"China’s Economy: Cassandra vs. Pollyanna"—George Magnus

From the China Books Review, January 25:

Some analysts are performing an autopsy on the Chinese economy. Others say it has never had more potential for growth. Who will win in this cage fight of the economists?

The untimely passing of Li Keqiang at age 68, in late October, marked the end of an era of reform in China’s economy. Li was associated with that reform, but delivered next to nothing to achieve it. Instead, he was sidelined as Premier by Xi Jinping, and as a result a deeply troubled economy has emerged, along with a malaise that is hanging over society and business. This leaves us asking: what has gone wrong in China? And what, if anything, can be done to put it right?

Throughout his career, Li was a leading advocate of economic reform, favoring less regulatory red tape, restrictions on the role of the government and greater use of market mechanisms. Prominent among extensive reform proposals, unveiled at the Third Plenum of the 18th Party Congress in November 2013, was the elevation of the role of markets in China from having a “fundamental” to a “decisive” role in the allocation of resources.

Those reforms never saw the light of day. Following the Chinese financial crisis of 2015-16 (in which the stock market tumbled, the yuan came under significant pressure and China lost about $800 billion from its international reserves), they were extinguished in the wake of an increasingly state-centric and Party-oriented governance. The delayed Third Plenum of the 20th Congress, expected later this year, could illuminate the Party’s thinking about how it will address the nation’s mounting economic headwinds — but there is no flag-carrier for liberal reform anymore.

A deeply troubled economy has emerged, along with a malaise that is hanging over society and business.

It is against this backdrop that a debate over who killed the Chinese economy has raged in Foreign Affairs. Adam Posen, of the Peterson Institute, argued that during the last few years, Xi Jinping’s Zero-Covid policies and reversion to state control have stymied the confidence of private firms and entrepreneurs, undermining the dynamism of China’s economy. Responding, Zongyuan Zoe Liu of the Council for Foreign Relations, and Michael Pettis of Peking University, argued that China’s economic problems pre-dated Covid and Xi by a considerable margin. Xi inherited a systemically flawed economic development model when he came to power, they posit, along with stunted population growth and low productivity; his failure was to exacerbate this by becoming reliant on centralization, keeping the old dysfunctional model on the road.

These alternative versions of what went wrong are, in some ways, mutually supportive. All analysts agree on the principal flaws and problems in China’s economy, which I outlined in my book Red Flags (2019). These include: excessive levels of debt in local government, state enterprises and real estate; under-consumption; over-investment and misallocation of capital; the consequences of rapid aging in demographics; weakness in productivity growth; a more controlling and repressive governance; the subjugation of private firms and entrepreneurs; and, most recently, commercial and business decoupling, now rebranded as de-risking.

Yet the rival diagnoses of China’s weakening economy carry profoundly different policy implications. If, as Posen argues, China’s economic problems are attributable to recent policy errors made by Xi Jinping (notably state intrusion into day-to-day commerce), then the treatment is simple: Xi should simply back off, re-set, and encourage private firms and entrepreneurs. Yet Posen is not optimistic that the autocrat who caused China to catch “long economic Covid,” as he terms it, can cure the disease.

Pettis retorts that this gets the causality backwards: the shift towards greater control and repression is the result, not the cause, of China’s faltering economy. While China was ripe for economic reform in the mid-2000s, powerful constituencies and beneficiaries in its political institutions persisted with a state model that gave rise to capital misallocation, inefficiency and imbalances. Managing these systemic problems, while trying to keep the political model intact, necessitated a strengthening of the role of Party and government at the expense of households and private firms. Pettis thinks Posen’s solution — to reduce government intrusion — might have a marginal effect, but China’s model really needs a total overhaul, involving extensive political as well as economic reform. The chances of this happening on Xi’s watch are essentially zero....

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Also at China Books Review, February 1:

Sunset of the Economists
Two decades ago, China’s reformist economists walked the halls of power and dictated policy. Now, they have been side-lined in favor of a new priority: national security. What happened?