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What’s wrong with China’s economy? Jeremy Mark on t= he property crisis, income inequality, and the need for a new economic mode= l.

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End of an Era

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What’s w= rong with China’s economy? Jeremy Mark on the proper= ty crisis, income inequality, and the need for a new economic model.

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Raj

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It&rsq= uo;s a brutal year for most countries’ economies, as inflati= on rises to highs unseen in decades and lingering pandemic disruptions crea= te financial uncertainty for billions of people. In China, long accustomed = to strong economic indicators, GDP growth has been largely stagnant this ye= ar, as Covid restrictions lock down factories and major cities. But the cor= onavirus doesn’t explain other signs of economic distress in the coun= try. Many global tech companies have flourished during the pandemic, yet th= e Chinese tech sector has lost more than US$1 trillion in market value sinc= e 2020, with the government in Beijing cracking down on some of the country= ’s biggest tech corporations. Public protests broke out in many Chine= se cities this summer, as homebuyers in 24 out of 31 provinces boycotted th= eir mortgage payments on unfinished apartments. Several regional banks have= now collapsed, and the unemployment rate has hit nearly 20 percent for peo= ple between 16 and 24 years old. Apple, Microsoft, and Amazon have moved so= me electronics production out of the country altogether. What’s going= on here?

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=09=09=09=09=09=09Jeremy Mark is a senior fellow in the Ge= oeconomics Center of the Atlantic Council, a policy institute in Washington= , and formerly a reporter and editor for The Wall Street Journal based in S= ingapore, Taiwan, and Japan. As Mark sees it, Covid is harming China’= s economic performance, but below this phenomenon, the country is suffering= from more fundamental issues that make its post-Covid prospects highly unc= ertain. Some of the problems come from how rapid China’s growth was i= n previous decades, leaving it today in need of developing a new, more adva= nced economy, less dependent on low-wage manufacturing. But a major economi= c—and increasingly, political—threat is now inequality, with ne= arly half of Chinese people still living on less than $150 a month. Under P= resident Xi Jinping, the state has meanwhile become more protective of its = power, weakening rival power centers, including the leading tech firms. And= Beijing now faces the critical question of how to deal with enormous debt = in the property sector, which is damaging developers, banks, and households= . The critical choices facing Xi and the Chinese Communist Party, Mark says= , will determine whether China pursues a more state-directed or private-sec= tor model for the world’s second-largest economy.

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——= —

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=09=09=09=09=09=09Michael Bluhm: How would you describe th= e current condition of the Chinese economy?

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=09=09=09=09=09=09Jeremy Mark: China’s Zero Covi= d response to the coronavirus—the shutdowns of cities and restri= ctions on travel, all aimed at containing the virus—has seriously dam= aged the country’s economy, but it’s only one of several factor= s. It’s the straw breaking the camel’s back. The result is GDP = growth that’ll probably be below 3 percent this year, which for China= is the equivalent of a recession. In 2021, growth was 8 percent.

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=09=09=09=09=09=09Beyond Covid, the Chinese economy faces serious structura= l problems. Public policies in recent years have led to self-inflicted woun= ds, and Zero Covid is only the most recent example. The biggest structural = issue is China’s need to upgrade its manufacturing sector and move be= yond low-end manufacturing based on cheap labor. It also needs a modern fin= ancial system, because the current system is hampering growth. And it&rsquo= ;s facing the reality of a rapidly aging, shrinking population. All these t= ransitions are becoming harder and harder for the government in Beijing. =09=09=09=09=09=09

=09=09=09=09=09=09The single most pressing structural issue right now, thou= gh, is that China’s rapid growth over the past decade has been accomp= anied by the massive accumulation of corporate and household debt in the pr= operty sector. The instability of this sector is threatening a large part o= f corporate China. It’s also threatening households, whose wealth has= largely been based on real estate. It’s threatening local government= s that have come to depend on property development for revenue. And now it&= rsquo;s even threatening many Chinese financial institutions. How the core = issue of this property bubble is resolved will substantially affect China&r= squo;s future economic course.

