Although China can look back on an economic miracle, its future seems highly encumbered.
Even with the best policies coming out of Beijing, aging demographics and the natural tendency for development to slow the pace of growth would have their effects, as would the legacy of past policy errors, such as residential overbuilding. Still, more problems will emerge from the zero-COVID lockdown policies. On a more fundamental basis, China’s economy will suffer from what looks like a reassertion of Maoist ideology.
The most immediate ill effects on the economy come from the anti-COVID regime. Whatever the public health necessities, the severe quarantines and lockdowns have achieved little beyond the much more economically friendly approaches used in the West.
COVID policy has also needlessly held back China’s economy by sowing fear among the Chinese public. Beijing has hidden the fact that the Omicron variant is milder and how Europe and America effectively cope with the virus in less severe ways. Beijing has also denied the Chinese public the benefits of foreign vaccines and other medicines.
There can be little doubt that these draconian actions have their roots in past Beijing propaganda claiming that China had handled the virus more effectively than other nations, a fiction promoted by certain ever-gullible parts of Western media. For Beijing now to admit that the West has anything more effective and is recovering would undermine an important internal propaganda fiction.
The economic damage of shutting down Shanghai, Hong Kong, and other centers may be incalculable, but it is undeniably significant. As Premier Li Keqiang made clear in his recent widespread address, the shutdowns alone may keep China from reaching its already downgraded real growth target of 5.5 percent this year.
Joblessness has already risen from 4.9 percent late last year to 6.1 percent this spring. Consumer optimism has fallen from an index level of 128 last year to barely 114 at the last measure. Housing sales, growing at double-digit rates only three years ago, have stalled in 2022. Exports have lifted Chinese manufacturing after months of serious declines, but that rise reflects a recovery overseas more than in China.
While COVID policies have had the most immediate ill effects, the Maoist reassertion promises to impose the most fundamental impediment to future Chinese growth. It is most visible in Xi Jinping’s touted “New Development Concept” (NDC). His answer for China’s economic future has several elements. Still, at the base, it constitutes what Kevin Rudd, president of the Asia Society, aptly describes as China’s “pivot to the state.”
It would, for the first time since Mao Zedong, reorient Chinese economic management around a strictly enforced industrial policy in which Beijing, through a revivified state-owned sector, would centrally direct the country’s entire economic effort.
Under this approach, Beijing has already denied financing to several fast-growing consumer service providers. Even though these companies were clearly meeting an economic need, they fell outside the planners’ preferences.
As part of his “pivot,” Xi has hotly criticized the “patriotism” of the leaders of these consumer services firms and any business leader who would stray from Beijing-approved economic directions. He has told these business leaders in no uncertain terms that they live in “partnership with the state” under the direction of its planners and, ultimately, the Chinese Communist Party (CCP).
Xi’s NDC has stressed what he refers to as a “dual circulation economy” under which China would shed its dependence on exports and rely more on domestic sources of growth. He has also emphasized “common prosperity” that would redistribute income from China’s business elite to the people.
Despite the humanitarian language surrounding this aspect of the NDC, it is less likely aimed to benefit the middle and working classes and more likely aimed at weakening business power centers outside the CCP.
Given China’s startling success after Deng Xiaoping opened the economy to the world in the late 1970s, this Maoist turn might surprise. But in many ways, Beijing has long advertised it. From Deng to Xi, China’s leadership has always described “liberalization” only as a means to the ultimate ideological goals of communism. Deng made that clear at the start in how he defined “socialism with Chinese characteristics.”
In the West, such hints were taken as cynical rhetoric, a gesture in the direction of old ideals by leaders who could see a different future, much the way Western leaders, for the sake of votes, rhetorically bow to traditional norms in which they no longer believe. But the West only believed what it wanted to believe about China.
Now it seems Beijing was always populated less by cynics than by true communist believers. Xi, after all, only recently explained his NDC by stating that the “overwhelming abundance of material wealth” brought by markets has positioned China for the next step on the road to socialism.
If Xi really is poised to take this next step, China’s growth and development are in for trouble. For one, his NDC contradicts itself. The only way China can prosper in the industries his planners are emphasizing—semiconductors, artificial intelligence, quantum computing, and modernized manufacturing—is to seize world domination in those areas, a move that would thwart his parallel plan to reduce China’s dependence on exports.
Sill more basically, the move to rigid planning would sap the dynamism of China’s economy. One of the reasons open markets accelerate development is that their decentralized nature creates a diversity of efforts to capture the future. Since no one can see the future, that diversity is more likely to hit on upcoming economic needs than any plan, which by nature, as the NDC does, concentrates on only a few areas.
It will take a while to kill China’s economic dynamism. The NDC may get lucky. World dominance in semiconductors, artificial intelligence, and quantum computing may be the future. They are certainly hot in the present. Still, the future remains unknown, especially in the world of technology.
When the planners make a mistake, a huge national effort goes in the wrong direction, something less likely in fundamentally decentralized markets. In time, a communistic centralization will waste resources, stifle imagination and experimentation, and steal the economic dynamism of past decades. The economy will stagnate long after the COVID lockdowns are just a bad memory.
