Mint Explainer: Is China losing its growth edge or is that just Western propaganda?


Premier Li Keqiang told officials in May that the country would struggle to achieve positive growth in the ongoing quarter because of its Zero-Covid policy of severe city-wide lockdowns. Manufacturing contracted in the month of March, the first time since March 2020. In the first two years of the pandemic, 2020 and 2021, Chinese exports of laptops grew in double-digits, as users around the world spent more time at home, working and otherwise. This year, China’s exports of laptops are down 16%.   

Keqiang’s address a fortnight back to more than one lakh officials across the country in a nationwide video conference pressed the urgency of the measures the government and the central bank are taking to stabilize China’s economy, and that must be implemented before the 20th Communist Party Congress in October, a key milestone for Xi Jinping.  

On cue, Western media has sprouted a profusion of sage commentary predicting the end of China’s miracle run, which saw its economy, measured in dollars at market exchange rates, growing at a compound annual rate of 11.7% between 1980 and 2019—dubbed as China growth miracle.   

This is wishful thinking. China’s growth rate will probably never go back to dizzying double digits but will still be large enough to make it overtake the US economy in market exchange rate terms as well. In purchasing power parity dollars, China overtook the US in 2014.  

Deng Xiaoping kicked off China’s economic reforms in 1998 — technically, but that was in December 1998, meaning the reforms effectively began in 1999. In theory, the “Four Modernisations” — of agriculture, industry, defence and science and technology — date back to 1963, but only in December 1998, with Deng Xiaoping assuming control of the party and adopting the four modernizations as the route to achieving moderate prosperity, did the slogan begin to acquire substance.  

In the usual narrative, China’s growth story begins with Deng’s reforms. This underestimates the contribution of reforms under Mao. In the early years of the People’s Republic, communal labour built canals, levelled plains and terraced hillsides in an extended hard grind that would not have passed muster under western-style capitalist cost-benefit calculus. Society was mobilized to educate itself. Healthcare was rudimentary but universally accessible. Women transformed from decorative objects of desire, who were forced to bind their feet, into men’s equals, who held up half the sky, in Mao’s colourful phrase. Even the Cultural Revolution had a redeeming side: total deference to authority and tradition stifles creativity and spontaneity. When want is shared by society at large, poverty spawns not hierarchy, but either a collective yearning for betterment or a numbing, collective despair. The country Deng started off with was bruised, but not in despair.  

Deng sent, over the years, 22,000 Chinese officials to Singapore, to learn from Lee Kuan Yew’s successful transformation of that city state. The ‘breaking of the iron rice bowl’, decollectivisation of farming, a free hand to private entrepreneurship, special economic zones and opening up to trade and investment from outside — these brought rapid gains in the 1980s. Next began the privatization of state enterprises, and the running of state-owned enterprises in an entrepreneurial fashion. In 2001, China joined the World Trade Organization, WTO, on unfavourable terms, meaning it had to accept low tariffs and trading partners reserved the right to treat China as a non-market economy, liable to norms different from those accorded to countries that enjoy Most Favoured Nation status. But the low tariffs proved a blessing in disguise — Chinese output had to be truly globally competitive, to survive in the domestic market.  

In agriculture, too, China has attained high levels of productivity. It is the largest producer of wheat, rice and potatoes, and one of the lead producers of cotton. It is a major exporter of high-value fruit and tea. China is a major importer of soya and pork, using the import volumes to not just extract concessions in trade, from partners such as Brazil and the US, but also to free up scarce domestic arable land for fruit and vegetables.  

China kept the exchange rate competitive. The result was a large current account surplus, year after year. Its domestic counterpart was excessive savings: in excess of 50% of output in several years. China’s foreign exchange reserves are in excess of $3 trillion. Instead of consuming as much they could have, the Chinese masses tightened their belts and exported their savings to the rest of the world. Even with consumption thus curtailed, Chinese poverty fell sharply. Rising incomes created a mass market that attracted nearly every foreign company out there.  

The Chinese leveraged the foreign desire to access the Chinese market to extract assorted concessions, from technology transfer and joint ventures to deference to nationalist sentiments — on the back of Tom Cruise’s bomber jacket in Top Gun’s second iteration, Maverick, the Taiwanese flag makes one fleeting appearance, instead of the noticeable presence it had in the original released in 1986.  

China has built up the world’s most modern infrastructure than any large country has — in power transmission, its ultra-high voltage direct current transmission is unmatched by any country in the world. Ditto, its network of highspeed trains and multilane highways.  

More students go abroad for higher education from China — and return home to enrich their native land — than from any other country. Today, Chinese universities publish original research in quantity and quality that is second only to the US. China is home to the second-largest herd of Unicorns, behind the US (India comes third). In Artificial Intelligence, China is almost on par with the US. Children are being offered courses in AI as early as in schools. In quantum communications, China is arguably ahead. Shenzhen is to hardware what Silicon Valley is to software. China and India produce almost the same number of graduates in Science, Technology, Engineering and Maths, just under 8 crore a year. But a larger proportion of them are ‘employable’ in China than in India. No other country produces these many STEM graduates.  

