The China Factor: Part Two

Can China reinvent itself to restore growth?

In this two-part essay, I explore China’s legal and governance challenges in Part 1 and economic factors in Part 2. My take: institutional constraints and contradictions built into China’s political and economic system pose obstacles to sustainable growth.

---

I have been asked to explain why I have become pessimistic about the Chinese economy. My concern is not something I can illustrate with backwards-looking charts and graphs and statistics. Rather it is what I sense about the future, based upon a deeper analysis of China’s political economy. I am concerned that the stimulus solutions proposed thus far won’t work, and that some initiatives that appear creative or modernizing could even make things worse—such as turning data into assets on the balance sheets of local governments. The question I would like to answer here is what is the nature of China’s systemic challenges?

---

via The Wall Street Journal

Animal Spirits

An economy cannot be forced to grow by words and numbers, slogans or symbols, invoked by politicians. It is a living, breathing, smoky being, fueled by the hard work of production and innovation, and fed by the sunny confidence that inspires consumption and demographic growth. Its roots spring from bottom-up demand, not top down-planning. Its ecosystem must be able to tolerate failure, in order to enable success.

Government cannot by itself create economic vigor and inspiration, but it can provide the necessary conditions: transparency, stability, and predictability—and a safety net when things go wrong. It should inspire trust.

So far outsized expectations about sweeping fiscal policies intended to revive China’s economy have not materialized. An increase in fiscal spending of .2% absent any rebound effect from lockdown reopening means that the 5% GDP target is merely an aspirational goal with little chance of success. Serious economists in China must feel relegated to the back row of policy discussions as unrealistic forecasts are made by politicians. This matters, because if China’s economy continues to falter, it will impact not only the US but the rest of the world in coming years, not just in trade, but in global financial markets as well.