Yves here. Simon Watkins is a diehard Anglosphere booster and so his posts need to be taken with a considerable grain of salt. Nevertheless, despite his strong bias point of view, his pieces often contain interesting facts. With respect to China, the headline statement should not be seen as controversial, if you step back a bit.
China is in the unfortunate position of trying to execute the “trees grow to the sky” fallacy. An economy as large as China’s can’t keep growing markedly faster than world GDP growth on a sustained basis. World GDP growth forecasts are in the 3.0% to 3.5% range. China cannot exceed world GDP growth by all that much on an ongoing basis without eating world GDP, an unacceptable outcome to many other players. Yet high growth rates are key to the legitimacy of the current government. The reality is the population will likely accept markedly less if the benefits of growth are reasonably well distributed across society. I don’t know China well enough to judge if that is a realistic way out of its high growth fixation.
On top of that, there are reasons to think that in the longer term, global growth seems unlikely to exceed 3.0% to 3.5% level, between increased resource scarcity, global-warming-induced harvest shortfalls and mass migrations, high levels of international and internal conflicts, and efforts by the US and EU to punish Russia and China, which is interfering with supply chains. A specific factor is that the loss of Syria appears to throw a spanner in China’s Belt and Road project (see Colonel Wilkerson for confirmation).
And in terms of China, the loss of housing wealth lowers the actual level of savings in China. Given the lack of social safety nets, the impulse of those so afflicted to save more to compensate will impede China shifting to more of a consumer-demand driven economy.
By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. Originally published at OilPrice.com
- China is adopting looser monetary and proactive fiscal policies to boost growth to 7%+.
- High youth unemployment, property sector defaults, and bad loans totaling trillions pose significant risks to achieving this target.
- Increased U.S. tariffs under a potential Trump presidency could further strain China’s economic recovery efforts and international trade.
Amid ongoing domestic and international concern over the scale and sustainability of China’s economic rebound from its Covid years, Beijing announced on 9 December that it will adopt an “appropriately loose” monetary policy next year, the first such easing in 14 years, and a more proactive fiscal policy to boost economic growth.
Although the measures already put into place earlier this year should enable China to achieve its growth target of “around 5%” for 2024, these new measures are aimed at recapturing the 7%+ annual economic expansion commonly seen in the country before the widespread onset of the pandemic at the end of 2019. “That is the figure the CCP [Chinese Communist Party] needs to ensure the security of its rule at home and the continuation of its policy to project power abroad, so not achieving this rate of growth soon is an existential threat to both,” a senior energy security connected to the U.S. Treasury exclusively told OilPrice.com last week.
Domestically, the longstanding covenant underlying Communist Party rule in China has been that the population will accept curbs on personal privacy and freedoms in exchange for an improved standard of living. This was relatively easy to achieve in the early phase of this model with the steady migration of hundreds of millions of people from a relatively poor agrarian existence to a relatively more prosperous urban one over time. The increase in economic growth for the country that accompanied this was stunning, albeit from a relatively low base, with gross domestic product (GDP) expanding over 10% a year for several years. As urban momentum gathered pace, so did the boom in construction and manufacturing for the products required by this burgeoning population, with this in turn fuelling a dramatic expansion in China’s manufactured exports. Even after this growth model shift into one defined by the rapid enlargement of the middle class, growth in consumption-led demand for goods and services remained very high.
However, as this began to drop as Covid appeared, unemployment rapidly rose across the country, especially among the key youth demographic. China’s government is acutely aware of the potential for high youth unemployment to spiral into widespread protests. It also knows that just before the series of violent uprisings in 2010 that marked the onset of the Arab Spring, average youth unemployment across those countries was 23.4%. After its own figure reached a record 21.3% in June 2023, it stopped publishing the youth unemployment data and only resumed when it had changed the data inputs.
Consequently, as the pandemic increased curbs on personal privacy and freedoms while the standard of living for much of the population declined the longstanding covenant between the people and the government was seen to have broken. And for the first time since the mid-1980s that culminated in the 1989 massacre in Tiananmen Square, China’s CCP faced a wave of public protests across the country. Unprecedentedly for President Xi Jinping personally, this included protesters shouting “Step down, Xi Jinping! Step down, Communist Party!”. Internationally, the U.S. was also watching these developments and is very aware of the fundamental covenant that allows the CCP to continue to rule in China. It is also aware that China’s projection of its power abroad is dependent on its ability to leverage huge ongoing financial investments in strategically-important countries into political influence.
Worse still for Beijing is that Donald Trump’s second term as president is highly likely to take an even more stringent approach to China than even his first. Back in 2017 at his first national security meeting, then-President Trump described China as a “strategic competitor” which along with Russia was trying to “shape a world antithetical to U.S. values and interests”. In 2020, he gave a long speech detailing the multiple ways in which he saw China as having “for decades, ripped off the United States like no one has ever done before”. And even before he has taken office this time around, his campaign trail was punctuated with comments that he will dramatically increase trade tariffs on China. As Eugenia Victorino, head of Asia strategy for SEB in Singapore exclusively told OilPrice.com, President Trump’s second term effectively heralds a resumption of the U.S.-China Trade War. “The Phase 1 deal will be renegotiated with the [Robert] Lighthizer plan likely implemented, and this will raise average tariffs to around 22% from 13%,” she said. However, that may well just be the opening salvo of the new Trade War between the two countries, as during the 2018-2019 period of the previous one the U.S.’s tariffs against China were raised in stages. By September 2019, up to US$250 billion of Chinese-made imports faced 25% tariffs while US$120 billion of imports were facing 15%, Victorino underlined.
That said, she highlights that Beijing may be better prepared for the resumption of such hostilities than it was last time. “In 2018, exporters assumed that the threat of a 25% tariff on a broad basket of goods was merely a negotiating tactic, but this time they have been working with the assumption of an increase of average tariffs by around 30-45%,” she told OilPrice.com. “Moreover, Chinese exporters have been managing their margins for the past 6 years,” she concluded.
