As 2022 drew to a close, China’s economy, and consequently the global economy, was expected to be on the verge of a surge suddenly. After 3 years of strict restrictions, mandatory mass testing, and endless lockdowns, the Chinese government suddenly made a decision to abandon its “covid zero” policy, which suppressed demand, hampered manufacturing, disrupted supply lines, and produced the biggest slowdown the country’s economy had experienced since the start of market-friendly reforms in the late 1970s. In the weeks following the policy change, global costs of oil, copper and other raw materials rose on expectations of higher Chinese demand. In March, then-Chinese Premier Li Keqiang announced a real GDP expansion target of around 5%, and many outside analysts predicted it. It would pass much higher.
Initially, parts of China’s economy did grow: pent-up demand for domestic tourism, hospitality, and retail especially contributed to the recovery. The market had bottomed out. But at the end of the current quarter, the most recent GDP data told a different story: The overall expansion was weak and appeared to be ending on the downside. Wary foreign investors and cash-strapped local governments in China opted not to regain initial momentum.
This reversal was more important than a typical overly positive prognosis that lacks the mark. The severity of the challenge is indicated through China’s declining rates of consumption of durable goods and investment in China’s personal sector to a fraction of their previous degrees, and through the growing preference of Chinese families to put more of their savings into bank accounts. These trends reflect the long-term economic decisions of other people in general, and strongly recommend that in China, other individuals and companies are concerned about wasting access to their assets and prioritize short-term liquidity over investment. The fact that those signals haven’t returned to general pre-COVID-19 grades, let alone exploded after reopening as they have in the U. S. The U. S. and elsewhere are a sign of profound challenges.
What has become clear is that the first quarter of 2020, which saw the COVID outbreak, was a point of no return for Chinese economic behavior, which began to replace in 2015, when the state extended its control: since then, bank deposits as a percentage of GDP have exceeded 50% and remain at this upper level. Private sector intake of durable goods has declined by about a third since early 2015, and has continued to decline since the reopening reflecting pent-up demand. Private investment is even lower, two-thirds historic since the first quarter of 2015, adding a 25% drop since the beginning of the pandemic. And those two key bureaucracies of personal sector investment continue to decline further.
Financial markets, and probably even the Chinese government itself, have ignored the severity of those weaknesses, which are likely to weigh on the expansion for several years. Call it a case of “prolonged economic COVID. ” As a patient suffering from this chronic disease, China’s economic framework has not regained its energy and remains sluggish even now that the acute phase (3 years of incredibly strict and costly zero COVID lockdown measures) is over. The condition is systemic, and the only reliable information cannot be provided, which credibly assures ordinary Chinese citizens and businesses that there are limits to government intrusion into economic life.
China’s progression from a prolonged economic COVID will need to be identified for what it is: the result of President Xi Jinping’s overreaction to the pandemic, which has spurred a dynamic that has beset other authoritarian countries but China in the past has avoided. in the post-Mao era, Zedong. La economic progression in authoritarian regimes tends to stick to a predictable pattern: an era of expansion during which the regime allows politically docile enterprises, driven by public largesse, to flourish. But once the regime gains support, it begins to interfere in the economy in increasingly arbitrary ways. Finally, in the face of uncertainty and fear, families and small businesses begin to prefer having money to illiquid investments; As a result, expansion is steadily slowing.
Since Deng Xiaoping initiated the “reform and opening up” of the Chinese economy in the late 1970s, the Chinese Communist Party leadership has intentionally resisted the urge to interfere in the personal sector much longer than peak authoritarian regimes. But under Xi, and especially since the beginning of the pandemic, the CCP has returned to authoritarian media. In China’s case, the virus is not the main cause of the country’s long economic COVID: the main culprit is the general public’s immune reaction to excessive intervention, which has produced a less dynamic economy. This downward cycle provides US policymakers with an opportunity to reset the economic arm of Washington’s China strategy and adopt a more effective and less self-destructive technique than those pursued through the Trump administration and, so far, the Biden administration.
