Is China’s economic miracle over?

This week’s Project Syndicate-Big Question column features commentators with short answers to questions about the Chinese economy.

Whether the Chinese economy recovers after the negative shock of the zero-COVID policy is important not only for the country’s consumers and businesses, but also for the global economy. A sharp and prolonged backlash could also undermine President Xi Jinping’s hopes for a third term later this year and undermine the Chinese Communist Party’s legitimacy.

GEORGE MAGNUS (Oxford University Center for Chinese Studies)

China’s high-growth economic miracle, the zero of Chinese President Xi Jinping has lost momentum for many years amid mounting structural headwinds, well before the fallout from COVID-related lockdowns and restrictions slowed GDP growth this year.

This is compounded by a variety of factors inhibiting growth, including high debt burdens and debt-service costs, widespread misappropriation of capital, a shrinking labor force, low educational attainment and declining total factor productivity. The gigantic real estate market faces a decade-long contraction and unemployment is a growing problem, especially among young people.

In addition, China’s governmental regime, reflected in Xi’s “shared prosperity” campaign, is now seeking greater regulatory control over the behavior and performance of dynamic private companies, and seeks to curb the “uneven expansion of capital.”

China also faces a tough external environment as it challenges the existing world order and supports Russia. This is evident in the reassessment of their commitment and interdependence by governments and global corporations. Links with the West have helped China thrive for nearly four decades, but it has come under great pressure, including from the Chinese government, over national security concerns and perceptions of geopolitical risk.

Zero-COVID policies will ultimately be less economically burdensome, but will reduce confidence and future investment, particularly from foreign companies. The ongoing problem for China is that its political leaders are not addressing the root causes of a flagging economy, and this could ultimately make matters worse. They insist on supply-side solutions to a demand-constrained economy, and politically the Xi government is unable to overhaul its state- and investment-centric development model.

The next economic miracle will happen when China can achieve growth of 3% or more without undue negative side effects.

ESWAR PRASAD (Cornell University – Economics Professor)

A notable aspect of China’s economic performance over the past two decades is the grossly inefficient and risky growth model adopted by China the government’s ability to cope with the severe economic and financial strains it entails. The government has at various points maneuvered the economy around seemingly inevitable situations, such as the banking crisis, a major currency devaluation and the real estate collapse. Despite numerous disruptions in the financial markets and in the real economy, plausible doomsday scenarios have yet to materialize.

However, every last-minute escape from the crisis comes at a price. The massive rise in domestic debt, the loss of $1 trillion in foreign exchange reserves between 2014 and 2016, and the highly volatile prices of stocks, real estate and other assets are examples of the challenges facing the economy. It also highlights the declining effectiveness of macroeconomic policy tools and the government’s limited ability to respond effectively to adverse domestic and external conditions.

The government now faces several policy dilemmas, some of which it created itself. Authorities need to figure out how to sustain borrowing while maintaining growth; how energy-intensive production can be reduced while the economy remains dependent on heavy industry; and how market-based fiscal discipline can be reconciled with strengthening state control are key issues. Policymakers should also consider how to reduce wealth inequality while relying on the private sector to create more wealth, and how to encourage innovation while shrinking private companies.

Attempts to resolve these contradictory impulses under the cloak of market-oriented socialism will inevitably lead to further stumbling blocks and accidents. While the government’s policy approach is guided by the right objectives, it can lead to increased uncertainty and volatility in the short term, which in turn can reduce public support for much-needed reforms to support long-term productivity and growth.

Finally, negative demographics, high debt levels and an inefficient financial system will increasingly stun China’s growth, even if the government manages to propel the economy through murky waters.

NANCY QIAN (Northwestern University – Kellogg School of Management Professor of Chinese Studies, Economics)

China’s phenomenal economic growth in the 1990s and early 2000s was not a miracle, it was it was the result of deliberate economic decentralization. Miracles have the character of perfect, undeserved, and unbuildable. On the other hand, China’s economic policies are flawed, require leadership’s efforts, and can be improved.

China’s current economic difficulties trying to escape the zero-COVID trap compound existing problems: rising inequality, prices, unemployment and corruption. Perhaps the appearance of these problems is temporary, but that doesn’t change the fact that the problems are there.

One way or another, China will reopen its economy and return to normal. It can then choose between two paths with very different results. In one scenario, the Chinese economy would recover stronger than ever. The Chinese leadership can use the challenges posed by COVID-19 and the war between Russia and Ukraine to emphasize the need for China to deepen and expand its reforms and revive the maximum of the early reform era by improving the economic emphasis on human well-being.

The other path leads China into recession. In this scenario, Chinese leaders may interpret recent challenges as a reason to return to pre-reform rhetoric in order to thwart the economy and prioritize political ideology over people’s well-being.

The size, diversity and resilience of China’s economy give cause for optimism in the longer term. But how the next few years will pan out is uncertain and there will likely be many ups and downs.

ANGELA HUYUE ZHANG (Professor of Law at Hong Kong University)

I believe that as long as Chinese leaders continue to receive accurate information on the state of the economy, they will do their best to keep the economy out of trouble. Ultimately, economic growth is crucial to the legitimacy of the Chinese Communist Party.

However, it is important to keep in mind that economic growth, together with social stability and nationalism, is only one source of the party’s legitimacy. This explains why the government has struck a difficult balance between trying to meet its 5.5% economic growth target for this year and maintaining a zero-COVID strategy, which is important for social stability and national pride.

The Chinese leadership has responded very quickly to previous crises, and I think they will do the same this time. Whether China’s economic miracle continues will depend on one very important factor: learning. Will China’s top leaders and people reflect on the country’s recent challenges and determine what can be done better next time? I believe. People tend to learn more in a difficult situation.

At the beginning of 2021, China found itself in an enviable position among major economies – successfully containing COVID-19 and the only major economy to experience a dramatic recovery. But indifference often prevents learning, so the country is currently paying a high price for the lack of a clear pandemic exit strategy.

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