However, despite this, the likely monetary and fiscal policy measures that China will take to boost economic growth back to the key 7%+ annual rate required to ensure the security of the CCP’s rule at home and the continuation of its policy to project power abroad may not be enough, Mehrdad Emadi, head of risk analysis and energy derivatives markets consultancy, Betamatrix, in London, exclusively told OilPrice.com last week. “On the monetary policy side, China is already allowing for softer loans in the construction and housing sector in an attempt to prevent a second wave of bankruptcy and default by property developers, with the most up to date estimate of underperforming mortgages and inter-firm loans suggesting a nonperforming bad loan value of US$4.3-5.2 trillion,” he said. “New softer loans issued by the monetary authorities and the extension of credit to construction firms by state-owned banks are indications of how serious a threat these can be if the continuing downturn and loan defaults are left to market forces,” he underlined.
According to Emadi, US$840 billion of such softer loans have been made available with another US$250 billion ready to be made available. Latest estimates put the share of the housing sector in China’s economy at around 20-25%. Beijing is also considering a US$12 billion credit line at almost zero cost to be made available to the country’s automotive industry to also prevent it from becoming too fragile, he added.
At the same time, he told OilPrice.com, the fiscal policy changes are likely to be aimed at preventing the local authorities from becoming more immersed in land-tied deals in which they sold land to construction firms but have received little payment in the post-2018 period. “The hope was when the new apartments were sold by the construction firms the local authorities would get paid for the land,” said Emadi. “But this has become the real ‘Dragon’ in the economy as the deficits accumulated by the local authorities based on land-tied deals is somewhere between US$12-15 trillion, which poses a real bankruptcy threat to the regions that became too involved in such activities,” he underlined. “Even with Beijing’s impressive foreign exchange reserves [US$3.37 trillion equivalent], the magnitude of the bad money arising from these factors causes real concern about the ability of Chinese government to implement the reforms needed to make a measurable and meaningful lift to growth rate of 7% plus,” he added. At least as concerning for the CCP and President Xi is likely to be that these macroeconomic factors have become very personal for the population. “Due to the property defaults, bad loans, house price falls and rising unemployment level, China’s official reported figure of US$19.2 trillion for household saving is misleading – in reality, it appears to be around 31% lower,” he concluded.
42 comments
Comments are closed.
I don’t understand this obsession with constant growth. The planet’s resources are not infinite. Why not provide people with a guaranteed salary instead? China’s focus on growth stems from the need to create jobs for its population, but in reality, the state doesn’t need to operate this way. They could simply provide unemployed people with a minimum wage, funded by printing money.
China has spent hundreds of billions to save the stock market, but allocating the same amount to welfare is seen as sacrilegious. As long as China continues to embrace capitalism in this way, USA will for ever have hedge over them and that hedge is dollar. The only way to beat USA is to create welfare state with state funding it by printing money
>”I don’t understand this obsession with constant growth. The planet’s resources are not infinite. Why not provide people with a guaranteed salary instead? China’s focus on growth stems from the need to create jobs for its population, but in reality, the state doesn’t need to operate this way. They could simply provide unemployed people with a minimum wage, funded by printing money.”
Absolutely. This used to be common sense among the left. But then – it somehow vanished. And as you say it has become “sacrilegious”.
> They could simply provide unemployed people with a minimum wage, funded by printing money.
As Keynes foresaw the better part of a century ago, the “economic problem” (aggregate output adequate to provide for basic needs of the entire population) has been solved (although there remain issues of sustainability). But the “distributional problem” remains. The powerful do not want to surrender their disproportionate share of total output, so output has to increase in order to improve the material condition of those who are not powerful.
Income guarantee to the unemployed without increased output seems likely to result in inflation in the prices of many necessities, which would anger the employed. So output must grow, as a matter of the perceived legitimacy of the governing authorities.
I think that’s what is going on.
the crackpot free traders in west who are now howling about china’s over production, should be sidelined in straight jackets and institutionalized, after all they are outraged at the results of their own crackpot idiotology.
however, i have always viewed chinas belt and road suspiciously as a attempt to extend and cement their surplus.
instead of providing a real robust social safety net.
free trade breeds unhealthy inter dependencies, poverty, indebtedness, shortages, oligarchies, failed states etc, then eventually war.
i guess crackpots like bill clinton and tony blair created the environment for a third world war, after all, the first two world wars because of the collapse of free trade were not enough, they went for the hat trick.
china does have the wealth now needed to institute a robust cradle to grave which will absorb a lot of that over production, but free trade breeds lust for a easier way, and just export your unemployment, deflation and poverty onto others. its unsustainable.
this article was written many years ago, but it was a harbinger of things to come.
bill clinton is asking for a pardon, i think its has more to do than just the wars for free trade. he knew he was gutting america for the benefit of the few(wall street parasites), over the many.
now his policies have hit the fan, and their will be a lot of blame cannons being aimed.
https://hbr.org/1986/09/the-folly-of-free-trade
“Unlike the historical demand-and-supply relationship between market and industry, the new relationship that substitutes foreign industry for American industry represents an economic blind alley. The domestic markets of these foreign producers have neither the size nor the wealth to support their own industries. As they undercut U.S. production, however, they will gradually weaken the American economic base that they have come to depend on. Rather than a self-sustaining, self-reinforcing process, this new relationship becomes self-liquidating.”
Dumb Q but why is growth an important metric for a non-capitalist economy?
there is still chronic poverty in China, but more importantly…
the legitimacy of the govt rests in the Chinese middle class. the middle class want widgets just like the median American in Hollywood films.
The first one I totally agree with but would propose that there are better metric than “growth” for this.
“Dumb Q but why is growth an important metric for a non-capitalist economy?”