Before the pandemic, the vast majority of Chinese families and small personal businesses relied on an implicit “no politics, no problem” market, in place since the early 1980s: the CCP eventually controlled asset rights, but as long as other people remained out of politics, the party would remain out of its economic life. This modus vivendi is found in many autocratic regimes that want to keep their citizens happy and productive, and it has worked wonders for China for the past four decades.
When Xi took office in 2013, he embarked on a competitive crusade against corruption that, along the way, only controlled some of his main rivals, such as former Politburo member Bo Xilai. The measures were popular with the maximum number of citizens; After all, who wouldn’t approve of punishing corrupt officials?And they did not violate the economic pact, because they only attacked a component of the members, which together constitute less than 7% of the population. A few years later, Xi went even further by putting the country’s tech giants on track. In November 2020, component leaders gave the example of Jack Ma, a tech mogul who had publicly criticized state regulators, forcibly delaying the IPO of one of his companies, the Ant group, and removing it from public life. Western investors reacted with concern, but this time also most Chinese were satisfied or indifferent. The way the state treated the assets of a few oligarchs was of little importance in their day-to-day economic lives.
The government’s reaction to the pandemic is an entirely different matter. It has made visual and tangible the CCP’s arbitrary force on everyone’s business activities, adding those of smaller players. With a few hours’ warning, an entire community or village can shut down. indefinitely, retail businesses closed with no recourse, citizens trapped in apartment buildings, their lives and livelihoods suspended.
All major economies went through a lockdown edition at the beginning of the pandemic, but none encountered anything as brutal, severe and relentless as China’s anti-pandemic measures. Zero COVID was as ruthless as it was arbitrary in its local enforcement, which seemed to stick only to the whims of party officials. China’s Murong Xuecun compared the holiday to a crusade of mass incarceration. At times, shortages of food, prescription medicine, and essential medical care afflict even Beijing’s wealthy and connected communities. Meanwhile, economic activity has collapsed. At Foxconn, one of China’s largest generation export makers, staff and executives have publicly complained that their company may be shut out of global supply chains.
What remains today is a widespread concern that has not been noticed since Mao’s time: the concern to squander one’s assets or livelihood, either temporarily or forever, without caution and without appeal. This is the story told by some expats, and it is in line with economic data. . Zero COVID was a reaction to ordinary circumstances, with many Chinese claiming that Xi stockpiled more lives than the West’s technique could have done. However, memories of how local officials relentlessly implemented the strategy remain new and undiluted.
Some say the CCP’s resolution to abandon 0COVID by the end of 2022 following a wave of public protests signaled at least some basic, if belated, attention to popular opinion. The change in attitude was a “victory” for the protesters, in the words of the New York Times. However, the same cannot be said of the Chinese, at least in their economic life. A month before the sudden end of COVID, senior party officials told the national public they expected a slow withdrawal of pandemic restrictions; What followed a few weeks later was a sharp and general change. The sudden change has only reinforced the sense among fellow Chinese that their jobs, businesses and daily routines remain at the mercy of the party and its whims.
Of course, many other points influenced the huge and complex Chinese economy of this period. Corporate bankruptcies and anti-social lending are the result of a housing bubble that burst in August 2021 and remain a persistent obstacle to expansion and continue to constrain local government funding. Fears of overregulation or worse among tech business owners also persist. The industrial and generation restrictions imposed by the United States on China have caused damage, as have retaliatory responses from China. Long before the onset of COVID, Xi had begun strengthening the role of state-owned companies and increased party surveillance of the economy. But the party had also pursued some pro-expansion policies, adding bailouts, investment in the high-tech sector, and the simple availability of credit. However, the response to COVID made it clear that the CCP was ultimately responsible for resolving people’s abilities to earn a living or access their assets, and would make decisions in likely arbitrary tactics as priorities shift. of the party leadership.
