Zongyuan Zoe Liu
The Chinese economy is stuck. Following Beijing’s decision, in late 2022, to abruptly end its draconian “zero COVID” policy, many observers assumed that China’s growth engine would rapidly reignite. After years of pandemic lockdowns that brought some economic sectors to a virtual halt, reopening the country was supposed to spark a major comeback. Instead, the recovery has faltered, with sluggish GDP performance, sagging consumer confidence, growing clashes with the West, and a collapse in property prices that has caused some of China’s largest companies to default. In July 2024, Chinese official data revealed that GDP growth was falling behind the government’s target of about five percent. The government has finally let the Chinese people leave their homes, but it cannot command the economy to return to its former strength.
To account for this bleak picture, Western observers have put forward a variety of explanations. Among them are China’s sustained real estate crisis, its rapidly aging population, and Chinese leader Xi Jinping’s tightening grip on the economy and extreme response to the pandemic. But there is a more enduring driver of the present stasis, one that runs deeper than Xi’s growing authoritarianism or the effects of a crashing property market: a decades-old economic strategy that privileges industrial production over all else, an approach that, over time, has resulted in enormous structural overcapacity. For years, Beijing’s industrial policies have led to overinvestment in production facilities in sectors from raw materials to emerging technologies such as batteries and robots, often saddling Chinese cities and firms with huge debt burdens in the process.
Simply put, in many crucial economic sectors, China is producing far more output than it, or foreign markets, can sustainably absorb. As a result, the Chinese economy runs the risk of getting caught in a doom loop of falling prices, insolvency, factory closures, and, ultimately, job losses. Shrinking profits have forced producers to further increase output and more heavily discount their wares in order to generate cash to service their debts. Moreover, as factories are forced to close and industries consolidate, the firms left standing are not necessarily the most efficient or most profitable. Rather, the survivors tend to be those with the best access to government subsidies and cheap financing.
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