A fine question. Growth is a measure of the extent to which social welfare gains can be extended through an economy. Chinese growth since 1977 has allowed for life expectancy for the 1.4 billion to pass the level in the US. Similarly infant mortality levels in China are now lower than in the US. Chinese growth has meant universal free education. Has meant a social security system, national health insurance, an end to severe poverty. Food and energy self-sufficiency. Comprehensive housing. Modern utilities. Millions of advanced passenger vehicles. The most productive scientific research.
Take a look at the transportation-logistics network. Look at the development of a sports network that has meant the finest disabled athletes at the Olympics, and hours of physical education in schools from elementary on.
I have barely begun.
Sure, but 7% “growth” could just as easily be achieved by gross milking of economic rents thru FIRE sectors as in the US. Obviously this isn’t the case in China, but just illustrating that growth qua growth isn’t a great metric for measuring the success of Chinese strategy (or maybe I am overthinking it).
https://fred.stlouisfed.org/graph/?g=1pPhr
August 4, 2014
Real per capita Gross Domestic Product for China and United States, 1977-2023
(Indexed to 1977)
https://fred.stlouisfed.org/graph/?g=1Ckm9
August 4, 2014
Real per capita Gross Domestic Product for European Union, United States, India and China, 1977-2023
(Indexed to 1977)
Exactly, instead of issuing growth targets, why not focus on targets that more accurately represent their strategic goals, such as a Gini target or median income target, or a life expectancy target. Framing goals thru a growth lens or other wester/capitalist framing feels like a slippery slope IMO.
The complete removal of scarcity happens to be the main element of the communist level of development. And China is a socialist state governed by a communist party.
Ironically I find the American-created Star Trek universe (especially TNG/DS9 era) to be the best model for a realized communist economy (hence the funny, but more substantive than meets the eye at first, meme “fully automated luxury space communism”): Boundless energy and instant replication of all needed equipment, food, other supplies, and so on.
Those things are obviously a utopian dream but so would both electricity and essentially limitless, reliable, clean, running water from a tap in every household seem to any living person on earth not that long ago. And these “utopian luxuries” are taken for granted in every developed country in the world thanks to large-scale public investment many decades in the past (and now rotting away in post-capitalist societies which are reverting to feudalism, where people are now digging their own wells and putting solar panels on their roofs). China is headed in the other direction, and that requires continued growth in productive capacities and infrastructure.
But yes, China needs to balance that rapid and continuing growth against ills such as pollution. Aside from rapid progress in automation (compare Star Trek’s replicators), there are interesting developments in the energy field. China reportedly has a fission-fusion hybrid reactor ready for deployment in only a few years (and Russia has been pursuing similar research for a long time, but has not announced any imminent deployments). Such a reactor, while much easier to build than a “pure” fusion reactor (like the one at ITER), would remove any possibility of a nuclear meltdown.
Unfortunately, even if you did have the Star Trek magic abundance, that would still not solve the problem.
Capitalism depends on infinite growth because of the compound interest mechanism. It is what mandates that the real economy, i.e. consumption of actual resources has to grow infinitely, because that is the only way to repay the interest. So infinite compounding of debt and interest => infinite material growth. Which is an impossibility, thus collapse is inevitable.
But it does not follow that dependence on growth and capitalism are equivalent.
True, communist economies do not depend on growth. Which is why the USSR never had a single acute economic crisis of the kind capitalist economies regularly experience. But in practice it did chase growth. Because it had to compete with the West, and because it had to satisfy growing internal demand for stuff.
Increasingly silly and unnecessary shiny trinket-type stuff in fact. But people wanted it, even though they didn’t need it.
Why? Because that is the nature of intraspecies competition within Homo sapiens. Individuals compete on social status, but evolution does not select for behavior that chases social status in the abstract, because that is not understood explicitly by anyone, it selects for proxies for social status, and especially for proxies of the kind of social status that helps reproduction, which means control over resources and the prominent display of that control.
So in Soviet times everyone had what they needed, but whoever could also obtain shiny trinkets that were generally inaccessible was king locally because that meant he controlled more resources than others. And then the whole system collapsed because of it.
This is very deeply ingrained in the human psyche, so even if you could somehow magically create the Star Trek world, it would not last, because intraspecific competition would still be there and it will just shift towards fighting for control over things that the replicators cannot provide, even if those things are not necessary.
If you everyone is being taught the evolutionary basics of human behavior from an early age, so that all of the above is baseline common knowledge, together with its self-destructive effects, then maybe there is some hope. But we are talking about active learning having to overcome genetically encoded instincts. It’s an uphill battle, and will always be.
Well, you make interesting points. So first of all thank you for your reply. I do want to point out that the Soviet Union never claimed to have achieved communism. No socialist state ever has. I think what lies behind this misunderstanding is that these states in most cases were or are ruled by a “communist party”.
Also, I am not exactly sure what it means to be “dependent on growth”.
The Chinese state for example promises radically higher living standards for its citizens and basically for China to eventually become a space-faring, space-colonizing and highly prosperous superpower. If it could achieve this in a flash, that would be optimal, but in reality the process is gradual.
We see this gradual unfolding as “growth”, but I don’t see how China is directly “dependent” on growth itself from year to year as much as delivering the much higher levels of production, the education and health care systems, infrastructure, and so on that the country needs if the Party is to fulfill its promises to the Chinese people.
The Soviet Union from the 1970s onward failed to deliver continued growth and continued increases in living standards, quality of infrastructure etc.. It thereby gave the West the opening to construct the idea that socialism means “making do with very little, but spreading it out equally, or at least that’s what the nomenklatura wants the peons to believe”.
But this is both completely contrary to Marxist theory and to the country’s experiences in the 50s and 60s, when the Soviet economy grew rapidly and provided both an expansion in military power, space power and in the living standards of its citizens. Its rate of growth was in fact similar to the “miracle economies” in Western European and Japan.
I don’t see how the capitalist Western economies are dependent on growth either. In fact we’ve seen how Italy has stagnated for more than 20 years (including lower mean real wages today than back then), and how the population there is sort of fine with it. So is obviously the country’s elite. Italy might be an extreme example, but the rest of the West is catching up rapidly.
