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- Conference of November: Who killed the Chinese economy? - November 29, 2023
Foreign Affairs and the Peterson Institute for International Economics aired a discussion on November 14, 2023 about what caused the slowdown of Chinese economic growth. This question was first introduced by Adam S. Posen in his piece for Foreign Affairs issue of September/October 2023. In this issue, the magazine let other experts comment on Posen’s argument: Zongyuan Zoe Liu and Michael Pettis.
Posen, as he explained in this online event and his article, what caused China’s economic growth decline was Xi Jinping’s policy choices. After the zero covid policy and the reopening of the economy, the expected rebound in consumption did not happen. Other countries like Japan saw a big consumer rebound right after they reopened. This underlines the consumption shift in Chinese household behaviour, as they prioritized saving and liquidity over buying durable goods. Posen reaffirms that this behaviour change was caused by Jinping’s extreme response to the pandemic, which led to a less dynamic economy through arbitrary state interventions. As Vogt exemplifies, it’s not the virus that has caused these lingering symptoms but the overactive immune response on the part of the state.
Zoe Liu agrees with Posen on the main problems of the Chinese economy. She summarizes them in the four Ds: debts, demographics, demands, and decoupling. In her argument, she defends the unfairness of blaming Xi Jinping for causing these trends because they already existed. While Posen marks COVID-19 as a “critical juncture” for China’s economy, she believes it is just a step on a long path. She argues that the root of the problem dates back to 2013 when Jinping explained his vision of reform and deepening: “The cumulative policy shocks of Xi’s first two terms worsened the structural challenges that were dragging down—but not yet crashing—China’s economy” (“Who killed”, 2023). Xi’s policy missteps were highly consequential and accelerated the decoupling.
Pettis views causality differently from Posen. While Posen argues that the problems facing the Chinese economy are the consequence of the recent policy shifts, Pettis confirms that the root of the problem dates back to 2006 and is due to the Chinese economic growth model. Referencing Albert Hirschman, Pettis draws on his theory asserting that “any successful growth model has obsolescence built into it because it is designed to address and resolve particular economic imbalances” (“Who killed”, 2023). In this case, what was to be resolved were the lack of investment and savings. Hence, in 2006, when the Chinese economy closed the gap between what they had invested and what they could absorb productively, it was time for a growth model change—but that did not happen. Thus, as it has retained its high-investment model, investment rates have continued to rise while consumption levels have decreased. These high investment rates are no longer productive and lead to the unsustainable acceleration of debt to maintain growth rates. Contrary to Posen, Pettis defends that government intrusion is the consequence of weak private investment, not its driver. COVID-19 mattered as it accelerated this phenomenon.
Overall, these experts agree on the main problems and obstacles of the Chinese economy but differ on the causes and timing. This is a relevant discussion as the Chinese economy’s lack of vitality will likely have enduring effects on the rest of the world.
If you are interested in hearing the whole discussion: https://www.youtube.com/watch?v=6Z1TxK9JyWI&ab_channel=ForeignAffairs
Posen, S. Adam (September/October 2023). “The End of China’s Economic Miracle” Foreign Affairs, 102(5), pp. 118-130.
Who Killed the Chinese Economy? The Contested Causes of Stagnation. (2023, November-December). Foreign Affairs, 102(6), pp. 176+. https://link-gale-com.sare.upf.edu/apps/doc/A771913899/AONE?u=fabra&sid=bookmark-AONE&xid=d85f5956