Yes, frenetic development and absence of functional markets for allocating capital have meant excessive leverage and a pile-up of bad loans, particularly in the real estate sector.   

A deficit of saving options has pushed people to invest in second and third homes — in a bizarre replay, in price-stable China, of Zimbabwe’s prudent savers buying bricks and paint, instead of keeping their savings in bank accounts that lose value amidst that country’s hyper-inflation. Over-zealous efforts by the party to ground high-flying property magnates, limiting their access to credit and forcing them to not just stop relentless expansion but also sell off assets at a loss, have necessitated overt and covert state bailouts of large property companies. Goldman Sachs estimated last year that the total debts owed by poorly regulated funds run by local authorities added up to $8.2 trillion or more than twice the size of the German economy, according to the FT.  

The Communist Party’s zeal to stamp out any challenge to its authority — Alibaba founder Jack Ma’s public criticism of party regulation of finance was met with cancellation of what was touted to be the world’s largest initial public offering and a crackdown on tech companies that has destroyed their value on the market.  

The insistence on continuing with a Zero-Covid strategy, in spite of the availability of vaccines and treatments for covid infections, and rejection of western vaccines, has meant lockdowns of entire towns and regions, resulting in major supply disruptions, partly responsible for global shortages and higher prices. The Chinese leadership’s ability to follow a Zero-Covid strategy reflects the authoritarian nature of the state and zero tolerance for criticism. Censorship of the media and the social media and crackdowns on voluntary organizations limit the crystallization of concerted opposition to the ruling Communist Party.  

The treatment of Uighurs in Xinjiang, where the Muslim minority of Turkic origin are being corralled in reorientation camps, to rid them of supposed Islamist tendencies, has called for global censure, but with little resistance on the ground. Repression extends to state-encouraged boycott of western companies that refuse to buy cotton or fabric made from cotton grown in Xinjiang.  

Zero-Covid risks are one of the cornerstones of China’s political system. It is an authoritarian state, in which people have limited political freedoms and the Communist Party exercises control in every sphere. This loss of individual freedom and choice — the Chinese are cut off from the Internet familiar to us, and have access only to a censored part of the Internet cloistered behind what is called the Great Firewall of China — is counterbalanced by an implicit promise of continuous material progress. If growth falters, this grand bargain would unravel.  

These are structural problems only to the extent they stem from the party’s control of the economy. But the party could choose to exercise its control in a more benign fashion as well, especially when the party stares at all-important growth losing steam. Non-structural problems can be solved relatively easily. When the structural conflict between centralized control of decision-making and economic efficiency does manifest, it would be resolved, sooner or later, in favour of economic efficiency. Unlike Russia before the Soviet Collapse, China has, and has been expanding, the array of institutional mechanisms needed to keep an economy going regardless of changes in the political regime.  

The West and China have a degree of economic interdependence that was unthinkable between the West and the Soviet Union. Both face challenges such as climate change, the governance of fast-crowding outer space, pandemics and weapons and counter-weapons of mass destruction, that need both sides to cooperate. The ageing populations of the West (and Japan) have built up large pools of savings that have to be deployed in dynamic economies, to generate returns for their non-working, non-earning segments. Chinese capability to mass-produce high-quality kit, whether iPhones or Tesla cars, for the world market is not a competitive edge any company anywhere can dismiss. The Chinese market itself is a huge attraction, including for financial services — HSBC might split into two or shift its headquarters to China from Britain, because of this.  

Chinese wages have gone up dramatically, but so has Chinese productivity. Its factories deploy robots and cobots (co-working robots) in larger numbers than in any other country. The global supply chains that have vastly enhanced efficiency in production snake through China multiple times for most lines of production. Some are being reconfigured to reduce dependence on single-sourcing, but that will mean other countries being included in the network, not China’s exclusion from it.  

The areas of conflict between the West and China are in the spotlight all the time, ranging from geopolitics and democratic norms to control of high-tech. But the areas of complementarity are bigger and compelling. Complementarity will keep the West and China engaged and interdependent, even if to the accompaniment of much bickering. That engagement will allow growth to continue to flourish in China.  

As economies grow larger and per capita incomes rise, their domestic growth would come down. The US decadal compound annual growth rates were 7.6% in the 1980s, 5.6% in the 1990s, 3.9% in the 2000s and 4.1% in the 2010s, (computed from World Bank data. Their economic power is no longer fully reflected in GDP numbers, because their companies command resources across the world, the income from which does not always enter the home nation’s boundaries or national income accounting. China would not be immune to this trend. That would reflect a process of maturing, not of losing steam. 

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