China’s economy is undergoing a profound structural slowdown

More and more protests are taking place in China against zero-covid

The policies of the government led by Xi Jinping have naturally attracted international attention. The growing number of shutdowns in nearly three years of the pandemic has also disrupted economic activity in many of the country’s manufacturing hubs.

The International Monetary Fund expects China’s economy to grow by 3.2% this year, or 1.2% slower than emerging markets in Asia. This underperformance is in stark contrast to what has happened in recent decades, when China underwent a dramatic economic transformation that lifted hundreds of millions of its citizens out of extreme poverty. The definitive cultural agreement between the citizens of China and the Communist Party was that the party would offer a rapid increase in living standards for the people to accept a political system that gave them only limited freedom.

The deal could weaken as China’s economy stagnates. It is not a matter of temporary closure. China’s economy is in a deep recession due to the situation in three areas of economic growth—employment, wealth and productivity. China’s labor force is shrinking. The economic boom fueled by low-cost bank credit has led to a large dispersal of capital, particularly in the real estate industry. And productivity growth has been slow.

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These symptoms appeared in the years following the North Atlantic financial crisis. The Chinese government tried to deal with the development crisis with a combination of finance, investment and credit that worked well against the recession. Reversing the decline of the system requires more than incentives.

The numbers tell the story well. China grew annually by 10.7% between 2002 and 2011. Economic growth in the period 2012-2022 was 6.3%. Of course, as with many other countries, China’s decline in the last decade has also been affected by the shock of covid in 2020. Many economic forecasters expect that China will only drive growth of 3.5-4% in the last decade. The most important thing is that China has been showing slow growth over the past decade even though it still maintains the equivalent of about 45% of the gross domestic product, a sure sign that the efficiency of its spending is improving.

The Chinese leadership has recognized the need to move away from the economy that thrived until recently – from manufacturing to employment, from international demand to domestic demand and from investment to consumer spending. The bottom line for this change will be greater than all of these, from commodity-led economic growth to productivity-driven economic growth. This is what Japan did after 1975 and East Asian countries did after 1998.

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One of China’s most important economic policy initiatives was announced in 2015. The ‘Made In China’ program is a ten-year plan to promote ten industries that the government believes are important for the future: robotics, green mobility and green. energy, information technology, high-speed rail equipment, electrical equipment, aerospace engineering, new equipment, agricultural technology, marine engineering and medical equipment. These should be the building blocks of the fourth industrial revolution.

The industrial policy that China is pursuing now is different from the past experiences of industrial policy in Asia—from the failed Nehruvian experiment in India to the successful experiment in countries like South Korea. Previous attempts at industrialization in this part of the world were aimed at growth, so that the factories that existed in the most developed countries were quickly built indoors.

China has other needs. It is trying to build new industries – and standards – that are at the frontier of technology around the world. This has huge political implications, which is one reason why the US and its allies have been trying to impose technology on China. There is little information on whether the Made in China program has been successful. However, a recent paper by Lee G. Branstetter of Carnegie Mellon University and Guangwei Li of Shanghai Tech University, using data from the financial records of listed companies, shows little evidence that companies that receive financial support under on the Made In China policy they have said high yield. , increased spending on research, accreditation or benefits (‘Does “Made In China 2025” work in China? Evidence from Chinese Listed Firms’, National Bureau of Economic Research, Working Paper 30676).

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The transition from an input-driven economy to a productivity-driven economy is difficult, and important for China. Its old economic model is now unable to provide rapid growth. The Western alliance has learned from its past mistakes and is unlikely to give China access to modern technology. Can China beat them in that game? It should move quickly to a smart economy. The main question is whether the political system of governance can encourage innovation at the global technological frontier. The question that was asked of the Soviet Union will now be asked about China. The political nature of the protests in China is also important for the future of China’s economy.

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