China’s Imagination Deficit
China is at a critical juncture. Its deflation-prone debtintensive economy is seriously underperforming. Its government has become embroiled in a major superpower conflict with the United States. And it is staring down the barrel of a demographic crisis. Worst of all, Chinese authorities are responding to these challenges more with ideology and stale tactics from the past, rather than with breakthrough reforms. Imaginative solutions to tough problems are in scarce supply.
As a diehard China optimist for most of the past 25 years, I haven’t come to this conclusion lightly. My Yale course, “The Next China,” made the case for a powerful shift in the Chinese growth model, from an investment- and exportled economy to one driven by domestic consumption.
Yes, I worried that China’s porous social safety net – both for retirement and health care – could lead to a rise in feardriven precautionary saving that would inhibit consumer demand. But, viewing these concerns more as challenges than risks, I remained convinced that China would ultimately rebalance its economy.
I began to have serious doubts in 2021, when Chinese regulators clamped down on internet-platform companies. With this assault taking dead aim at entrepreneurs, I warned of a mounting “animal spirits deficit.” In my latest book, Accidental Conflict, I widened my concerns to include the implications of President Xi Jinping’s “common prosperity” campaign, which targeted the wealth creation of Chinese risk-takers. And then, a year ago, I threw in the proverbial towel; in “A China Optimist’s Lament,” I argued that the government’s newfound fixation on national security would further diminish China’s potential for economic dynamism.
I have taken a fair amount of flak for this change of heart, especially from long-biased US politicians and their media consorts. Surprisingly, the Chinese have been more open to debate, especially over the possibility that the Next China is starting to look more like the Next Japan. After discussing these concerns with a wide range of senior officials, business leaders, academics, former students, and friends in a series of visits to China over the past few months,
First, the Chinese policy response to a flagging economy is unenlightened. The government is relying on what it has long called “proactive fiscal stimulus and prudent monetary policy” to support economic growth of around 5% in 2024 (Premier Li Qiang will officially announce the target at the National People’s Congress in March). As was the case in the aftermath of the Asian financial crisis of 1997-98 and the 2008 global financial crisis, China is once again resorting to the brute force of large cash infusions to address today’s major dislocations in the property market, local-government financing vehicles, and the stock market.
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