China's economic woes
The first half of 2023 delivered a steady stream of bad news for China’s economy: slow growth, record youth unemployment, low foreign investment, weak currency and exports, and a property sector in crisis. Last month, Chinese authorities increased measures to support the renminbi and boost the country’s housing market. Although China has managed numerous difficulties in the past, there is no doubt that the country’s leadership faces a unique set of challenges. To explore these fundamental issues, United States-China relations, and other factors crucial to China’s future, Chronicle spoke with Professor of Political Science Robert S. Ross, who has visited and studied China extensively.
Q: What are the economic factors contributing to the slowdown in China’s economy? Is China heading toward a recession?
Ross: There is a tendency to expect strong and dramatic Chinese government measures to right the Chinese economy. Yet a more pragmatic approach to economic problems would be a gradual, incremental approach, allowing for ongoing analysis of the effect of incremental policy adjustments before implementing additional measures. This is how the U.S. Federal Reserve Bank has responded to U.S. inflation. Thus far, China has provided support to troubled sectors, reduced its banks’ reserve requirements to encourage lending, and supported the stock market. Should these measures prove insufficient, I would expect additional measures.
It is also important to note that the decline in China’s growth rate reflects the decline in both international and domestic consumption. The global recession has contributed to a dramatic decline in Chinese exports. Exports will increase, and thus GDP growth will improve, once the global economy recovers from the recession. Domestic consumption has also declined as domestic savings have increased, because the Chinese people lack confidence in the post-COVID Chinese economy and because their savings have declined with the decline in real estate values. Over time, domestic consumption will also rebound, contributing to growth.
On the other hand, there are structural problems in the Chinese economy that constrain growth and that require the leadership’s attention. These problems include declining private sector confidence in government support and low labor productivity. There remains considerable uncertainty whether these issues will be addressed.
Q: What role does Communist Party ideology play in the efforts to revive China’s sagging economy? Isn’t China risking prolonged stagnation by either stalling or failing to boost output by implementing stimulus programs and/or welfare policies common in the U.S. and Europe?
Ross: Despite the name of the Chinese ruling party, ideology has long been irrelevant in Chinese politics. Neither Marxism nor Maoism play a role in policy making. Rather, the political instincts of the Chinese Communist Party leaders are similar to those of leaders of other authoritarian parties: maintain absolute authority over the country. The foremost political factor in economic policy making is the Chinese Communist Party’s priority on assuring its control over the economy to keep itself in power. The fate of the Communist Party of the Soviet Union continues to haunt Chinese policymaking. In recent years, the party has increased its control over the economy by strengthening the role of state-owned enterprises in the economy, at the expense of the private sector investment. This has been detrimental to both economic growth and innovation.
Q: American companies are accelerating efforts to reduce their dependence on Chinese suppliers, citing a 24 percent reduction in Chinese imports during the first half of this year versus 2022, and Mexico is now emerging as the U.S.’s top trading partner. What is driving this supply chain transformation?
Ross: The combination of China’s changing political environment and U.S. policy toward China has cautioned American companies from relying on their investments in China for continued growth. On the one hand, China says that it welcomes foreign investment. But its retaliation against U.S. controls over technology cooperation with China and China’s increase focus on self-reliance suggests that there is now greater political risk for corporate investments in China. The downward trend in U.S.-China relations suggests that both U.S. and Chinese controls over U.S. investments will increase and challenge long-term profitability. This trend contributes to corporate efforts to diversify supply chains.
Nonetheless, U.S. investment in China will remain robust. For most companies, there are few alternatives to investment in China. India and Vietnam, for example, lack the transportation and energy infrastructures, as well as an adequate technology-capable work forces, to support reliable production processes and timely deliveries. Also, the Chinese market is too attractive to sacrifice in the interest of significant corporate “decoupling.”
Q: U.S. Secretary of Commerce Gina Raimondo recently assured Chinese officials that the U.S. was not seeking to sever economic ties with China, but expressed a litany of concerns—such as intellectual property theft, raids on businesses, a new counterespionage law, and exorbitant, unexplained fines—that has prompted the American business community to describe China as too risky and “uninvestable.” Are the challenges that the U.S. faces in reviving this relationship insurmountable, or is there a path forward?
Ross: U.S.-China diplomacy will not ease U.S.-China relations. The downward trend in relations does not reflect misperceptions or a lack of dialogue. Rather, it reflects U.S. resistance to the rise of China and U.S. policy responses. The sources of tension are U.S. technology controls, ongoing U.S. trade war tariffs against China, U.S. policy toward Taiwan, and U.S. strengthening of its security partnerships on the Chinese maritime perimeter. China’s response has included its pressure on American companies in China, as well as in its economic and military pressure on Taiwan and its effort to weaken U.S. security partnerships in Asia. Diplomacy cannot alter this dynamic. For China and the United States, diplomacy is merely an effort to establish each side’s “reasonableness.” Each country knows this about the other. Short of an economic implosion and the end of its rise, there is nothing China can do to alter U.S. policy and, thus, the downward trend in relations.
Q: The biggest problem facing China is its population decline: approximately 850,000 from 2021 to 2022, confirming what demographers had previously estimated. Why are birth and fertility rates falling? What are the long-term impacts of these demographic changes?
Ross: China’s birth rate has significantly declined and over time the size of its workforce will also decline. But the constraints on Chinese economic growth have little to do with Chinese demographic trends. With a population of 1.4 billion, China has plenty of people to staff its workforce. The issue is not the size of the workforce, but the low productivity of Chinese workers. By some measures, Chinese labor productivity is one-fourth the productivity of U.S. labor productivity; the U.S. economy is larger than the Chinese economy, despite having one-fourth the population of China.
China’s slow labor productivity reflects its inability to introduce advanced technologies into production. If Chinese policy can encourage greater investment in manufacturing technologies, its economy would continue to grow at an impressive rate. It is unlikely that China will fully transform its economy, but even a moderate improvement in productivity would offset any decline in the birth rate.