In nature, males go to great lengths to capture the attention of potential mates. Bull elephants enter musth, stags grow resplendent antlers, and backyard birds engage in full-throated song. All project exaggerated versions power and virility, designed to win over the audience of potential partners. Humans differ in just one respect: Excessive sexual display is not solely the prerogative of males.
Being complex social creatures, humans also use exaggeration to impress about other things, including their supposed intellectual prowess. In a world of social media, where it is possible to instantly access large audiences, but where many voices compete for attention, exaggeration is the route to recognition.
These days, intense competition has arisen over who can trash China’s economy the most. From Wall Street to the White House, among think tanks, academics and journalists across the political spectrum, China bashing is on full display. Variously, China is described as a ticking time bomb, ‘Japanified’, ensnared in a middle-income trap, drowning in debt, and other vivid images portending its downfall.
Hyperbole shapes perceptions, but it does not change truths. So, at the risk of losing audiences egged on by exaggeration, the truth about China is almost certainly more nuanced, complex, and uncertain than the purveyors of hype would have us believe.
We do not make this point to deny that China faces enormous challenges. Nor to argue that China’s is in good shape (it is not) or to suggest that Chinese economic policy is without flaws. Rather, it is an assertion that today’s fashionable pessimism about China ignores or underestimates intrinsic strengths of the Chinese economy. China’s future is neither clear nor foreordained.
Although widely reported, it is nevertheless helpful to begin with a recap of the major challenges China’s economy faces.
China’s largest imbalance resides in its two-decade long story of excessive debt-financed urbanization. Estimates suggest that the cumulative impact of unwinding property mal-investment could amount to as much as 10% of Chinese GDP, or roughly $2 trillion dollars at prevailing exchange rates. And while comparisons to the housing crises of the US or Europe precipitating the global financial crisis are probably wide of the mark (given much lower risk of bank runs in China), an oversupply of Chinese housing and rising bad debts will impose long-lasting impacts on household wealth, resulting in a persistent drag on consumer demand.
China’s second major challenge is an ageing population. China’s labor force growth has slowed to a standstill and its population will shrink for a generation or more. A declining supply of labor means that productivity must accelerate if strong economic growth is to be maintained. The good news is that after a quarter century of significant capital misallocation, better investment outcomes may now ensue. Yet it is by no means assured that productivity will grow rapidly in the years to come—in China or anywhere else.
In short, China’s trend economic growth rate has slowed and will slow further in the years to come. Even with some allowance for catch up into higher value-added sectors, China’s long-term sustainable real GDP growth rate has probably decelerated to about 3% per annum, only marginally higher than that of the US. It is therefore little surprise that many economists have postponed the date when China’s economy will overtake that of the US until the middle of this century or later.
But it strikes us as hyperbolic to suggest that slowing trend growth in China is tantamount to a ‘ticking time bomb’. One might, of course, question whether China’s political and social institutions can cope with weaker growth, sector dislocations and higher unemployment during its inevitable transition. But those are questions pertaining to China’s political system and not its economy, per se.
Equally, any analysis of China’s medium-term growth prospects is incomplete without noting China’s intrinsic economic strengths. Specifically, they include an enormous domestic market, access to global markets via supply chains for trade and finance, China’s human capital potential, and China’s market-based economic dynamism.
Having the world’s second largest national economy as well as access to global trade and finance, makes China an exceedingly attractive place for investment and innovation. China also offers a well-diversified economy—it is not overly reliant on a single product, market, or industry.
A vast pool of existing human capital—Chinese universities produce more engineers annually than any other country—is also a key strength. Moreover, China is poised to make massive education gains. Today, over 70% of Chinese workers have not completed secondary education, but the histories of other successful middle- and high-income countries suggests that increasing average education levels will provide China with legions of skilled works increasingly tooled for the challenges of modernity.
Still, the most underestimated factor by pessimists is their failure to account for market forces in China’s development. According to the World Bank, state-owned enterprises represent about one quarter of China’s output, with the private sector dominating production. China’s economy is ‘communist’ in name only—it is not the old Soviet model of centralized planning. Rather, China’s economy is flexible and dynamic, as its successful sectors including alternative energy, electric vehicles, data analysis, and high tech underscore.
Herein lies the crucial issue when considering China’s prospects, the one Adam Posen has recently and eloquently raised. To paraphrase, whether secular pessimism or guarded optimism is warranted for China depends crucially on whether President Xi’s increasingly authoritarian government is compromising those same foundations of free enterprise in China. If so, pessimism is warranted, otherwise probably not.
Free markets are nothing more than the freedom to exchange property rights. For a market-based economy to thrive, therefore, property rights must be respected. As Posen notes, Xi’s crackdowns on corruption and tech tycoons, as well as his government’s harsh implementation of zero-Covid policies during the pandemic, risk shattering the confidence of ordinary Chinese households and businesses in their ability to make basic economic decisions freed from government intrusion.
If Xi’s authoritarianism erodes trust in property rights, it will mark a historic reversal of the policies unleashed by Deng Xiao Peng and his successors in the four decades after 1980. A Xi U-turn would pose the single biggest threat in a half century to China’s emergence as a growing economic power and would validate the pessimist’s fears.
Simply put, there is no evidence of a successful economic development without the protection of property rights.
In this most crucial respect, conjecture is possible but firm conclusions are not. We simply do not know how Xi’s authoritarian tendencies will play out, whether they will clash or co-exist with a market economy. That question, rather than breathless claims of pessimistic certainty, should be our focus.
Unfortunately, how we think about and analyze issues, how competition for attention interferes with clarity of communication, works against those who are cautious about drawing premature conclusions. But sometimes the search for truth requires us to ward off hype, exaggeration and bias.