Xi Jinping's Long March

Struggle sessions continue as India charts its own path: A framework for understanding US-China relations

In 2022, I believed that China’s economy would recover slowly, but I did not predict that the current slump would last this long. I underestimated the brittleness of Chinese policymaking, rooted more in politics and dogma than in the principles of economics.

China was once the driver of global growth. Now there is little doubt that its economy is slowing. We just don’t know how much and how fast, because reliable data is getting harder to find. It sometimes even contradicts itself, as trade economist Brad Setser explains:

Is China's external surplus small and receding (as the IMF argues) or large and if anything growing as China relies on exports to offset its real estate downturn?There is no consensus, in large part because important data sets diverge.¹

A New Long March in the Wrong Direction

If China is heading in the wrong direction in terms of economic policy, there is no reason for competitors to celebrate. Much depends on Washington’s response to Beijing, while India is poised to benefit either way. The US should lead, not follow, in order to successfully adapt to a multipolar 21st century. However, in both countries, political considerations tend to outweigh economic issues which are poorly understood. We might be seeing overcapacity in tradable goods, but there is definitely undercapacity in leadership in both countries able to understand how trade, and the global economy work.

China’s current path is reminiscent of ill-begotten Mao-era measures which massacred sparrows and turned farm and cooking implements into micro steel smelters. The result was famine for tens of millions. Is Xi Jinping leading China on a new Long March to a more insular, uncertain, and less prosperous future?

Backyard furnace to produce steel during the Great Leap Forward era, 1958

Observers looking for new fiscal stimulus coming out of the Third Plenum in July were disappointed.² It seems the time for the cash handouts which worked in the US has passed.³ And no relief was granted to assist purchasers cheated by real estate developers, inaction justified by government concern over moral hazard. The problem however was caused by property developers, many of whom have already been punished. Buyers had reason to believe that it is the government’s job is to regulate illegal behavior and protect its citizens.

In fact, the structural issues that spurred massive overdevelopment in the property sector were always under the control of the central government. Cities and provinces, starved of tax revenue, naively resorted to investment in real estate, with a predictable result: a massive bubble that has destroyed billions of dollars of assets.