The Chinese economy: fact, fiction, faith and flexibility

Aug 28, 2022
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The Chinese economy has long been a source of contention, with predictions of its “imminent collapse” pitted against portrayals of its strength and resilience.

Is China’s competitive edge dying as it “runs out of people” or is slower population growth not quite that catastrophic? Will President Xi Jinping achieve his goal of Common Prosperity for all Chinese citizens, or will rampant inequality constrain economic growth and make that impossible? Can Xi’s “iron fist” deliver green growth or does it condemn China to dirty skies? Is “debt-trap diplomacy” really a thing, or is it a myth?

In the 2022 Australian Centre on China in the World Annual Lecture, I draw on a range of “China narratives” to highlight how fact, fiction, faith and flexible thinking affect one’s answers to these complex questions, including my own. In so doing, I identify factors that are likely to constrain China’s economic growth in the decades ahead, as well as those that could sustain it. I summarise some of my key points in what follows here.

Foreign Affairs magazine regularly poses the question ‘Can China keep rising?’, presenting multiple competing narratives in response – to its credit, with no obvious bias that I can detect. The titles of two articles published in late 2021 illustrate this point. The first, by Michael Beckley and Hal Brands, is called “The End of China’s Rise: Beijing is running out of time to remake the world”. According to this narrative, “China’s government is concealing a serious economic slowdown and sliding back into brittle totalitarianism. The country is suffering severe resource scarcity and faces the worst peacetime demographic in history”. This, combined with the government’s “force-feeding capital through the economy since 2008” leads to their conclusion that “China is tracing an arc that often ends in tragedy: a dizzying rise followed by the spectre of a hard fall”.

The second, by Jude Blanchette, conjures up a very different picture with the title “Xi’s confidence game: Beijing’s actions show determination, not insecurity”. Blanchette’s main argument is that, while the “doomsayers” are not entirely wrong in identifying the factors that will constrain China’s growth, they fail to weigh these up against Beijing’s potential and actual strengths. His most contentious point is that Beijing’s biggest strength is its “effective authoritarianism”, enabling the party “to mobilise and channel resources with remarkable speed” via “targeted political, ideological and regulatory campaigns”. While acknowledging that this “disregards the rights and freedoms of Chinese citizens”, his bottom line is that the “CCP in 2021 has been stronger, more capable, and in command of more resources than at any other time in its 100-year history”. And, despite the many economic and geopolitical headwinds it faces, it is well placed to address them.

Which of these narratives is more likely to be correct? The answer is far from black and white, on most fronts at least.

Narratives relating to China’s demographic “collapse” have long challenged my own understanding, based on over a decade of research on the topic. This research started with learning that Deng Xiaoping had deliberately aimed to reduce China’s population growth to zero by the year 2000, to assist with the goal of quadrupling per capita income by that time. The one-child policy didn’t quite deliver the former, but per capita income quadrupled by 1996.

While fertility decline wasn’t the only driving factor, I have no doubt that it was a significant one. According to Cai Fang, former Director of the Population Institute at the Chinese Academy of Social Sciences, up to one third of the increase in China’s per capita income during its “growth miracle” years from 1985 to 2013 could be explained by declining fertility. This “demographic dividend” was celebrated by Chinese officials and scholars for decades, with good reason.

Fast forward to the introduction of the two-child policy in 2016, and now a three-child policy. There are very sound non-economic reasons for supporting this policy shift, and I absolutely do. But in purely economic terms, if reducing fertility could be so important for raising per capita income, how could increasing fertility also be a good thing? Yes, China is ageing more rapidly than other countries of comparable levels of development. But its citizens are also much better off for exactly the same reason: fertility decline.

Critically, even if many Chinese couples now choose to have only one child, as they seem to be opting for, this “low-fertility trap” need not be catastrophic. Raising the retirement age and labour force participation rates, especially among women, are two straightforward ways to boost the proportion of workers in the economy – thereby reducing the aged dependency problem. And investments in education and human capital would boost the productivity of the current and future workforce as well.

Whether the Chinese government will make these investments is a separate question. This relates to one of Xi Jinping’s latest buzzwords, “Common Prosperity. As Yuen Yuen Ang explains, the publication of Xi’s Common Prosperity speech last October in Qiushi, the theoretical journal of Communist Party elites, indicates that this new concept is not merely propaganda. Rather, it is “a set of instructions for government officials who are tasked with implementing Xi’s vision”. This vision, according to Xi “means that all people will prosper together, both materially and spiritually, not just a small minority.” Aligning with Deng Xiaoping’s decades-long call for “there to be no polarisation of rich and poor, [because] that’s what socialism means”, could “Common Prosperity” finally offer a solution?

I have my doubts. Invisible China: How the Rural-Urban Divide Threatens China’s Rise, published by Scott Rozelle and Natalie Hell last year, presents a dire picture of rural-urban inequality in China today, stemming from decades of underinvestment in health and education in rural China – home to some 500 million people. Their three key policy prescriptions are to reform the hukou system, which has “maintained and reinforced inequality through law”; to recentralise the fiscal system so that poor areas can afford to fund better education and health outcomes; and to shift the focus from short- to long-term growth, to ensure that essential human capital investments are made now, to prepare for the future. None of these reforms are straightforward, but all of them are doable: so why haven’t they been done yet?

