China is flailing
The leadership is frantically trying to fine-tune its economic policies, but it isn't helping
It’s interesting to me that the three most powerful countries in the world are all hitting major stumbling blocks right now. For the U.S., the problems are political in nature — bitter internal division and a dysfunctional political culture that prevents the country from acting to solve its problems. For Russia, the problems are obviously military in nature — its bungled invasion of Ukraine. For China, however, the problems are economic.
It’s difficult to overstate what a dramatic fall from grace China’s economy has taken. Back in 2005, when journalists were first starting to write breathless accounts of how Chinese industry would take over the world, annual real GDP growth was running at over 11%. By 2019, on the eve of the pandemic, that rate had been just about cut in half, to 6%, and the trend was looked clear:
And this protracted growth slowdown came even as China was shifting its industrial policy from local/regional initiatives to a coordinated national effort.
Americans didn’t really seem to notice that slowdown. Instead, after China bounced back more quickly than other countries from the initial Covid shock, the dominant narrative became one of Chinese triumph and the eclipse of the U.S. and its rich-world allies.
Such maximalist narratives are nearly always overblown, however, and this one was no exception. In the middle of 2021, China embarked on a series of policy experiments that have brought its economy crashing back to Earth. These included an arbitrary crackdown on the consumer internet industry, an attempt to curb the real estate sector that sparked a huge crash, and a “zero-Covid” policy that threatened to trap the country in an eternal cycle of lockdowns. As a result, China’s GDP growth has now officially slowed to just 0.4%, and given China’s well-known tendency to smooth its GDP numbers, it’s likely that the true number is negative; China is probably now in a recession.
Of course, a recession doesn’t spell doom for the Chinese growth story; countries typically bounce back after recessions. (A maximalist narrative that “China is over” would be just as overblown as last year’s narratives of Chinese invincibility.) The country’s leadership is now hastily backtracking on many of the policies that triggered the slowdown. But so far the reversals don’t seem to be having the desired effect, and the picture that’s emerging is of a Chinese policy apparatus that is far less omnipotent and infallible than many in the U.S. have assumed. If China is going to right its growth ship, I think its leaders are going to need to reexamine the way that decisions have been made in the country in recent years.