https://foreignpolicy.com/
~~ recommended by emil karpo ~~
The conventional wisdom on China has shifted but still misses the bigger picture.
People pose on a statue next to a river, with skyscrapers in the background.
Herd sentiment among pundits and others who analyze the direction of Chinese affairs has always been subject to sudden shifts. In the late 1970s and early ’80s, China was mostly a neat geopolitical story in the West: Mao Zedong had died, and what perished with him was China’s long-standing focus on autarky and decades of overt opposition to the capitalist world order. Western leaders and media cheered on the rise of the smiling and friendly-seeming Deng Xiaoping. Though they were hopeful about China’s economic growth, few expected the country to rapidly emerge as an economic competitor of the first order.
In the 1990s, this began to change in a remarkably brief period of time. By the early 2000s, China increasingly came to be viewed as an unstoppable economic juggernaut.
A new shift has occurred recently, and if anything, it has been even more dramatic. Here and there, and then suddenly almost everywhere, opinion shapers and experts have been saying that the great Chinese growth engine is broken and that the country is no longer destined to lead the world in the decades ahead.
Among specialists who follow China most closely, the two main causes cited for this new conventional wisdom have been known for years. The first is that China’s growth model has been overreliant on policies such as financial repression and extraordinary levels of investment. Here, repression has nothing to do with the usual political usage of the word. It means, rather, that the state controls domestic interest, exchange rates, and capital outflows in such a way that citizens receive little accrual or benefit from their high rates of savings. Instead, these are captured by the state and channeled into industries that are favored or prioritized by bureaucrats, including many that are state-owned.
Some of the problems that might arise from financial repression can seem apparent even to lay people. Bureaucrats tend to know little about business and are unlikely to be in the best position to make the smartest and nimblest economic bets about the industrial future. Some features of this setup may be less than obvious, though. When the state captures and invests the nation’s savings according to its own whims, capital becomes scarcer and more expensive for private investors. This also suppresses the domestic consumption that most mature economies depend on for growth. Finally, as the state channels more and more investment into industries of its choosing, average return on investment falls. China is now at the point where it must invest huge amounts of capital to produce each new dollar of economic growth, and everything points to this continuing to worsen.
The other big factor, by now almost universally cited by the new China skeptics, is the country’s dismal demographic situation. Every week seems to bring new stories about either the rapid aging of Chinese society or the growing reluctance of women and couples to have children. To be fair, the numbers are truly shocking.
As good a benchmark as any of where the mainstream media stands in its appraisal of China is an article last week by New York Times columnist Paul Krugman. In it, Krugman, a Nobel laureate in economics, expatiated at length on these two factors. For the economic repression argument, he cited Michael Pettis, a Beijing-based specialist in China’s economy whom I’ve been reading and quoting now for well over a decade. He also referenced China’s demographic problems, which I’ve been laying out for just about as long.
Like many others, only with far more expertise, Krugman has turned some of his attention to the question of whether China can find its way out of its economic conundrums and return to a brighter economic path. He is not optimistic, though, and although I agree with his overall conclusion, I differ somewhat on the reasons for this.
Krugman notes that Chinese President Xi Jinping’s government is unwilling to wind down financial repression by bolstering China’s weak social safety net, which, in turn, might lead to a much greater contribution of consumer spending to GDP and to growth. Krugman attributes this refusal to an ideology of anti-“welfarism” and hostility to supposedly “lazy people” that reminds him of the governor of Mississippi. It is true that Xi has spoken in this vein, but his social safety net problem runs much deeper.
Xi is not just ideologically hostile to the creation of more generous health, retirement, and unemployment systems. The real problem is that China has waited this long to grapple with these issues in the first place. Beijing was slow to take aging and population decline seriously, putting them off until they could no longer remotely be denied and then all but panicking. The country is suddenly now awash in campaigns urging young people to create bigger families, and these are unlikely to work.
China should have begun a much more generous funding of social insurance and welfare programs when it was still enjoying the full blush of its economic boom. This is when Beijing could have best afforded such things and when they would have had the greatest impact. Now, with deaths outpacing births—and a corresponding decline in the number of young, working-age people and a boom in retirees—funding chronic illness care, nursing homes, and general retirement feels like a crushing burden to the country’s leaders, especially with economic growth already slowing.
This is not mostly due to anti-welfare thinking at all. Rather, it is about what looms as an increasingly excruciating choice between guns and butter, as I wrote in a 2016 essay. Both there, and in my 2017 book, Everything Under the Heavens, I argued that China saw the present period as a window of opportunity that was bound to close. Beijing hoped to use this window to make big geopolitical advances and lock them in through a combination of impressive economic growth and extraordinary military modernization before the costs unavoidably associated with aging forced it to switch direction and prioritize social needs at home.
Signs of this strategy can be found nearly everywhere one looks, from China’s muscling into the seas of the Western Pacific, where it has rebuffed its neighbors’ territorial claims while building artificial islands that host military outposts, to its enormous capital expenditures on the Belt and Road Initiative (BRI). Now in something of a retreat, the BRI is the program through which China has invested massively in infrastructure projects throughout Eurasia and other regions of the world.
I don’t just find fault with Krugman’s statement of the new conventional wisdom, though. I also fault myself. I saw China’s window of geopolitical opportunity closing in the face of swift aging and population decline sometime in the 2030s. The reality is that the window has already begun to narrow.
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