The slow collapse of the Chinese economy


China is going through an economic crisis in slow motion that could undermine the stability of the current regime and have serious negative consequences for the world economy. Despite the many warning signs, Western analysts and policymakers are optimistic that Xi Jinping is up to the task of handling the crisis. Such optimism is misplaced.

The United States and its allies have many tools to influence the Chinese economy and must weigh the consequences of an acute crisis against the threat its current trajectory poses to the United States. Policymakers should think about how best to deploy these tools, instead of passively assuming the rapid growth and stability of the Chinese economy will continue.

In December, real estate developers China Evergrande and Kaisa joined several other over-indebted bankrupt companies, exposing hundreds of billions of yuan and dollar-denominated debt to default. Real estate makes up about 30% of the Chinese economy, almost double the levels that led to the 2008-09 financial crisis in the United States, Spain and England.

The real estate sector has played a key role in keeping annual growth above 6%. However, a debt bubble swelled by 20% per year between 2014 and 2018. Originally intended to accommodate rapid urbanization for the industrial economy, the urban real estate market is now oversized. About 90% of urban households own their own properties and enough vacant housing is available to accommodate 10 years of urban immigrants. Sales and prices have fallen this year, and over-indebted builders and creditors are suffering the consequences.

After a major change in the way central and local governments distribute tax revenues in 1994, Chinese local authorities began to rely on land sales for the income needed to improve infrastructure and social welfare. At a minimum, a third of local government revenue comes from the sale of land. Another 10 to 15% comes from development-related taxes.

But land sales fell more than 30% at the end of 2021, putting local finances at risk. Local governments have struggled to respond to other priorities such as healthcare, pensions, environmental cleaning, income inequality and education. In addition, up to 80% of household wealth in China is found in real estate, a protection against the weak social safety net. In other words, an economic collapse is a potential threat to the implicit social pact in China between authoritarian rulers and a quiet population.

In his zeal to reaffirm the dominance of the Chinese Communist Party, Xi has organized a crackdown on some of China’s most innovative industries and the entrepreneurs who build them. The party channels credit to public enterprises to the detriment of the more dynamic and job-creating private industry, includes agents in the management committees of most enterprises and disciplines business leaders perceived as resistant to the leadership of Mr. Xi. The crackdown on new industries such as ridesharing, private education, social media, and online and private healthcare is particularly damaging to growth.

Xi favors the less productive and least innovative parts of the Chinese economy while tightening control, limiting funding and punishing business leaders in many prominent industries. This is not a recipe for maintaining strong economic growth. Despite frequent claims that China is catching up with or overtaking the West in technology industries, it still has a long way to go to achieve the self-sufficiency and global leadership it seeks. US sanctions on advanced semiconductors, for example, have curtailed Huawei’s ability to manufacture its own 5G phones. China’s semiconductor industry is 10 years behind world leaders, according to a recent German study.

China’s commercial aviation industry lacks an internationally certified aircraft to compete with Boeing and Airbus,

despite three decades of concentrated effort. Its biopharmaceutical industry has failed to produce an effective vaccine against Covid. Steel, batteries and high-speed rail, where China is competitive, risk trade retaliation due to environmentally harmful production practices and theft of intellectual property. China’s alleged advance in artificial intelligence could be blunted by imposing the same limits on data flows in China that it imposes internally, thereby undermining its monopoly on big data, and by limiting U.S. investment in businesses. Chinese AI.

China’s overall productivity levels are also lower than those of other advanced economies. Xi’s shift towards state-owned enterprises and industry will certainly not improve this relative weakness.

In short, it’s hard to escape the conclusion that the Chinese economy is systematically weakening and that Mr. Xi’s new priorities offer little hope for a rapid recovery. The United States and its allies could further compound Xi’s challenges by vigorously enforcing trade laws, limiting China’s access to Western technology and funding, and imposing sanctions against brutal violations of human rights committed by China in Xinjiang and in developing countries which it tries to exploit through its “Belt and Road” initiative. A good example of such exploitation is the atrocious mining conditions of key components of cobalt and lithium batteries in Africa and South America.

A major slowdown or an acute financial crisis in China would certainly have a negative impact on the global economy. But U.S. and allied policymakers have tools that could both influence the direction of China’s economy and help undo some of the accumulated damage to their economies caused by Chinese mercantilism. A first step is to undermine the narrative of a relentless and unstoppable economic advance under Xi’s leadership.

Mr. Duesterberg is a senior researcher at the Hudson Institute and author of a new study entitled “Economic Cracks in the Great Wall of China: Is China’s Current Economic Model Sustainable? “

Newspaper Editorial Report: A diplomatic Olympic boycott may not be enough. Image: Mandel Ngan / AFP via Getty Images

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