After defying temptation for decades, China’s political economy under Xi has nonetheless succumbed to a trend familiar among autocratic regimes. They have a tendency to start with a “no politics, no problems” pact that promises business like before. those who keep their heads down. But at the time or, more commonly, in the third term, leaders increasingly neglect industry considerations and pursue interventionist policies as long as they fit their short-term goals. They point to examples of some political rivals and multinational giants. corporations. Over time, the risk of state control over day-to-day trade spreads to ever wider segments of the population. At different times, Hugo Chavez and Nicolas Maduro in Venezuela, Recep Tayyip Erdogan in Turkey, Viktor Orban in Hungary and Vladimir Putin in Russia have all rejected this well-trodden route.
When entrenched autocratic rule violates the “no politics, no problem” agreement, the economic ramifications are widespread. Faced with uncertainty beyond their control, other people seek self-insurance. They keep your money; They invest and spend less than before, especially on illiquid assets such as cars, appliances and installations for small businesses and real estate. Their greater threat aversion and greater preemptive savings act as a drag on growth, such as what happens after a currency crisis.
Meanwhile, the government’s ability to steer the economy and protect it from macroeconomic shocks is declining. Since other people know that a certain policy can be implemented arbitrarily, that it can be expanded one day and canceled the next, they become less susceptible to stimulus packages, etc. This is also a familiar pattern. In Turkey, for example, Erdogan has in recent years pressured the central bank to cut interest rates, which he hoped would fuel an investment boom; Instead, what it has fueled is skyrocketing inflation. In Hungary, a first fiscal and financial stimulus package failed to mitigate the economic impact of the pandemic, despite the fate of similar measures in neighbouring countries.
Shanghai Railway Station Entrance, Shanghai, December 2022 Aly Song/Reuters
The same shift is already visible in China because Xi has strengthened the Chinese personal sector’s immune response to government intervention. The stimulus packages brought since the end of the zero-COVID policy, ended to encourage the consumption of cars and other durable goods. , have not gained much popularity. And in the early part of this year, the percentage of Chinese corporations applying for bank loans remained as low as in 2021, i. e. partly its pre-COVID average, despite efforts through the headquarters. bank and the Ministry of Finance to inspire low-interest loans. Little appetite for illiquid investments and little responsiveness to supportive macroeconomic policies: that, in a nutshell, is prolonged economic COVID.
Once an autocratic regime has lost the acceptance of the average family and business, it is difficult to regain it. Returning to smart economic functionality alone is not enough, as it does not eliminate the threat of long-term disruptions or expropriations. The autocrat’s Achilles heel is an inherent lack of credible moderation. To engage seriously in such moderation would be to admit the option of abuse of power. Budget control training.
Deliberately or not, the CCP has gone further in the opposite direction. In March, China’s parliament, the National People’s Congress, replaced its legislative procedures to make it easier, rather than complicated, to pass an emergency law. Such a law now requires only approval by the Congressional Standing Committee, which is made up of a minority of former supporters. Many outside observers have overlooked the significance of this change. But its practical effects on economic policy will not go unnoticed by households and businesses, which will be even more exposed to the party’s edicts.
The result is that the long economic covid is more than a momentary brake on expansion. Most likely, this will affect the Chinese economy for years. The most positive forecasts have not yet taken into account this lasting update. Questioned China’s expansion clients for this year or next, they have focused on easily observable disruptions, such as business leaders’ fears about the high-tech personal sector and the financial fragility of the real estate market. These sector-specific stories are important, but they matter much less for medium-term expansion than the prolonged economic COVID that is affecting consumers and small businesses in general, even if this syndrome is less visible to foreign investors and observers. (This is possibly apparent to some Chinese analysts, but they can’t point it out publicly. )And while specific policies might oppose disruptions limited to a specific sector, the broader syndrome will persist.
