Navigating the Tides: China's Economic Evolution in a Post-Pandemic World
The COVID-19 pandemic has caused significant changes to the global economy's landscape. There has been a rise in anti-globalisation sentiment, and geopolitical competition has increased. The changes brought about by the pandemic were not the same as those experienced during the era of globalization. In China, private enterprises are facing increasing difficulties in their operations. The deteriorating business environment is also eroding investors' confidence in the market's future. Countries such as China and India can do well with democracy as long as they can mobilize the necessary resources and labor to stimulate growth. Unfortunately, authoritarian regimes are not very good at getting nations to develop into developed status. Most of the world's richest economies are considered to be some form of democracy. The exceptions include Kuwait, Saudi Arabia, and Singapore.
Due to the increasing geopolitical tensions and uncertainty in China, many foreign companies are now apprehensive about investing in the country. On the one hand, there are concerns about the possible sanctions imposed by the Western world, and on the other, there is an unsettling feeling that China might retaliate disproportionately to these actions. Consumers in various countries, especially those in China, are feeling less confident due to the negative outlooks about the economy and the stock market. This is reflected in the country's investment and consumption figures.
China's Domestic Development and Economic Outlook
The West tends to focus on China's relationship with the US. However, this year, the spotlight will most likely shift to the country's domestic issues. While the relationship with the US is important, China's biggest challenge is its own development. After several decades of rapid economic growth, China's progress is starting to look shaky. According to the IMF, it is expected that the country's growth will slow to 4.6 percent next year. The real problem is whether the political economy can still deliver the goods and services that it used to provide.
The Middle-Income Trap and Productivity Issues in China
Most middle-income countries are stuck in the "middle-income trap." Those that do break free usually do so by improving their labor productivity. This is not an accident, as authoritarian regimes tend to overinvest in areas that are not productive. For instance, after 2008, China's productivity growth started to decline as the country's policymakers focused more on the construction of infrastructure and real estate. The ILO claims that the gross domestic product per hour in the US is around $70, while that of China is around $15.50. According to the World Bank, China is a middle-income nation. This status indicates that the country is struggling to move toward high income status. China tend to avoid this trap by improving their productivity. Unfortunately, China's overreliance on certain sectors has resulted in lower productivity.
State Capitalism and Its Limitations in China
China's state capitalism is becoming an increasingly liability. This is why Chinese President Xi Jinping has a unique dilemma. He wants to preserve the ruling Communist Party's monopoly on power, while at the same time ensuring that the people have a higher standard of living. To achieve this, he has to let the private sector play a more prominent role in the country's development. This is an approach that is counter to his desire to assert political control. There are also conflicting political inclinations in China. For instance, the country's ruling party has been carrying out various anti-corruption measures and regulations. It has also been conducting raids on foreign companies.
The leadership of the Communist Party is expected to address issues that could affect its authority. The autocracy handicap is considered to be its toughest challenge so far. The annual economic planning meeting of China's central government was held last month. It reaffirmed President Xi Jinping's commitment to high-quality development and focused on creating a modern industrial system. Other goals included increasing domestic demand and reforming the country's supply-side framework. Despite the various challenges that the country is facing, the officials' pronouncements at the conference were not very encouraging. The growth of China is very important to the ruling Communist Party and its legitimacy. Despite the various problems that the country's autocracies face, they have managed to deliver better than expected economic growth. Unfortunately, they are unable to deliver on the promises that they made to the people.
Consumers in China are not confident about the country's economic prospects. Their expectations have been affected by concerns about the stock market, income growth, and employment. This is a trend that can be seen in the country's investment and consumption figures. Due to the various factors that have affected China's economic growth, different perspectives have emerged regarding the country's future direction. Some believe that the country is headed for a "war-driven economy." This theory suggests that China should focus its investments on areas such as the military, technology, and food security. Promoters of big-city schemes, extravagant consumption, and individual wealth generation should be discouraged.
