If one observes the Western press, one will find that there has been a proliferation of reports, analyses, and assessments that China has reached a peculiar “end of the road” in terms of its economic growth dynamics.
The “negative” signs include a number of elements of the conjuncture: the failure of the zero-covid policy that brought the Chinese economy to the brink of recession; The abandonment of the zero-covid policy that will lead to a spike in cases and the collapse of the Chinese health system. The aging of the population combined with the first ever population decline. The low rise in productivity that has a horizon of productive stagnation. The housing debt bubble that threatens to drag down the entire Chinese economy. The ongoing challenges and legitimacy crisis of Xi Jinping’s leadership role.
But is this the real picture of the Chinese economy? As is often the case with coverage of international developments in times of great geopolitical division and controversy, these assessments reflect a certain charge that is to some extent expected.
By this we do not mean to argue that these elements do not stand. But that one needs to see its interconnection with other data and ultimately the overall dynamics that are taking shape to be able to get the full picture.
China’s situation in relation to the pandemic
Although there is still the problem of complete data on the true situation of the pandemic, at the moment there is no picture that China is in a state of sanitary collapse despite the lifting of restrictive measures. It has apparently had a major outbreak and expects more cases after the ongoing major holiday and travel season around the Lunar New Year ends, but it doesn’t seem to be “collapsing”.
It is also important that China had reached a limit with the zero-covid policy that may have seemed effective in earlier phases of the pandemic, when China even managed to have an increase in life expectancy in contrast to e.g. with the USA, it had now become a factor of considerable social discontent. Against this background, the lifting of the measures appears to have improved the social climate and apparently fuels economic growth as well.
In any case, the shift towards private consumption within China is a key choice of the current Chinese leadership. It is no coincidence that a round of upward revisions to China’s growth prospects has already begun at this time. Consequently, it is possible that in 2022, where the zero-covid policy prevailed, which quite often “closed” entire regions and the corresponding production units, the growth reached only 3%, far below the initial forecasts, but the prospects for this year they are better. In fact, we should not forget that even the low forecasts of international organizations for growth in China in 2023 of just over 4% do not cease to mean much greater growth than the G7 countries, most of which are expected to remain stagnant or even to go into recession. At the same time, the first estimates have already been formulated that want Chinese growth to exceed 5% in 2023.
The question of population decline
There was much discussion about the announcement that China’s population had declined for the first time. This was mainly due to the impressive decrease in births in 2022 (6.77 births per 1000 people, while in 2019 it was 10.41), but it is not certain that it will continue. Obviously, China, as a result of the one-child policy that existed for several years, is facing the demographic dynamics of a “developed” country, and the “developed world” has historically recorded a decline in births. However, this does not directly mean a reduction in economic momentum. And this has not only to do with the absolute numbers but also the degree of urbanization of the population. For example, India will soon surpass China in terms of absolute population, but it has a largely rural population, in contrast to China’s highly urbanized population. This means that in the first phase China is not in danger of falling productivity due to negative demographic trends.
However, the data show that China still has higher productivity growth rates than the US. It shows slowing trends, something recorded globally, but in absolute numbers it remains much higher than the US in terms of growth rates.
In addition, China has a very large industrial robot installation program ahead, which is expected to make a significant contribution to productivity, in a country that should not be forgotten has a strong manufacturing sector and a relatively lower emphasis on services, where productivity growth rates they are smaller.
The relationship between investment and consumption
At the same time, China has a comparative advantage in terms of how the relationship between investment and consumption is structured. And that’s because it remains a high-investment country, even as it can obviously rely on the depth of the Chinese market and the potential to grow consumption. In fact, there is a positive relationship between investment and consumption. This is also reflected in the fact that, since 2000 and after, China, in addition to the very large investment, has also had much higher private consumption growth rates compared to other developed economies, while precisely the area of social consumption, in which it was lagging behind , he can also contribute to the increase in total consumption. Something that is expected to intensify as the goal of “common welfare” increasingly means the need for more “welfare state” spending and benefits.
The political questions
Obviously, China also has active contradictions in its economy, but they are not the ones that are usually found in the relevant discussion.
The main problem is precisely the risk of acquiring various “bubbles”. This has partly already been seen in the housing sector, where a “property bubble” has essentially burst. Accordingly, there is always the question of the risks of overinflating large tech companies, especially when they want to expand into the financial sector. Questions that take on an extra importance especially now that it seems that the Chinese leadership is seeking to give room to “private initiative” again.
And of course there is the question of whether and to what extent the Communist Party can continue to function as a “hegemonic” force within Chinese society. Moves like the “change of line” for the pandemic show that it can still be flexible enough and respond to pressure “from below”.