In recent months, Bank of America, The Economist Intelligence Unit and Goldman Sachs, for example, have revised down their forecasts for Chinese GDP expansion in 2023, cutting at least 0. 4 percentage points. it has yet to penetrate, and because many forecasts assume, ly, that Beijing’s stimulus systems will be effective, China watchers are still overestimating customer expansion for next year and beyond. Forecasts for annual GDP expansion in 2024 through the Organization for Economic Cooperation and Development (5. 1%) and the International Monetary Fund (a modest 4. 5%) may have exceeded 0. 5% or more. The desire for the right type down will only accumulate over time.
China’s personal sector will save more, invest less, and run fewer dangers than before the prolonged economic COVID, well before Xi’s momentary term. The intake of durable goods and investment in the personal sector will be less susceptible to stimulus policies. The most likely consequences will be more a volatile economy (as macroeconomic policy will be less effective in incentivizing households and small businesses to offset recessions) and higher public debt (since more fiscal stimulus will be needed to achieve the desired impact). These, in turn, will slow average economic expansion. over time by reducing productivity expansion, in addition to reducing personal investment in the short term.
However, Xi and other CCP leaders may only see this as a vindication of their confidence that the country’s long-term economy is based less on the private sector and more on state-owned enterprises. Even before the pandemic, government stress led banks and the investment budget to favor public corporations in their lending, while investments in the personal sector declined. Research by economist Nicholas Lardy found that the percentage of annual investment going to Chinese personal sector corporations peaked in 2015 and the percentage held through the state has risen sharply since then, year on year. For two reasons. First, personal investors and small businesses will err on the side of caution and stay liquid rather than make big debt-financed bets. Second, any tax cut or stimulus package targeted at the personal sector will be less successful in the short term than investment in the public sector. Add to that Xi’s continued drive for self-sufficiency in cutting-edge technology, subjecting an increasing percentage of investment decisions to even more arbitrary party control, and customers for expanding productivity and returns on capital. just darken.
U. S. officials and allies, some of whom see China’s strong expansion as a threat, would likely rejoice in the country’s disease. But a weaker, slower-growing Chinese economy will also have downsides for the rest of the world, adding that the U. S. If the Chinese continue to prefer to save on bank deposits rather than make an investment and continue to spend more on locally provided facilities than on generation and other durable goods that require imports, Its overall industry surplus with the rest of the world will continue to grow. -Any Trump- in the efforts of taste to reduce it in spite of everything. And when another global recession hits, China’s expansion wouldn’t help buke demand as it did last time. Western officials deserve to adjust their expectations downwards, but they deserve not to. rejoice too much.
Nor do they deserve to expect prolonged economic COVID to weaken Xi’s grip on force in the near future. As Erdogan, Putin, and even Maduro can attest, autocrats who break the “no politics, no problem” pact tend to remain in place despite slowing growth, and sometimes even crumbling. The perverse truth is that local party bosses and officials can get even more loyalty from a suffering population, at least for a while. In a volatile economic environment, the rewards of being smart-looking and the risks of incurring their wrath increase, and the safe opportunities to seek state sponsorship or employment are less. Xi can simply take economic measures to plug the cracks for a while, as Orban and Putin effectively did, employing the EU budget and force revenues, respectively. With targeted public spending and sectoral measures such as public employment subsidies and public assurances that the government’s crackdown on tech corporations is over, Xi may still temporarily boost growth.
But this dynamic will not last forever. As many observers have rightly pointed out, China’s youth unemployment rate is worrying, especially among highly skilled workers. If the CCP’s policies continue to diminish people’s economic opportunities and long-term stability, discontent with the party will increase. It means that some are already self-insured. Faced with insecurity, they move their savings abroad, relocate production and business investment, and even migrate to less dubious markets. Over time, those departures will look exciting to broader segments of Chinese society.
Even if Chinese monetary asset outflows remain limited for now, the long-term incentives are clear: for average Chinese savers, who hold most, if not all, of their savings in yuan-denominated assets, buying assets made sense even before the pandemic. This makes even more sense now that domestic expansion customers are declining and dangers similar to the CCP’s whims are increasing.