How are these countries dependent on growth, much less infinite growth? Since the end of the 1970s their governments have successfully gaslit their labor forces that they need to shut up or lose everything they have to foreign competition.
And for decades now the chasm between rich and poor has grown wider and wider in Western countries while both social safety nets and infrastructure have crumbled. As long as the populations don’t rise up and overthrow the capitalist elites, why would these elites have a problem with no growth or even negative growth? In fact they go out of their way to promote this as the way of the future, at their weird ski parties in Davos and so on.
It means the system falls apart without growth.
Which can be a consequence of the system chasing growth even if it does not really require it in the way it functions.
Actually it did continue, but at a slower pace. The problem is, which is the crucial part, it was no longer perceived internally to be improving things. Because basic needs were met at that point, but the increasing exposure to the West resulted in people wanting things they didn’t actually need while having a very distorted view of how the situation really was in the West. In the 1980s in the USSR a lot of people seriously thought the universal reality in the West was that of Beverly Hills, not of Detroit and the Bronx. The never very good, and at that point outright senile, state propaganda machine did little to explain what is actually happening.
The Soviet problem was precisely that resources are finite and that it was not an empire in the usual way.
First, typically empires suck resources from the periphery towards the core. With the USSR it was the exact opposite — Russia subsidized the republics within the USSR, the USSR subsidized the other Eastern Bloc countries, by the late 1970s and the 1980s the Eastern Bloc as a whole was in the business of subsidizing the newly socialist Third world countries in Africa and Asia. Meanwhile the US was enjoying 25% of the the world’s consumption with 5% of the population, by doing precisely what empires do — taking other people’s stuff — and probably in a more aggressive way than any empire ever has.
Second, the you-can-have-two-out-of-three rule applies in this case too. The three things being investment in the military, investment in human capital and investment in consumerism. The USSR chose the military and human capital (education, healthcare, a robust social safety net), the US chose the military and consumerism, Western Europe had the luxury of not having to spend that much on the military because of it being an occupied by the Americans territory, and thus being able to invest more in human capital. Of course, again, none of that was ever explained to the Soviet people, who mostly didn’t even see the military spending, took the investment into human capital for granted, and focused entirely on consumerism in the West as something that they uniquely didn’t have, without ever understanding what the alternative was (they did see what that alternative was in the 1990s, but at that point it was too late).
Italy doesn’t have any other choice but to be fine with it, it is a small inconsequential country.
Meanwhile the US with its military and financial might does have a choice. And it decided to do a Operation Barbarossa 2.0, only in slow motion, and go to war with the largest nuclear power in the world in order to grab its resources and thus enable another few decades of growth. Which is a rather insane thing to do, isn’t it? Because total collapse can come in a matter of minutes when you are on that path. But clearly some people are that desperate.
Because gaslighitng only works up to a point. It can work for a very long time — clearly European elites were very successful in gaslighting their population into accepting what should have been completely unacceptable living conditions for most people until the 20th century. But then in the late 19th century they did face a real threat as things could no longer continue like this. And some of them did pay the ultimate price for it.
The mechanism here is simple — the rich/elites hand out loans, the rest have to pay them back with interest. Which is a net wealth transfer from the poor to the rich, because at the end of that transaction the rich hold proportionally more of the money supply. If there is no growth in the real economy, then over time this process automatically impoverishes the masses in absolute terms, with a long-term tendency of reduction to total destitution of everyone but the select few on top. This is a revolutionary situation, but it can be avoided by externalizing the process through growth of the real economy, i.e. “growing the size of the pie” allowing for smaller proportional shares of it to be larger in absolute terms. Which means increased consumption of real resources. Up to a point, you can do that by digging more holes in the ground, but after that you need to take over other countries through neocolonial measures, and if that does not work, you need to wage war against them and take their stuff by force.
This is exactly the story of the West since around 1970 — that is when it ran out of internal resources while Western elites were no longer as keen on restraining their own rapaciousness as they were in the post-WWII world, and the process of gradual relative impoverishing of the masses began. It has not yet shifted to truly widespread dramatic absolute reduction to total destitution, but for some people that is the reality already as the future is, as often happens, unevenly distributed (you see the homeless camps mushrooming around America), and that is the future for the rest too. The elites’ goal appears to be to somehow postpone the revolutionary moment to the point where they will hold enough additional real power in the form of automated killing machines and production facilities to be able to dispose of the masses while maintaining their own luxury living standards. And they might have made an accurate short-term bet, but where they are failing is in thinking there will be no internal competition between them after that, which will eventually ensure their own self-destruction regardless of how long they manage to postpone it.
In the Star Trek world, they have pseudomilitary ranks, titles, honors, and the opportunities to accumulate exclusive experiences. And clout chasing online shows that this can work even in a world of material inequality.
It seems to me that most discourse around China’s economic growth is out of fear, using free-market rationals when they are utilizing a more controlled method.. Maybe it comes from their thorough understanding of Capitalism through Marxist criticism. The thing with China is that they are able to stimulate the economy in a targeted manner and then deleverage it by controlling the associated debt.
Western economies are very demand focused and we tend to focus on decreasing demand, rather than increasing supply, to control the economy. Policy is all about keeping a balance that is slightly inflationary, and growing at a “healthy” pace. The only sector it seems like we are willing to do something similar for is fossil fuel energy.
Look at China’s housing and how they have over 90% home ownership. That would never happen in the West because it goes against our financial ideology. They set the goal of housing people, propped up a massive real estate industry, then dealt with the debt. I think they understand monetary policy way better than most Western governments.
In Western countries, most “growth” is actually inflation. What they report as “growth” is the difference between actual inflation and reported inflation. This is why in reality living standards are falling while the economy is supposedly growing. It’s all a big scam.