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=09=09=09=09=09=09Bluhm: You mention policy decisions beyo= nd Zero Covid having contributed to China’s economic problems. What d= o you have in mind?

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Mark: The governance of China has become the domain of a single man, Pre= sident Xi Jinping, whose interests are now focused on the accumulation of p= ower for himself and the Chinese Communist Party—and on a very specif= ic vision of China’s future. The Chinese Communist Party, the CCP, wi= ll hold its 20th Party Congress next month, which will re-elect him as the = party leader, after which we can expect to see the continuation of Xi&rsquo= ;s one-man rule for the foreseeable future.

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=09=09=09=09=09=09This has serious implications for the economy, because Xi= has made a series of policy decisions that have hurt the economy—wha= t I referred to as self-inflicted wounds—and growth is weak. Consumer= confidence has been undermined, and Xi has made things worse by cracking d= own on China’s tech sector and humiliating a lot of China’s mos= t successful entrepreneurs. And he’s overseen policy actions that hav= e punctured the property bubble without any clear vision of how the governm= ent will prevent a financial crisis.
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=09=09=09=09=09=09All this has undermined many Chinese people’s dream= s for their future. And it’s taking place at a time when the global e= conomy is struggling to cope with the effects of Covid, soaring energy and = food prices, and the Ukraine war. As a result, we’re likely to see a = drop-off in demand for Chinese exports in the coming year—and then th= at will only make matters worse.
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Norbert Braun

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More from = Jeremy Mark at The Signal:

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=09=09=09=09=09=09“Party leaders were greatly concerned by the social trends emerging from what made these tech companies so su= ccessful. So you’ve seen a crackdown in online education, which was s= een as profiteering at the expense of parents trying to raise successful ch= ildren. It was also seen as widening inequalities in Chinese society, becau= se only the very well-off could afford to get the best education through th= ese profit-making companies. There was a cra= ckdown on online video games and movie streaming, because the authoriti= es felt that too many young people were spending too much time in unproduct= ive pursuits, as opposed to a more serious, nationalistic approach to educa= tion and daily life. There were grave concerns about monopolistic behavior = by big tech companies, as well, which dominate retail, online payments, and= other sectors—and a feeling that these companies were violating laws= , necessitating extensive new laws to control the companies. Ultimately, th= e Party saw a competing power center emerging among many of the most succes= sful capitalists—and they cracked the whip.”

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=09=09=09=09=09=09“The biggest issue is that there are deep i= nequalities in Chinese society. For all the sense there is of Chin= a as a very prosperous, modern country, the fact is that 600 million Chines= e live on an income of less than $150 a month. The gap between rich and poo= r—and even between the middle class and the poor—has been growi= ng and is now very wide. And you see this reflected in educational inequali= ty. Only one-quarter of the labor force has a high-school degree. By one es= timate in 2018, only 13 percent of young men in the countryside had one. Xi= Jinping and the Chinese Communist Party are very focused on this because, = if you’re talking about sources of potential unrest in the future, 60= 0 million people who don’t have a middle-class income are a much bigg= er cause for worry than high-school and college graduates who’re havi= ng trouble finding jobs.”
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=09=09=09=09=09=09“How Beijing decides to get past this prope= rty crisis will determine the next 10 to 20 years for China. They = can muddle through, and the central government has vast financial resources= —but a crisis like this is going to require vast financial resources.= And the question is how they’re going to move to address some of the= deep problems that have emerged across local government, the private secto= r, and state-owned companies. China could very well end up going through a = period of very slow growth that will make it much more difficult to meet th= e needs of its people, particularly the hundreds of millions who haven&rsqu= o;t benefited as the middle class and the wealthy have benefited. There are= key questions about the relative roles of the private sector and the state= sector—and Beijing’s impulses in recent years have been toward= a statist response, such as reining in the tech companies, which hasn&rsqu= o;t helped the economy.”
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The Signal explores urgent quest= ions in current events around the world—to support it and for full ac= cess:

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