China’s economy needs State push, and more

With the regulations shrinking the space for private businesses to manoeuvre, the contradiction underpinning Beijing’s technological strategy becomes apparent

As the world grapples with economic chaos and uncertainty owing to trade and technology disputes kicked off by the US, the International Monetary Fund has recently shared an upbeat view on the Chinese economy. It has predicted 4.8% growth this year compared with a previous forecast for 4%. Amidst the overall gloomy global growth situation, China seems to be dodging the cyclical headwinds well. But it is clear that without significant government intervention, maintaining a steady upward trajectory would be difficult. In this context, understanding China’s political economy becomes more urgent than ever.

As the number of China’s young urban dwellers dips due to demographic change, the need for new housing will diminish in the coming years (AP)

While the Chinese government, since the Covid crisis, refrained from announcing an aggravated stimulus package, its calculations began to change from mid-2024. In late September last year, the Chinese central bank announced a raft of monetary measures, which included rate cuts and property market support to stabilise growth amidst challenges at home and pressures abroad.

These pro-growth pronouncements became the key highlights of this year’s Two Sessions, in which Premier Li Qiang unveiled plans to issue a total of 1.3 trillion yuan in ultra-long special treasury bonds to make room for more growth-boosting measures. While these policies suggest a shift in China’s macroeconomic approach aimed at short-term returns, the large-scale stimulus, contrary to what many Keynesians claim, is not without its risks.

The effects of the 2008 mega stimulus (against the backdrop of the global financial crisis)continue to cripple the Chinese economy. A heavy focus of the 4 trillion-yuan stimulus package led to massive increases in domestic capacity for steel, cement, and aluminium, while demand from export markets fell and property deflated amid financial tightening. Not only is China’s problem of overcapacity fuelling trade tensions with the rest of the world, but the monetary easing pursued by Chinese policymakers, along with new efforts to revive the property sector, is doing more harm than good. Some economists have even compared today’s China to that of Japan in the 1990s, when the bursting of the real-estate bubble, along with demographic collapse, led to a decade of economic stagnation.

While it can be argued that the risk of a property bubble is somewhat overstated, key property sector vulnerabilities are yet to be addressed, which accounts for 70% of China’s household wealth, with important implications for domestic consumption. In fact, the effects of stimulus are mostly felt in the five major cities where the real estate prices have risen in the last few months, while the demand for housing, both residential and commercial, in China’s slower-growth regions continues to remain sluggish. Also, as the number of China’s young urban dwellers dips due to demographic change, the need for new housing will diminish in the coming years.

The more pressing concern, however, is China’s exports. With the shift from Beijing’s reliance on the real estate sector to investment in manufacturing, China is trying to acquire markets in almost all parts of the world. Like most dynamic Asian economies, China too was dependent for the last four decades on labour and scale to create an export-led economic growth model. Beijing’s export-promotion strategy since the 1990s facilitated China’s rapid integration into the global trading system. However, the 2008-09 crisis revealed how China’s overreliance on exports had created serious structural imbalances characterised by high savings and a weak domestic market. As a result, a gradual shift in Beijing’s policy to developing a closely integrated domestic market has gained momentum since then. But despite the Chinese Communist Party’s commitment to demand-side measures to boost consumption, the implicit supply-side support to manufacturers remains, which nevertheless lies at the core of the Sino-American trade dispute.

As this year marks the decade of China’s ambitious industrial strategy “Made in China 2025”, Washington is closely monitoring China’s technological progress and its impact on global manufacturing. The pressing concern facing the U.S. is how China’s AI-augmented new production model is reshaping global cost structures and supply chains. While some of these fears may be true, what Western policymakers need to understand is that the state-market relations in China remain tricky, and state-owned enterprises continue to be key players in high-tech manufacturing.

Although the manufacturing frenzy may seem real, the problems underlying it run even deeper. Given Xi’s top-down approach to economic reform, which includes greater party control over leading tech firms and conservative bureaucrats carrying out economic directives, the domestic private sector, more than the foreign investors, has lost confidence in the Chinese State. With the regulations shrinking the space for private businesses to manoeuvre, the contradiction underpinning Beijing’s technological strategy becomes apparent.

While the government intervention becomes important to maintain the current growth rate of 5%, but to unlock long-term growth potential, President Xi has to rethink the role of the State and let markets play a “decisive role” in resource allocation, critical to the modern economy he aims to build. Theoretically put, it is not a dispute between Keynesians and Hayek’s school of thought; instead, it asserts the importance of planning, but in a decentralised fashion.

Priyanka Pandit is assistant professor, Department of International Relations and Governance Studies, Shiv Nadar University. The views expressed are personal