Growth – as measured by GDP – is just the rate at which money is circulating within the economy at a given time. It doesn’t (except over perhaps the very long term) really tell us what is happening within the economy. It does not make a distinction as you say, between inflationary factors, debt, or the real productivity of the economy. Ireland, for example, had close to 10% per annum GDP rise over 20 years from 1990 to the 2008 crash. For the first decade it was ‘real’ growth – there was a huge rise in productivity and wealth. For the second decade, it was just fluff – a debt bubble (and this is leaving to one side the issue of tax transfers, which grossly alters the figures). Its a very bad measurement of how good or bad an economy is doing, and its not even particularly good at comparing countries, unless they have very similar economies.
I tried to find this 7% figure for 2025 from Chinese sources (not U.S. Treasury), and every place seems to have it at 5% – which is the same as this year and actually down from 5.2% of actual growth in 2023.
So, just based on that it seems to me that the writer picked the highest number mentioned, then added a hypothesis that CPC rule depends only on growth, and as that high number can’t be achieved, CPC is heading for difficult times.
I also would like to point out that in China state and only state owns all the land. It can’t be sold. Period. So any article talking about land sales is fundamentally wrong. What the local government is selling is the land use rights, and those are more like transferable leases that have an expiration date.
I can’t claim to understand the Local Government Financing Vehicles, but it seems to be something totally different from “getting paid for the land”.
The distinction between ownership and leasing isn’t all that much different than in the US or Europe. In the UK, after all, notionally the ‘Crown’ owns all land, and most of London is owned by a few historic estates which leases the land to developers. Since you ‘own’ the building on the land, there is only a notional distinction between how it works in China and in Common Law jurisdictions – Chinese people can and do buy and sell property off each other all the time. There is no functional difference between this and someone buying a house in London over which the Crown or some Duke or other owns the land lease. There are plenty of examples of property owners in China refusing point blank to sell or give it to local governments, hence the ‘nail house’ phenomenon. In some respects, property owners in China actually have more rights than in western countries. This is unsurprising in a country where the savings of most families are almost entirely in property.
What is different in China is that ownership law is somewhat looser and court judgements are more arbitrary on land ownership disputes, which is unsurprising given the countries history. Plus local governments rights over open land (mostly farmland) provides the temptation to use land appropriation rights (which exist in nearly all countries) to raise money for infrastructure and other developments – this is a methodology which is by no means unique to China. To a large degree, its how most railways around the world were built in the 19th century, and it has been aggressively used in many Asian countries in particular.
I guess you didn’t read the linked article, then. Here’s another one: What Will China Do When Land Use Rights Begin to Expire?. I don’t think there’s any academic research on these issue regarding England and Wales? Almost as if one of these things is not like the other.
As i stated, there is a clear distinction in most legal jurisdictions between ‘land’ ownership and ‘property’ ownership. The article linked relates solely to land use rights, which is not the same thing as property ownership – a very different thing in fact, whether you look at land law in Common Law jurisdictions, China, Japan, or pretty much any other advanced country. The concept of absolute land ownership (‘from heaven to hell’ as it used to be termed), doesn’t really exist in any advanced economy as it would be impossible to sustain. The subtle distinctions between different types and degrees of ownership keep whole armies of lawyers and judges busy in nearly every country, including China.
A lot to unpick in this article, but just to emphasise one point that is often misunderstood – GDP growth targets in China can be more accurately described as inputs, not outputs. In other words, a 7% growth target is not something for the country to aim for – it is an instruction to local governments on how much they should increase economic activity (and GNP measures activity, not ‘wealth’) – they leave it up to the local level to decide how to raise the money. This has long been both a strength and weakness of the Chinese development model. Unfortunately, due to weak taxation systems and declining property values, this is increasingly through various forms of debt – the reluctance of Beijing to step in with direct financial support is becoming increasingly problematic. China has very low levels of central government debt, but very high levels of debt at provincial level, which is very difficult to measure due to the close interrelationship of local authorities, banks and businesses at nearly every level.
Measuring ‘actual’ economic growth in China is notoriously difficult – and not only because of the difficulty in interpreting official statistics – there are no universally agreed measures of ‘real’ wealth and its particularly difficult to make comparisons between countries at different stages of the development cycle. Historically, one of the best proxies has been energy growth – and the IEA has just increased its predictions for energy growth (specifically, coal burning), for China, which could be good news for its economy (if terrible for the climate). However, for a variety of technical reasons, there has been a significant disconnect in the world economy in recent years between energy usage and growth, so its not as useful a metric as it used to be. The one thing for sure is that there is a huge disconnect between the success of Chinese exports, and its domestic internal economy, which has been somewhat stagnant since before covid. The very high youth unemployment level is a particular problem (its hard to get firm figures on this due to the way figures are collected in China, but its probably somewhere between 15-20%).
The best way to interpret the December 8th statement – which like all such Beijing statements is gnomic and open to numerous interpretations – is that there is an increasing concern about domestic unemployment and so the focus for now is on keeping local economies active by whatever means necessary – and to a large degree this means putting off necessary if unpopular actions, such as shutting down older inefficient industrial plant and keeping property values from declining too steeply (they still have a long way to go).
The article gets some important points wrong. To wit:
1. “high growth rates are key to the legitimacy of the current government”. Not at all. They’re welcome but, if growth stopped right now, the government’s legitimacy would be unaffected.
2. “The reality is the population will likely accept markedly less if the benefits of growth are reasonably well distributed across society. I don’t know China well enough to judge if that is a realistic way out of its high growth fixation”. China’s Gini Coefficient is falling steadily.
3. “the longstanding covenant underlying Communist Party rule in China has been that the population will accept curbs on personal privacy and freedoms in exchange for an improved standard of living”. The same longstanding covenant underlies Capitalist rule, too. What else is new?
4. “Consequently, as the pandemic increased curbs on personal privacy and freedoms while the standard of living for much of the population declined the longstanding covenant between the people and the government was seen to have broken”. Only 7% of Chinese were ever locked down, GDP grew 3x faster than America’s and the standard of living rose between 2019-2023.