It is very hard for me to put aside my hopes in this case – that the Chinese government will do what Rozelle and others have campaigned for over several decades, because the benefits would be enormous. But my job as an academic is to assess how policy and outcomes evolve in this – and other – domains. And the track record over the last forty years is hope dashing.

In recent years, the Chinese government has made it clear that GDP growth is no longer its “sole yardstick of success for development”, shifting its focus towards “high-quality” growth that is not only more inclusive, but greener and more sustainable as well.

Back in 2015, the journalist Chai Jing produced a documentary called Under The Dome, which was pretty scathing about the Chinese government’s failings in this domain. I wrote a chapter called Under the Dome in the China Story Yearbook that year trying to reconcile Chai Jing’s narrative with the vast number of policies and plans that I knew the Chinese government was enacting to address the problems. While I tried to be balanced in my assessment, I also admit to assuming for many years that China had a good chance of delivering on its domestic and global climate change commitments, because surely an authoritarian government – despite its many shortcomings – could at least succeed in this.

It’s taken me until this year to realise that this assessment could be wrong. Several of my Chinese Economy Masters students wrote essays last year addressing whether China had shown true commitment to a low-carbon ‘green’ economy, and was on its way to achieving it. Drawing on the latest academic literature, they explained how “fragmented authoritarianism” constrains Beijing’s ability to pursue green growth, as provincial governments continue to prioritise GDP above all else. They further explained how both the COVID-19 pandemic and the Russia-Ukraine war have led to Beijing’s stimulus packages, which favour investment in coal mines – because they generate more rapid job creation than renewable energy investments. One also reminded me that rapid urbanisation and rising consumerism among the massive middle class are significant problems, and likely to get worse. These essays really drove home to me that in the past I may have placed too much “faith” in a “strong Chinese government” to counteract these problems. Now, I’m not so sure it can, or will.

In contrast, I feel much surer about a notion that I consider to be pure “fiction”: “debt-trap diplomacy”. This term has become ubiquitous in Western media for describing what the Chinese government is doing through its Belt and Road and other global investments. Yet from the outset, it made no sense to me: why would any national government fund investments in another country in the hope that those investments would go belly up, as a way of gaining leverage over the recipient country in order to exert malign influence on them? Surely there are better ways to gain influence than that.

Deborah Brautigam, a world-leading scholar on Sino-African relations confirmed this intuition in her 2019 article, which explores how the “debt-trap diplomacy meme” has begun “to solidify into a deep historical truth”. Drawing on a database of more than 1000 Chinese loans to Africa, Brautigam “has not seen any examples where [she] would say the Chinese deliberately entangled another country in debt, and then used that debt to extract unfair or strategic advantages”. Her serious challenge to the “dominant media narrative” is consistent with the findings of Shahar Hameiri and Lee Jones, who likewise conclude that the debt-trap narrative is “simply incorrect”. I have no reason not to trust their views.

It doesn’t follow that I think the Chinese government is innocently pursuing win-win development through its global economic engagements. Of course it is pursuing power and influence as well: because that’s what ‘great’ powers do. And some of its multinational companies are behaving badly in the process: because that’s what (some) multinational companies do. The facts in this particularly complex zone – where geopolitics, economics and grand strategies intertwine– are very hard to ascertain. But we should at least rule out the fictions along the way.

Growth rates matter for many reasons, including their obvious role in determining when China will become the world’s largest economy, and what that means for how it will use its growing global power. But more importantly, it matters whether future growth is high quality – both inclusive and green – for the sake of China’s 1.4 billion citizens, and for the planet too. Delivering on this will be the true test of the Chinese government’s capabilities in the years ahead.

Thomas Orlik uses the term “Sinophrenia” to describe a “condition of modern commentary that combines the belief that China will imminently collapse with the belief that it is taking over the world.” The article by Beckley and Brands falls into this category. In contrast, Jude Blanchette’s article might seem “Sinophoric” to some. I’d call it balanced, but that’s just my view.

This “Sinophrenia versus Sinophoria” plays out in growth projections for the Chinese economy: over the next two decades, I’ve seen them range from 2-3% or worse to 7-8%. I’d hazard a guess that if we lined up all those forecasters, we’d find a strong correlation between their projections and their ‘faith’ in the Chinese government. We all need to work harder to base our expectations on the knowable facts, and how they might interact with the unknowable possibilities instead.

Assessing the future prospects for growth in any country is fraught with difficulty – and especially knowing how often economists turn out to be wrong. I do believe, as Scott Rozelle and Natalie Hell put it, that “a growing, thriving China is good for the world. A floundering China would be far more dangerous.” But that’s not the same as knowing China will continue to grow and thrive in the future. I don’t think anyone can possibly know that, without living long enough to see it happen.

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