Is China’s Growth Miracle Over?

This video is another attempt to shake up the style a little bit. It’s been a while since I’ve done an all visual video, and this one almost qualifies. I’ve noticed that a lot of the successful geopolitics videos on YouTube tend to be lighter on the speaking in person, and heavier on the storyblocks and animated maps. Storyblocks is a stock video website I’ve been subscribed to for about six months now. It’s a cheap service, and you get what you pay for, but it’s a fun way to build a video. The selection is limited enough that after going through the library, I am beginning to see the same clips over and over in the work of my competitors. I think I have a few more rudimentary animation skills than a lot of the other geopolitics YouTubers, and I think I mixed animated graphs well with the storyblocks clips. Let me know what you think!

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Video Transcript after the jump…

Everybody knows that China is destined to replace the United States as the number one world economy. This idea has gone from a sneaking suspicion in the 1990s to an article of faith in the 2020s. China’s rampaging economic growth has made this inevitable. The country’s recent turn towards wolf warrior diplomacy and the bullying of smaller countries on the world stage provides a worrying preview of the future.

The problem with that standard story of inevitable Chinese dominance, is that it is no longer true. It depends on a mental model of Chinese growth that no longer exists. China’s economy is still likely to become the world’s biggest eventually. But China’s era of miracle growth is over, and it has been for half a decade.

Deng Xiaopeng is the man most responsible for China’s rise out of poverty. The Communist Party’s initial period in power, under Chairman Mao, saw China unify and forcefully assert its independence, but that’s about all you can say in its favor. Mao’s Stalinist policies in agriculture and industry killed 10s of millions and failed miserably at making the country richer. And that’s before Mao got old and went nuts. After drawing the country through one final trauma with the Cultural Revolution, Mao finally died in 1976. Though Deng Xiaopeng had fallen from grace during Mao’s long decline, he managed to scramble his way to the prime position by 1978, where he made some very important decisions.

He opened the Chinese economy up to the world, first in special economic zones, and then more broadly. While Deng held onto power behind the scenes until his death in 1997, he set up a system where no one man could consolidate power after him. He famously used an old folk expression to describe his policies, “crossing the river by feeling the stones.” The idea was to clear out the mania of one man rule, deemphasize ideological claptrap, and simply focus on what works. Deng’s approach was spectacularly successful.

According to the World Bank, 88% of the Chinese population lived in extreme poverty in 1981. The World Bank put that figure at 1.9% in 2014, and today it’s basically zero. Mao’s time in power saw the Chinese economy fall from the sixth largest in the world to the 10th. Under Deng’s reforms, China went from number 10 to number two, with a GDP three times the size of Japan’s, the next country in line. Manufacturing replaced subsistence farming, and some of the world’s largest cities blossomed out of empty fields. China went from a pariah state to one of the most admired in the world. Through the 80s, 90s and 2000s, the steady drumbeat of GDP growth continued. It would rise and fall with the world economy, but it averaged 10% a year, for decades.

Until the US housing market intervened. The 2008 financial crisis didn’t end China’s growth miracle immediately, but it definitely ended it.

The Chinese Communist Party knows that its legitimacy comes from growth. So when the world economy crashed in 2008 it had a problem. Unlike the European banks China hadn’t gotten too caught up in US real estate, but being an export driven economy in a world wide recession is no fun. China’s answer was economic stimulus. Massive stimulus. Maybe the biggest the world had seen before 2020. And they paid for this with debt.

It was a more complicated sort of debt than in the US and Europe. In the West economic stimulus is paid for with government debt, or through some central bank chicanery. But in China, the state doesn’t just own the central banks, it owns most of the other banks too. In the US the Bush and Obama administrations had to jump through hoops and essentially bribe banks to lend more money. The Chinese government could simply order that local governments, banks, and other businesses loan and spend more money, and that’s exactly what they did in 2008.