First, this is a cross post with some comments from me. You conflate the two.
Second, the Chinese government is not as well-supported as polls indicate:
https://cddrl.fsi.stanford.edu/publication/do-chinese-citizens-conceal-opposition-ccp-surveys-evidence-two-experiments
Now you can say this is pretty good by US standards, but we have had stagnant real wage growth since the 1970s and a huge rise in equality, so Americans should be mighty unhappy with their leaders.
Third, China’s leaders have considered delivering growth to be the foundation of their legitimacy. Only in 2023 did Xi say he was shifting away from that, perhaps conceding to the new post Covid normal. I was remiss in not pointing out that China was trying to shift away from rising incomes as the core of the social contract with citizens. From Bloomberg in Xi Jinping Drops Economic Growth for ‘Values-Based Legitimacy’ in October 2023:
As for the Gini coefficient, the last measurement I can find is 2020. Generally speaking, crises and big downdrafts tend to lower income inequality (that happened in the US after the financial crisis, and our last Gini measurement was in 2021, and similarly shows improvement). So it is too early to say whether this outcome is an artifact of policy or Covid.
Your other points addressed the material from Simon Watkins, and I warned he was a mixed bag.
Surely the more the west stops the belt and road reaching the med and then Europe mainland , the more likely it is to go north through Russia or south through Iran and India then by sea to Africa.
Its forcing the Chinese to get closer and closer to Russia and Iran in particular and bury any border hatchets with India. Which just plays to SCO and BRICS being more and more significant for China, and probably India.
Seems like a counter-intuitive strategy. But then that does make it consistent with the rest.
“An economy as large as China’s can’t keep growing markedly faster than world GDP growth on a sustained basis. World GDP growth forecasts are in the 3.0% to 3.5% range. China cannot exceed world GDP growth by all that much on an ongoing basis without eating world GDP, an unacceptable outcome to many other players.”
Yves, I don’t understand this statement. How Chine orders its real resources within its borders to increase concrete material benefits to it’s citizens does not depend on the rest of the world. And its success in growing is not a zero-sum game that robs other countries of GDP.
The only way I can understand it is if you are equating all of China’s growth with foreign trade but I am sure this is not true. Michael Pettis wrote in 2023 that:
“China, however, is an extreme outlier. Investment last year accounted for around 43 per cent of its GDP, and has averaged well over 40 per cent for the past 30 years. Consumption, on the other hand, accounts for roughly 54 per cent of China’s GDP (with its trade surplus making up the balance).”
https://www.ft.com/content/4075ac49-f3b6-42a0-88c4-168292048feb
If only 6% of Chinese GDP is driven by exports, internal investment and consumption growth can drive GDP at almost arbitrary rates. Some of it might be mal-investment and the ecological consequences are another story entirely but if the Chinese state wants a 7% growth in activity, it can get it, simply by doing what Western states deny and using its state capacity to invest (and strong arm local governments into doing the same).
There are questions to be asked about the Chinese growth model and its distributional equity and its sustainability in real, material terms but a 7% growth rate of GDP is not one of them.
China unlike Russia is not remotely an autarky. It depends in a big way on the rest of the world for food and energy. So it is in the position of competing for resources and adding to the general problem of unsustainable growth.
I don’t see why that or “trees don’t grow to the sky” observations are controversial.
I think its important to make the distinction between ‘growth’ and ‘GDP growth’. The latter is a somewhat arbitrary measure that may, or may not, be connected with the real productive capacity of an economy.
In deep historical terms, countries only usually manage very high rates (say, above around 3% growth) for relatively short periods of ‘catch up’ growth, often followed by another period of ‘fake’ growth due to investment bubbles. Once they’ve reached close to either the level of the most advanced country, then they real level of growth is likely to end up matching global rates, unless they discover something very new or strike oil.
There is no real consensus among the many researchers I’ve read about what point China can, or has the potential, to reach – plenty of researchers look at the amount of capital investment per person and note that China is well behind the US, and as such has plenty of scope for more rapid growth through high levels of investment. Personally, I think this is misleading – China has already grasped the low hanging fruit and will have to fundamentally change is growth model if it is to maintain anything near 3%+ plus levels (assuming this is desirable given the environmental damage this is causing). It is in very great danger of hitting the sort of ceiling many other high growth countries have hit in the past – Brazil, Argentina, Turkey, Lebanon, South Africa, Thailand and so on have all had periods of extreme high growth, often lasting for 2 or more decades, before either stagnating or actively falling backwards. To a large degree, this comes down to the ‘real’ capacity of the economy to handle more growth and a wide array of factors.
As Pettis has noted, when both the problem and solution is obvious, but nothing is done to address the problem, then its safe to assume that there is some sort of institutional blockage making reform difficult or impossible. China has been actively, at a very high level, discussing the necessary changes to the development model since at least around 2006 (in simple terms, switching from an extraordinary high rate of investment to a more balanced consumption led economy with the necessary much higher wages for ordinary workers that this implies). But it still hasn’t changed course, despite annual exhortations from Beijing (almost always cancelled out by GDP targets that make these changes impossible). The current growth model can only work if you assume the rest of the world is happy to keep buying Chinese exports without China reciprocating by importing a matching amount (of course, the US is an equal culprit in this – its imbalanced economy is the flip side of the coin). There is no particular reason to think that the rest of the world is happy to accommodate this – in particular those many countries hoping to emulate past Chinese growth rates.
The other alternative for China of course is to refocus from ‘growth’ to internal distribution – raising wages and improving quality of life and economic equality. Some very positive steps have been taken in recent years, especially in improving the quality of life in both cities and the countryside, but the overall social welfare/pension/ health/education system in China really is a mess and has a long way to go to match those countries China benchmarks itself (including of course Taiwan).