Debunking the War-Driven Economy Theory
It is very unlikely that China will engage in actual warfare. The country has a long history of struggling when it comes to maintaining a war-driven economy. This is because focusing on war negatively affects the country's growth. It is also important to note that maintaining a steady state of preparedness is not the same as investing in defense. The concept of a war-driven economy suffers from a major flaw. It assumes that the economy is perpetually vulnerable to either war or the massive military apparatus, which requires significant financial support. Infrastructure, on the other hand, is a materialized debt, which necessitates upfront investments and ongoing maintenance costs. There is an inherent contradiction between a sustainable economy and a war-driven one, as excessive infrastructure build-outs lead to repayment obligations.
Whereas, the concept of effective control and coverage is related to the state-owned enterprises' dominance in various strategic fields. This includes sectors such as insurance, banking, and securities, which are typically dominated by central or state-owned entities. Even sectors that have traditionally been dominated by private firms are gradually shifting toward a centralized economy. These include asset management, digital technology, venture capital, and semiconductors.
Due to the nature of the centralized economy, there will be a significant concentration of competition in various fields. Private enterprises have traditionally been the main players in areas that have experienced market competition, such as retail, textiles, apparel, internet finance, and photovoltaics. Under the centralized model, the government will be able to systematically control all private enterprises. A centralized economy is different from a planned one in that it incorporates a market element. In China, unlike in the past, where there was no market, the centralized model indicates that the market will continue growing with economic expansion, though it is subject to certain degree of central authority. In addition to financial and fiscal resources, the government can also leverage major projects to control the market.
In China, the government is expected to exert more control over various strategic sectors by utilizing state-owned enterprises. Also, due to the country's resource allocation and policy systems, it will be able to exert a greater degree of control over the private sector. This means that government institutions and market entities in other countries should prepare for the changes.
Regional Economic Dynamics in Asia
Those who were supposed to be affected by the country's recovery from the pandemic were doing well even without it. Some bellwethers were able to maintain a fairly steady performance. For instance, Singapore, which had been struggling with recession fears throughout 2023, ended the year with a strong performance. South Korea's economy also performed well in December. Asian markets were fixated on when the US Federal Reserve would start to reduce interest rates, as well as the prospect of China's central bank cutting its borrowing costs. The slight rise in the value of the Chinese currency was attributed to Jerome Powell's efforts to put a floor beneath the expansion. Things didn't go as planned. There was a lot of optimism about China's potential to boost the rest of Asia when President Xi Jinping started to dismantle "zero-COVID" in 2022. The outlook for the region was viewed closely with Beijing, and as its recovery faded, it became common to state that this had implied bad news for the economies of other countries. However, despite the various factors that affected China's economy, it did not seem like it was going to explode. Therefore, economic performance of China plays a significant role in the global economy, as it is the second-largest country. It is also a major trading partner of many nations, and its strategies and actions have an impact on the world.
Conclusion
The emergence of the COVID-19 pandemic has caused the global economy to undergo a seismic shift. China's emergence as the epicenter of this change has highlighted the various vulnerabilities in the country's political and economic frameworks. As the world struggles with these changes, the country's trajectory can potentially determine the global economy's growth and stability. The pandemic has presented China with various challenges. One of these is the country's state-controlled economy, which has been negatively affected by the lack of confidence among foreign investors. This is also caused by the growing concerns about the escalating tensions between the West and China. And the country's internal economic problems, which have been characterized by a decline in productivity and growth, have highlighted the limitations of a ruling regime that has transitioned from being a middle-income country to a high- income one. The middle- income trap, which many developing nations are going through, is a significant challenge that China must overcome. The Communist Party's efforts to maintain its dominance while promoting growth have presented China's leaders with a unique dilemma. It seems that the path to economic recovery contradicts the party's desire to maintain political control over the private sector, an area of vital importance for efficiency and innovation.
China is at a crossroads, as it faces both external and internal pressures that are challenging its traditional political and economic structures. The country's leaders will have to make decisions that will significantly affect both its own destiny and the global economic architecture. As the world watches China's rise and evolution, it is constantly monitoring the country's efforts to balance its ambitions with the requirements of political control and stability. The country's approach will also affect global trade, economic stability, and international relations.
Pic Courtsey-Pankaj Jha
(The views expressed are those of the author and do not represent views of CESCUBE.)
