Workers stand outside the abandoned Evergrande commercial complex in Beijing on January 29, 2024.Greg Baker/Getty Images
John Rapley is a writer and academic who lives in London, Johannesburg and Ottawa.His books include: why empires collapse (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
Canada is not alone in its housing problems. This week, Evergrande Group, China’s second-largest real estate developer, was ordered liquidated by a Hong Kong court. This is a sign of the country’s stagnation, an economic model that has reached its limits.
The World Bank predicts China’s economic growth rate will be 4.5% this year, just short of the Chinese government’s official target of 5%. While this may sound high, it is far below the country’s boom years, when annual growth rates reached double digits. And even that 4-5% number for him should be taken with a pinch of salt. Chinese data is not always reliable, with some experts estimating that the economy may actually be growing closer to 3%.
That might still seem pretty good if China weren’t lagging behind Western economies to some degree. Despite 40 years of impressive growth, the country’s per capita income remains only about one-fifth that of the United States. Once the peak period is over, geopolitical competition with the United States will end.
That’s more money than Beijing can bear. When China first began to allow capitalism to re-enter the country in the late 1970s, the ruling party did not do as much as many Western analysts had hoped, and as the Soviet Union would later do, with disastrous consequences for itself. , and did not liberalize the political system. In the same way. On the contrary, it strengthened its grip on political power and suppressed the emerging democratic movement that had gathered in Tiananmen Square.
Thereafter, an implicit social contract governed the relationship between the ruling Communist Party and its people. “You give up freedom, we give you prosperity.” The growth model that China used to develop its economy was simple and straightforward. It would move China’s vast population from the countryside to the cities, where it would provide an endless supply of cheap labor to its budding industrial sector.
At the time, China’s re-opening to the world seemed like a perfect opportunity, given that Western countries were trying to rebuild their economies. On the other hand, allowing companies to outsource production to China could increase profits and spark a new wave of investment back home. Similarly, importing products made by cheap Chinese labor could reduce inflation and interest rates, which would not only benefit the Western middle class but also further support investment. right. So in its two decades spanning the turn of the millennium, China became the world’s factory, producing one-third of the planet’s manufactured goods.
But something changed after the 2008 financial crisis. First, China began to have a labor shortage. China is becoming less attractive as an outsourcing destination as wages begin to rise as the population ages. More importantly, the world has begun to lose some appetite for imports from China. Western governments began to face a backlash from voters who felt they were losing jobs to China. Donald Trump’s trade war didn’t restore American jobs, but the blowback against China had begun.
The pandemic has added further impetus to this pivot. As shipping route closures during lockdowns exposed how dependent Western countries were on a wide range of Chinese imports, policymakers sought to decouple and de-risk their economies and thereby reduce the risk of imports from the Middle Kingdom. started talking about reducing exposure to The world continued to import huge amounts of goods from China. However, it has become clear that Western countries’ demand for Chinese imports will grow more slowly in the future than in the past. The resulting slowdown in the country’s economy has left leaders with a dilemma.
Given China’s huge domestic market and the fact that the country only spends about half of its annual production, with the rest going to savings accounts and investments, the Chinese government will start selling what it produces domestically. there is a possibility. In theory, cutting investment and then increasing demand would be enough to restore China’s previous growth rate. However, this will require some relaxation of restrictions on civil society. But this will require some relaxation of restrictions on civil society, so that investment and spending decisions are delegated to the people rather than to bureaucrats or oligarchy.
Under Xi Jinping, the trend was reversed. His “common prosperity” plan has cracked down on what the ruling party sees as oligarchic excesses. Instead, the government relied on its best tools to revitalize the economy. Overseas, the company is planning large-scale investments to expand its market through the Belt and Road Initiative, while at home, speed rail is the focus of the real estate and infrastructure construction boom.
The problem is that inflating supply rather than demand creates deflation. Many of these homes and office buildings remain unsold. Prices will fall. The owner goes bankrupt. And here we are. This dilemma will not resolve itself. Until China’s leaders confront this problem head-on and change their model to one that focuses more on demand, the economy is likely to continue slowing.