Can China Get Out of Its Rut?

During her recent visit to Beijing, US Treasury Secretary Janet Yellen pulled few punches about China’s current strategy for achieving its ambitious 5% growth target for 2024. By increasing China’s already massive manufacturing capacity, rather than fostering domestic demand, American officials argue, the government policies are giving Chinese firms an unfair cost advantage vis-à-vis businesses in the United States and elsewhere.

Peking University’s Yao Yang agrees with Yellen that China has an overcapacity problem in crucial Chinese industries like alternative energy and electric vehicles, but argues that Chinese saving habits – not government subsidies – are the root cause. And while domestic demand is the “seemingly obvious solution,” changing the population’s saving behavior “would take time.” In the meantime, the only way to absorb the excess savings is for Chinese firms to expand their investments abroad.

But that will not have an immediate effect on growth at home. Yu Yongding, who served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006, thinks fiscal and monetary expansion hold the key to achieving this year’s growth target. While “China’s government should continue to promote consumption,” both consumption growth and real-estate investment are set to keep falling this year. Only more infrastructure investment – together with stimulus measures, such as cuts to the benchmark interest rate – can offset the effects of these trends.

According to New York University’s Nouriel Roubini, however, China’s sluggish post-pandemic growth reflects deeper problems. China’s “shift back to state capitalism is plainly incompatible with President Xi Jinping’s development goals.” Add to that the fact that “China’s problems are structural, rather than cyclical,” and there is a real risk that the country will become ensnared – as most emerging economies are – in the so-called middle-income trap.

Perhaps the thorniest structural problem, notes Yi Fuxian of the University of Wisconsin-Madison, is China’s “bleak demographic outlook.” But, rather than acknowledge the extent of the challenge ahead, Chinese leaders continue to fudge the census data and base their policies on unrealistic demographic forecasts.

It does not help that, as Yale’s Stephen S. Roach points out, “open and honest dialogue” no longer appears to be welcome in China. The recent China Development Forum in Beijing – which featured only “good stories” about China’s economy – was a case in point. Still, Roach disagrees with the “consensus view in the West that the Chinese miracle was always doomed to fail,” and remains “highly critical of America’s virulent Sinophobia.”

Tackling such Sinophobia, Northwestern University’s Nancy Qian writes, may well start with in-person interactions between ordinary Chinese and Americans. At a time when the “public discourse in both countries has become almost exclusively about zero-sum competition, if not outright hostility,” Chinese and Americans “must not lose sight of their common humanity.”