The more time passes, the more Keynes is proven right in his proposals at Bretton Woods, and what an historic error it was for the US to refuse to accept his arguments – so much conflict today comes down to the chimeric ‘success’ of extreme export/investment led models of growth.
PK, I agree that these are all questions around China’s growth model. I am not so sure that history teaches us that countries necessarily plateau at the level of the most advanced nation – Japan and Korea and Taiwan did not so perhaps history teaches us that East Asia countries are not bounded!
More likely, it teaches us that Shimomuran economics works (the use of fiat money to fund investment, initially developed by Shimomura in the Japanese industrialisation of Manchukuo and then applied in Japan proper for the post-war recovery; the money was always described on the Bank of Japan balance as “the savings of the people” when the nosey Americans asked – true enough by Wynne Godley’s sectoral identities but it was money created by the government!).
This is turn proves Keynes right about something else: “What we can do, we can afford”. And that is what I was driving at with my scepticism of this post’s priors. Yes, China needs certain commodity inputs. I am not assuming an autarchy. But why, assuming markets in the necessary commodities, is the real national development that China’s people can accomplish (hospitals built, doctors trained, trains manufactured, roads laid etc.) necessarily bounded by 7% per annum?
There may be good reasons for an upper bound to steady state growth – 7% is a doubling in 10 years! – but I don’t think “because the others do” is any explanation, it is just a description of a wider phenomenon. I suspect the limits lie in econophysics. Ultimately an economy is the transformation of matter and energy using matter and energy and the most limiting element is the energy.
The capital infrastructure of a country will limit the energy a worker can deploy (their own energy and the energy of the machines they directly operate and indirect deploy). If your population is growing fast, you can deploy a lot of energy into the economy. If your population growth is slowing or reversing, you need to make a lot of capital investment in order to increase the mean energy deployment per worker to compensate but that capital investment itself requires the prior input of energy. There will be some asymptotic rate of growth of energy deployable in productive work for a given population size and starting capital infrastructure and whatever the lag is between capital investment and energy flux increase.
PS: PK – did you watch Kneecap yet? They’re on the Oscar’s shortlist….
https://www.imf.org/en/Publications/WEO/weo-database/2024/October/weo-report?c=223,924,132,134,534,536,136,158,922,186,112,111,&s=NID_NGDP,&sy=1980&ey=2024&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1
October 15, 2024
Investment as a percent of GDP, 2024
Brazil ( 15.9)
China ( 42.0)
France ( 22.3)
Germany ( 20.6)
India ( 33.7)
Indonesia ( 30.5)
Italy ( 22.1)
Japan ( 26.6)
Russia ( 25.0)
Turkey ( 25.6)
United Kingdom ( 17.1)
United States ( 21.8)
https://www.imf.org/en/Publications/WEO/weo-database/2024/October/weo-report?c=223,924,132,134,534,536,136,158,922,186,112,111,&s=NGSD_NGDP,&sy=1980&ey=2024&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1
October 15, 2024
Savings as a percent of GDP, 2024
Brazil ( 14.1)
China ( 43.4)
France ( 22.3)
Germany ( 27.2)
India ( 32.5)
Indonesia ( 29.4)
Italy ( 23.2)
Japan ( 30.4)
Russia ( 27.7)
Turkey ( 23.2)
United Kingdom ( 14.3)
United States ( 17.9)
https://fred.stlouisfed.org/graph/?g=1qT1Z
August 4, 2014
Real per capita Gross Domestic Product for China, Germany, India, Japan and United States, 1977-2023
(Indexed to 1977)
https://fred.stlouisfed.org/graph/?g=1tLSg
August 4, 2014
Real per capita Gross Domestic Product for Brazil, China, France, Indonesia and United Kingdom, 1977-2023
(Indexed to 1977)
A growing population needs constant economic growth – more than the rate of the population increase! That’s because as the population grows, you need to increase operating costs proportionately, but also make massive investments in new infrastructure and developing new resources. At some point you need to redo the entire infrastructure at a higher level of efficiency, a massive cost. The numbers vary with circumstance, but for an established industrial economy without an open frontier, just 1% population growth per year may require more than 3% economic growth per year just to stay even. Of course, add in downwards pressure on wages, and asset price inflation, and you can see that the average person has no stake in this sort of “growth”, but it’s what the super rich desire above all else.
A country with a stable or slowly growing population, however, doesn’t need any economic growth to stay even. Oh the wealthy financial interests do, but not the average worker and not the society as a whole. A rapidly growing population is like running on a treadmill that gets steeper and steeper and faster and faster, until eventually you need superhuman effort just to stay even. A stable or even gradually declining population is like walking along a level garden path: maintaining the status quo is easy, and even modest effort can move you forwards. If China’s real economy only grew at a rate of 1% a year, this would be pure profit and could in time compound to substantial real wealth. Of course, the devil is in the specifics, and just because in principle a stable population can be a good thing, you still need to make the transition from a system based on debt driven growth, and the super rich will fight this tooth and nail, for example demanding that the government take on enormous pointless debt to subsidize them.
China simply doesn’t NEED massive economic growth, the issue I think is how to move away from a system that does, and that’s not trivial.
I question the idea that China can only grow its economy by stealing growth from others, even at this point in its development. What reason is there to assume that China’s economy should stagnate at a PPP-adjusted GDP per capita of 26,310 USD, 30% of that of the United States, and also still a lower level than that of Turkmenistan or Argentina? (These numbers are from the IMF projections for 2024.) China leads the world, by margin that grows every year, not only in things like steel and cement production but now also in high-quality research and development.
I subscribe to Michael Hudson’s idea that growth in the real economy, especially over time, follows the growth in energy consumption on pretty much a one-to-one basis. Looking at historical data, both for China and other countries bears this out. (Whether such continued growth in energy consumption is acceptable or sustainable is a different matter.) Automation is another important area that the Communist Party of China has correctly identified and prioritized, given the country’s demographic challenges (which it shares with most of the planet, but obviously Western and East Asian countries in particular).
