culture of consumerist individualism – grew nostalgic for the 'strong' state. Their superpower status, historic breakthroughs in space, and grand victories on the battlefield were all long gone. Trading their new freedoms for the promise of renewed imperial glory seemed like a good deal." ----- "After Stalin, the only time the state engaged so openly in such violent repression was under Yuri Andropov, who headed the KGB in the 1970s before becoming General Secretary of the Communist Party in 1982 (he died in 1984). -- Putin, who regards Andropov as a personal hero, has reinstated the Andropov-era 'disciplinary check-ups' of cultural institutions." ------ "We are dealing with people who want 'full revenge for the fall of the Soviet empire.' The empire they want to build will include Andropov-style control over every aspect of Russian life, as well as a grander claim of being anointed by God. Like the Orwellian equation “2+2=5,” it is a story that you would have to be insane – or brutally compelled – to believe."
Oct 27th 2023
EXTRACT: "The cost of electricity from solar plants has experienced a remarkable reduction over the past decade, falling by 89% from 2010 to 2022. Batteries, which are essential for balancing solar energy supply throughout the day and night, have also undergone a similar price revolution, decreasing by the same amount between 2008 and 2022. ---- These developments pose an important question: have we already crossed a tipping point where solar energy is poised to become the dominant source of electricity generation? This is the very question we sought to address in our recent study."
Oct 9th 2023
EXTRACT: "Sooner or later, Israeli Prime Minister Binyamin Netanyahu’s destructive political magic, which has kept him in power for 15 years, was bound to usher in a major tragedy. A year ago, he formed the most radical and incompetent government in Israel’s history. Don’t worry, he assured his critics, I have “two hands firmly on the steering wheel.” But by ruling out any political process in Palestine and boldly asserting, in his government’s binding guidelines, that “the Jewish people have an exclusive and inalienable right to all parts of the Land of Israel,” Netanyahu’s fanatical government made bloodshed inevitable."
Oct 9th 2023
EXTRACTS: "....whereas Israel can prevail militarily over any of its enemies, albeit at an increasing toll in blood and treasure, it cannot stop the most dangerous threat of all—the deadly erosion, resulting from its continuing brutal occupation, of that moral foundation on which the country was established." --- "....the Israeli public must demand the immediate resignation of Prime Minister Netanyahu."
Sep 27th 2023
EXTRACT: "......today’s American body politic has little patience for long-term thinking. This was not always the case. George Kennan, first as a diplomat and later as an academic, devised the containment strategy that the United States used against the Soviet Union during the Cold War. Andrew Marshall, as the head of the Pentagon’s Office of Net Assessment, pushed the envelope on US military strategy. And Henry Kissinger, of course, was the ultimate practitioner of what has been dubbed “Grand Strategy.” "
Sep 23rd 2023
EXTRACT: "In a recent CNN interview, Paul Krugman of The New York Times finds it hard to understand why ordinary American voters do not share his euphoric view of US President Joe Biden’s goldilocks economy – which appears to be neither hot nor cold. Inflation is falling, unemployment remains low, the economy is growing, and stock-market valuations are high. So why, Krugman asks, do voters give Biden’s economy a lousy 36% approval rating?" .... "what matters to working people is not the monthly or yearly price change taken alone. What matters is the effect on purchasing power and living standards over time. Whether these are rising or falling depends on the relationship of prices to wages. When wage growth exceeds price increases, times are generally good. When it doesn’t, they aren’t."
Sep 14th 2023
EXTRACT: "The fundamental lesson, then, is that the issuer of an incumbent international currency has it within its power to defend or neglect that status. Thus, whether the dollar retains its global role will depend not simply on US relations with Russia, China, or the BRICS. Rather, it will hinge on whether the US brings its soaring debts under control, avoids another unproductive debt-ceiling showdown, and gets its economic and political act together more generally."
Aug 31st 2023
EXTRACT: "TOULOUSE – The days between Christmas and the New Year often prompt many of us to reflect on the problems facing the world and to consider what we can do to improve our own lives. But I typically find myself in this contemplative state at the end of my summer holiday, during the dog days of August. After several weeks of relaxation – reading books, taking leisurely walks, and drifting in a swimming pool – I am more open to contemplating the significant challenges that will likely dominate discussions over the coming months and pondering how I can gain a better understanding of the issues at stake."
Aug 30th 2023
EXTRACT: "To the extent that international relations is an extension of interpersonal relations, how leaders publicly talk about their adversaries is important. US rhetoric about Putin, as much as shipments of F-16s, can push him – and thus the war – in various directions."
Aug 20th 2023
EXTRACT: "Since the end of World War II, the United Nations has been the cornerstone of the international rules-based order. While numerous other international agreements address issues such as chemical weapons, biological warfare, and regional stability, the UN has been entrusted with the overarching role of maintaining global peace and stability. What made it effective, at least for a while, was the support of the world’s liberal democracies and, crucially, the unwavering commitment of both Democratic and Republican administrations in the United States." ---- "That all changed with the Bush administration’s decision to invade Iraq, a sovereign country, in the face of fierce international opposition and without the UN Security Council’s approval. In doing so, the US severely damaged its own credibility and undermined the global rules-based system,... "Many of America’s current domestic political divisions grew out of the Iraq War. Whereas presidents like Franklin Roosevelt, Harry Truman, and Dwight Eisenhower demonstrated that effective leaders can make the world a safer and better place, even in the face of great adversity, Bush’s presidency showed that the opposite is equally true."
Aug 20th 2023
EXTRACTS: "a period of parliamentary history between 1719 and 1772 called 'the age of liberty'. This marked the end of autocratic monarchy and the beginning of an era of parliamentary power " ---- "This was a period of large-scale legislative projects and freedom of speech became central to the idea of freedom from tyranny. The most important piece of legislation was the Freedom of the Press Act of 1766, a law that aimed to protect freedom of information as a means of promoting democracy. It has been amended since but its tenets remain the same. " ---- "Describing Muslims, to allude to the situation of the Qur’an burnings, as criminals would be criminal. But to burn the Qur’an is in itself not, according to the current formulation of the law, an attack on Muslims. It is rather seen as an attack on the religion of Islam. Such attacks are not illegal because the aim of the attack is not directed against a protected group of people but against a belief – an idea. That is not illegal."
Aug 18th 2023
EXTRACTS: "But if the dollar should lose its privileged place, what could replace it? At present, the euro, which accounts for 20% of global central-bank reserves, is the only currency that could realistically serve as a substitute. Its appeal, however, is undermined by the fragmentation of Europe’s national sovereign-debt markets, as well as lingering doubts about the European Union’s long-term viability in the wake of the UK’s departure.'" ---- "The Chinese renminbi, which accounts for less than 3% of global reserves, is not a serious threat to dollar hegemony. "