The Chinese Communist Party is increasingly managing China’s economy via diktat, writes economist Adam S. Posen in this enlightening essay. He notes the long-term risks of this conduct for the global and Chinese economies: Excessive interference has reduced the ordinary Chinese citizen’s willingness to invest and spend locally, and simmering discontent, Posen predicts, could push more investment overseas, to other nations’ benefit. Executives, investors and students of political economy will find this an intriguing look at one aspect of China’s emerging economic challenges.
- After its rebound from the COVID-19 pandemic, the Chinese economy has slumped.
- An officious Chinese Communist Party hinders the nation’s economic recovery.
- A prolonged downturn in China affects the global economy.
After its rebound from the COVID-19 pandemic, the Chinese economy has slumped.
China’s relaxation of its harsh COVID-19 restrictions initially boosted a moribund economy that had languished under the weight of forced sequestration, government-mandated testing and seemingly endless supply-chain shutdowns. Early 2023 saw an increase in domestic tourism and retail business. Yet by the middle of the year, growth had declined: Private sector investment and durable goods consumption had slowed markedly. Citizens preferred putting their savings into liquid bank accounts to making long-term investments.
“Those trends reflect people’s long-term economic decisions in the aggregate, and they strongly suggest that in China, people and companies are increasingly fearful of losing access to their assets and are prioritizing short-term liquidity over investment.”
China’s financial markets and economy are suffering from a bout of “long COVID.” This economic reversal is the latest iteration of a trend underway since 2015, when the Chinese Communist Party (CCP) expanded its authority. Bank deposits as a share of GDP have risen by 50%, while private investment has declined by two-thirds and private-sector durable goods consumption has dropped by one-third.
An officious Chinese Communist Party hinders the nation’s economic recovery.
In the late 1970s, CCP leadership under Deng Xiaoping refrained from meddling in private enterprise. The early days of Chinese capitalism featured a hands-off approach by government, as long as citizens steered clear of politics. The CCP has since succumbed to a familiar pattern: An economically permissive authoritarian regime, offering a carrot in the form of public beneficence, garners support from citizens and industry, and then begins to interfere in the economy in a peremptory and unpredictable fashion. The pandemic seems only to have exacerbated this behavior.
“What has become clear is that the first quarter of 2020, which saw the onset of COVID, was a point of no return for Chinese economic behavior.”
In the face of growing authoritarianism, people and companies are acting cautiously, saving more and spending less, particularly on less liquid assets and items such as cars, white goods, business improvements and machinery. That risk-averse behavior is slowing the economy, much as it does in the wake of a macroeconomic financial crisis.
A prolonged downturn in China affects the global economy.
The Chinese government will be hard-pressed to regain its people’s confidence, even with an economic resurgence, given the public’s embedded fear of potential confiscatory measures without notice. The party appears to be digging in its heels: The National People’s Congress recently simplified legislative procedures to enact emergency laws.
A more volatile Chinese economy could result in a preference for domestic goods and services over imports, resulting in a greater trade surplus with the rest of the world. This will not likely weaken Xi’s grip on power. Rising discontent with conditions at home could possibly lead more businesses to offshore and more people to emigrate.
“Instead of trying to contain China’s growth at great cost to their own economy, American leaders can let Xi do their work for them and position their country as a better alternative – and as a welcoming destination for Chinese economic assets of all kinds.”
The United States and other nations can provide a haven for Chinese capital and talent by remaining open to that migration. Such an approach – “suction, not sanctions” – would benefit the newcomers and the receiving countries at China’s expense.
About the Author
Adam S. Posen is the president of the Peterson Institute for International Economics.