China has made absolutely incredible strides in automation in the last 5-10 years alone and will most likely keep doing that. But how long can it keep growing energy production at 7-8% year? This is (by definition) an exponential growth, and in absolute numbers, it requires adding more energy production for each year that passes. It helps that China alone was responsible for three quarters of all new wind and solar capacity last year, but unfortunately a lot of the growth in electricity production (the majority of it, actually) comes from new coal generation capacity.
Interestingly, electricity production in China grew 6.9% from 2022 to 2023, after growing at 3.7% from 2021 to 2022. Primary energy production* grew by 6.5% from 2022 and 2023, after a paltry 1.5% growth between 2021 and 2022. The source is the country energy profile for China from the site “Our World In Data”. (Linking seems to anger the spam filter.)
*Using the substitution method, which takes into account that electricity from solar, wind, nuclear, hydro etc. is more valuable than the heat value of fossil fuels or biomass, by dividing the electricity production of the former sources by a number that seems to vary between about 33% and 38%.
Prof. Hudson is of course correct that energy use is historically a very good proxy for development, probably better (at least in comparative terms) than GDP or related measures. However, in absolute terms its not all that good a measure (unless you want to assume that Canada is several times richer than Sweden). It is also questionable to use it in recent years, because there has been a notable decoupling of energy growth and economic growth in several advanced countries over the past decade or so, including the US – both in a positive and negative direction. Much of this may be down to short term reasons, such as cryptocurrency energy use, electrification, changes in industrial structure, and the transition to renewables, but I think caution is needed in assuming that a rise (or fall) in overall energy use over a fairly short term really means too much.
It would be interesting to adjust energy production by imports and exports. I suspect a lot of Canadian energy production / consumption is embedded energy in petrochemicals and ores etc. Similarly, the decoupling of energy and economic growth is a temporary artefact of the West moving primary industry to BRICS. Sweden probably consumes more energy than it admits via imports of manufactures whereas Canada has disproportionate energy using industry in its primary export sectors. Actual energy use by Canadians to live is a much smaller multiple of Swedish energy use per capita.
https://www.imf.org/en/Publications/WEO/weo-database/2024/October/weo-report?c=193,122,124,156,924,128,172,132,134,174,532,178,436,136,158,542,137,546,138,196,142,182,576,184,144,146,112,111,&s=PPPPC,&sy=2007&ey=2023&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1
October 15, 2024
Per capita Gross Domestic Product, 2023
United States ( 82,715)
China ( 24,503)
Australia ( 67,901)
Austria ( 71,998)
Belgium ( 71,035)
Canada ( 62,266)
Denmark ( 80,211)
Finland ( 63,559)
France ( 63,881)
Germany ( 69,532)
Greece ( 40,048)
Ireland ( 126,992)
Israel ( 53,810)
Italy ( 59,165)
Japan ( 51,399)
Korea ( 60,046)
Luxembourg ( 148,694)
Netherlands ( 79,586)
New Zealand ( 52,856)
Norway ( 100,154)
Portugal ( 47,226)
Singapore ( 141,554)
Spain ( 52,908)
Sweden ( 70,047)
Switzerland ( 93,055)
United Kingdom ( 60,735)
About Chinese economic development and the Chinese social welfare system, development and social welfare gains through the society, for the 1.4 billion, have been truly wonderful. While China does not have the per capita GDP level and resources of a Switzerland, nonetheless Chinese development has been wonderful and China has been catching up even with Switzerland.
Describing the Chinese social welfare system and development in pejorative terms is needless and at best simply uninformed.
https://fred.stlouisfed.org/graph/?g=1uwEG
August 4, 2014
Real per capita Gross Domestic Product for China and Switzerland, 1977-2023
(Percent change)
https://fred.stlouisfed.org/graph/?g=1uwEQ
August 4, 2014
Real per capita Gross Domestic Product for China and Switzerland, 1977-2023
(Indexed to 1977)
https://www.imf.org/en/Publications/WEO/weo-database/2024/October/weo-report?c=193,122,124,156,924,128,172,132,134,174,532,178,436,136,158,542,137,546,138,196,142,182,576,184,144,146,112,111,&s=PPPPC,&sy=2007&ey=2024&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1
October 15, 2024
Per capita Gross Domestic Product, 2024
United States ( 86,601)
China ( 26,310)
Switzerland ( 95,837)
https://fred.stlouisfed.org/graph/?g=1CkGP
January 15, 2018
Life Expectancy at Birth for United States, China and Switzerland, 2000-2022
https://fred.stlouisfed.org/graph/?g=1CkGX
January 30, 2018
Infant Mortality Rate for United States, China and Switzerland, 2000-2022
I don’t think GDP growth has much to do with the size of the GDP. It has to do with per capita GDP and the potential for the individual in a nation to be more productive.
This is why poor countries (low per capita GD) have a high rate of growth if not saddled with wars, corruption and other problems. This was how China managed to have high growth in the past decades. Say we have a hard working population toiling on farms from sunrise to sunset, growing rice and making a few dollars a day. Now comes the gov and investors to set up a toy shop hiring these hard working people for $5 an hour. Suddenly, their productivity increases 10-folds. Next comes education, they educate their young and then set up more sophisticated factors and shops and now their kids are make $10 an hour assembling cellphones. etc and etc.
At this point, China’s per capita GDP is around $10000, still way below that of advanced nations. This means they still have a lot of poor people not being very productive. It is then a matter of educating them, employing them and making them more productive.
This process will stop when everyone has been educated to the limit of their ability and being fully employed. After that, per capita GDP growth will depend strictly on technology advances.
When a nation’s GDP grows, its consumption also grows, so more Chinese productivity squeezing out other countries’ GDP growth is only partially true. In a perfect world, consumption would grow with its GDP, but China’s rise has been fast and Chinese people need time to feel financially secure enough to consume as they produce. The young generations are already talking about “lying flat”, meaning they are going to relax, work less and consume more.