The United States deserves to welcome those economies, as well as Chinese corporations, investors, academics, and personnel seeking greener pastures. But existing policies, followed during the Trump and Biden administrations, do the opposite. They seek to shut down U. S. universities and corporations to Chinese academics and staff. They limit foreign investment and capital inflows, and discourage Chinese corporations from entering the United States and allied economies, whether for production or studies and development. The Chinese government’s conduct contrasts with that of the United States. These policies deserve to be reversed.
Alleviating those constraints doesn’t necessarily mean alleviating industry barriers, it can only gain advantages in U. S. economic and foreign policy. On its own terms. In fact, if the U. S. economy is in a bad light. If the U. S. were more successful in attracting Chinese productive capital, labor, and innovation, those inflows would partially offset the really high economic prices incurred as a result of the industrial conflict between the U. S. and China. Washington would also not want to dilute national security limitations on critical technologies. Allies deserve, of course, to limit access to fast sectors, just as they limit certain sensitive exports. In reality, however, the ultimate thefts of Chinese intellectual assets by U. S. companies take the form of cybercrime, counter-engineering, and outdated commercial espionage: that is, for the most part, it will have to be dealt with directly through means other than limiting foreign investment.
Removing maximum barriers to Chinese skill and capital would not jeopardize U. S. prosperity or national security. U. S. However, it would be more complicated for Beijing to have an emerging economy that is stable, self-sufficient and tightly controlled through the party. Compared to the current U. S. economy. If the U. S. economic strategy toward China is more confrontational, restrictive, and punitive, the new technique would lessen the threat of damaging escalation between Washington and Beijing, and prove less divisive between U. S. allies. This is true for the US and emerging economies. This technique would require communicating that Chinese, savings, generation and brands are welcome in the United States; in contrast to containment efforts that blatantly exclude them.
Street Sweeping, Beijing, July 2023 Thomas Peter/Reuters
Several other economies, in addition to Australia, Canada, Mexico, Singapore, the United Kingdom and Vietnam, are already reaping benefits from the influx of Chinese students, businesses and capital. In doing so, they strengthen their own economic strength and weaken the CCP’s control over its territory. This effect would be maximized if the United States did the same. If Washington goes its own way, perhaps because the next US administration opts for continued confrontation or greater economic isolationism, it deserves to at least allow other countries to go its way. establish routes for the other Chinese and trade, rather than pressuring them to adopt the containment barriers that the U. S. has imposed on other Chinese countries. The U. S. military is erecting. When it comes to Chinese personal trading, the U. S. It exerts tighter control over Chinese companies.
The more Beijing tries to avoid outlets useful to economic output, for example by maintaining strict capital controls and restricting corporate listings in the United States, the more the sense of lack of confidence behind those outflows will deepen. Other autocrats have attempted this self-destructive strategy; Many have been forced to maintain transitory capital controls indefinitely, just to inspire Americans and businesses to make greater efforts to circumvent them. more exodus of other people and capital.
The woe to the Chinese economy through the long economic COVID presents an opportunity for US policymakers to override strategy. Instead of looking to engage China’s expansion at the expense of its own economy, US leaders can let Xi do their homework for them and position their country as a better fit and welcoming destination for Chinese economic assets of all kinds. Even savvy officials have a bias as to how well this strategy served the United States in dealing with systemic rivals in the 20th century. It is occasionally forgotten that during the Great Depression it was far from clear that the US economy could outperform fascist regimes in Europe, and a similar uncertainty about the functionality of relative expansion was repeated for much of the war. cold. Despite this uncertainty, the United States emerged victorious in part because it kept the door open for other people and capital, siphoning off skill and investment and ultimately turning economic controls against itself. autocratic regimes. As the CCP grapples with its long, self-afflicting economic COVID, this strategy deserves a relaunch today.