And It worked! For a little while. China rapidly built up high speed rail, a rural health system, and hundreds of other projects. They did so much that they ran out of mega projects to build, and had to go looking in other countries. Much of this investment was useful, but a lot of it wasn’t, and it burdened every actor in the Chinese system with massive debt that began to weigh on the economy. GDP Growth was great for a year or two, but then it began to stagnate. And the debt from 2008 ties China’s hands. It’s 2020 coronavirus stimulus was nowhere near as large.

When Xi Jinping came to power in 2013, his priority was digging China out of this hole. But his attempts to rebalance the economy, and launch more consumption based growth keep falling flat. Liberalizing investment rules in 2015 led to a bubble and a crash the Shanghai stock market still hasn’t recovered from 7 years later. Arguably the US and Europe haven’t recovered either. That 2015 China crash made the already crappy world economic recovery from 2008 just that little bit worse, and bad enough to give us both Brexit and Trump. Over the past year we have seen China’s massive real estate industry shake under Xi’s mandates that it become less speculative and less debt ridden. The attempt to make the real estate market more sane has to be balanced against the fact that tens of millions maybe hundreds of millions of Chinese now have their life savings locked into real estate prices inflated by unsustainable debt. More and more of China’s economy seems to be limited by these sorts of damned if you do, damned if you don’t choices. And growth keeps stagnating. Most of this is just normal developed economy stuff. But China’s authoritarian government has been reacting very poorly to the end of easy growth.

Xi Jinping, despite, or perhaps because of his failure to resolve any of these economic issues, has been able to amass more power than anyone since Deng Xiaoping. Deng’s orderly system of 10 year terms for Chinese leaders has now been dispensed with, and a new personality cult has been built around Xi Jinping. This consolidation is certainly scary from the outside, but if I were Chinese I would be terrified. Now that the going has gotten a little tougher the Chinese Communist party seems to be reverting to an older and dumber form out of fear. Ideological nonsense is back. Communist dogma is reasserting itself over Deng’s pragmatism. I wouldn’t like the argument, but I think you can make an argument that Mao’s brutal one-man rule was necessary to assert the independence of a poor, agrarian country. You will never convince me that Xi’s neo-Maoist one man rule is going to be able to successfully manage the world’s second biggest economy, let alone the biggest.

Xi Jinping’s results have been pretty dismal. China’s economy remains massive, and it’s growth is still impressive. But if it’s going to overtake the United States, what matters is how Chinese GDP growth stacks up against US GDP growth. In the Deng era, China regularly outpaced the US by five to 10 percent, every year. In the Xi Jinping era, the Chinese economy looks more and more normal. China isn’t outpacing the United States by all that much anymore. 2021, with its recovery from the Covid shock saw the largest growth of the Xi Jinping era, at about 8%. In 2022, Chinese economic growth is expected to barely break 5%, just a percent or two ahead of the United States. The projected year when China’s economy surpasses the US keeps fading further into the future. It was supposed to be the mid 2020s, now it looks like the early 2030s. Even the Purchasing Power Parity calculation, that has China already ahead, could slip, as China’s working age population falls, and labor costs go up. I still think China’s economy will eventually surpass the United States, but I am less and less sure that it can do it under the current system. China’s growth Miracle is over, for now.

The 2020s will see both of the world’s two biggest economies reformat their economies from models that haven’t been working. During Covid, the US experienced incredible economic success, simply by giving money to poor people who spend money, rather than rich people who use it to inflate the prices of assets they already own. I don’t know if it will be the Republicans or the Democrats who eventually have the balls to do it, but by the end of the decade, I believe the institutionalization of minor redistribution could send US economic growth rates back into the 4-6% range up from the 1.5-2.5% range of the Reagan era. This isn’t geuaranteed, of course, but it is a plausible path to renewed growth. I don’t see that path for China right now, and I don’t think anybody in the Chinese Communist Party does either.

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