China’s economic problems can seem sudden and surprising. Just a few years ago, its economy inspired worldwide envy. Today, signs of trouble appear to be everywhere.
The real estate market is in a serious slump. Consumer spending is weak. Unemployment among young adults has surged above 20 percent — and the government has responded by suspending the release of that statistic.
“The most terrifying thing is that everyone around me is at a loss of what to do next,” Richard Li, the owner of an auto parts business who has closed two of his four stores, told my colleague Li Yuan. “I used to believe that our country would become better and better.”
Today’s newsletter is intended to help you make sense of the turnabout. My main argument is that China’s problems are not, in fact, new. They have been building for years, and Chinese leaders have long vowed to address them. So far, though, they have mostly failed to do so. That failure is catching up to them.
The only story
China’s ascent over the past half-century has been remarkable, producing an arguably unprecedented decline in poverty. Even so, the country’s economic model has been familiar: investing in physical capital and education to become more productive and lure residents of rural areas to cities where they work in factories.
In previous eras, England, Germany, the U.S., Japan and South Korea all followed the same model. So did the Soviet Union, after World War II. The economist Gregory Clark called it the only story of economic development.
After countries achieve rapid growth for several decades, they can come to resemble unstoppable forces, destined to dominate the globe. People made such predictions about the Soviet Union in the 1960s, Japan in the 1980s and China in recent years. But you’ll notice a pattern of disappointment in those examples, as Paul Krugman, the Times columnist and Nobel laureate economist, has pointed out.
Thirteen years ago, I visited China to report a story for The Times Magazine and wrote the following:
To continue growing rapidly, China needs to make the next transition, from sweatshop economy to innovation economy. This transition is the one that has often proved difficult elsewhere. Once a country has turned itself into an export factory, it cannot keep growing by repeating the exercise. It can’t move a worker from an inefficient farm to a modern factory more than once. It cannot even retain its industrial might forever. As a country industrializes, workers will demand their share of the bounty, as has started happening in China, and some factories will start moving to poorer countries. Eventually, a rising economy needs to take two crucial steps: manufacture goods that aren’t just cheaper than the competition, but better; and create a thriving domestic market, so that its own consumers can pick up the slack when exports inevitably slow. These steps go hand in hand. Big consumer markets become laboratories where companies know that innovations will be tested and the successful ones richly rewarded.
I did not predict China’s current problems, to be clear. I was agnostic about whether its leaders would take the steps to build a more advanced economy. But I did describe the consensus, both inside and outside China, about what those steps were.
China’s current problems stem from not having taken them. Its leaders have instead doubled down on the same strategies that worked in past decades, like the construction of more apartment buildings and factories. It’s not working.
China still does not have a thriving consumer economy to replace its smokestack economy. It has neglected to build a safety net strong enough to give ordinary workers the confidence to spend more. Health insurance is spotty. “Government payments to seniors are tiny,” Keith Bradsher, The Times’s Beijing bureau chief, wrote this week. “Education is increasingly costly.”
Why hasn’t China taken the necessary steps? Change is hard. The bureaucrats who run legacy industries like construction have more political influence than those who run nascent industries. President Xi Jinping also seems concerned that a robust consumer economy might undermine the ruling party’s authority.
‘At least 5 or 10 years’
Any article about China’s economy tends to include the caveat that it could turn around soon. So consider this newsletter caveated. But telling a coherent story about why and how China would boom again is becoming harder.
Xi is resisting changes that even Chinese experts have long advocated. The country’s population is shrinking, with the biggest declines ahead. And other countries have become warier of working with China, for geopolitical reasons.
In that 2010 Times Magazine article, I included the following paragraph of caveat. It feels a little different 13 years later:
None of this means China is on the verge of running out of steam. It probably has at least 5 or 10 years of rapid growth ahead, even if it simply doubles down on its current growth strategy, because it can still take more industrial market share from other countries. In a way, though, the country’s short-term strengths in manufacturing and exporting may be another reason to wonder what the future holds. Those strengths will make it harder for China to summon the urgency to remake itself.
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