‘There will be a reckoning’: Why part of China’s economic rise was a mirage, not miracle
NEW DELHI: China’s much-touted economic boom, epitomized by President Xi Jinping‘s ambitious reform plans from a decade ago, now appears to be more of a mirage than a miracle.
The reforms aimed to steer China towards a Western-style free market economy driven by services and consumption by the year 2020.
However, most of these reforms failed to materialize, leaving the Chinese economy heavily reliant on outdated policies, according to a Reuters report.
Moreover, a persistent reliance on older economic models has not only exacerbated China’s immense debt burden but also exacerbated issues related to industrial overcapacity.
The failure to restructure the world’s second-largest economy has raised significant concerns and skepticism about the nation’s economic future.
While some experts predict a slow drift towards a stagnation scenario akin to Japan’s experience, there is also a looming prospect of a more severe economic downturn.
“Things always fail slowly until they suddenly break,” William Hurst, Chong Hua Professor of Chinese Development at University of Cambridge, told Reuters, adding that China faces “significant risk” of financial crisis in the near term.
“Eventually there’s going to have to be a reckoning.”
Why, and how, the bubble burst
The bursting of China’s economic bubble can be attributed to an interplay of factors that have been accumulating over several decades.
As it emerged from a Maoist planned economy in the 1980s, China underwent a rapid transformation into an industrial powerhouse, investing heavily in factories and infrastructure to meet its developmental needs.
However, by the time the global financial crisis struck in 2008-09, the nation had largely fulfilled its investment requirements relative to its level of development.
Over the years, China experienced significant nominal economic growth, but this expansion was accompanied by a massive increase in overall debt, which expanded ninefold.
To sustain this growth, China doubled down on investments in infrastructure and property, diverting resources away from household consumption.
As a direct result, consumer demand remained weaker as a portion of GDP compared to most other countries. Meanwhile, the job market became increasingly concentrated in the construction and industrial sectors, which were less attractive to young university graduates.
This policy focus also inflated China’s property sector to account for a quarter of its economic activity, leaving local governments heavily reliant on debt.
The slump in the property market further exacerbated the situation, curbing China’s demand for building materials and causing economic ripples.
Moreover, the impact of the Covid-19 pandemic worsened existing issues, hindering the economy’s ability to recover despite China’s efforts to reopen.
“We’re just beginning to be confronted with the reality. We’re in untested territory,” Max Zenglein, chief economist at MERICS, a China studies institute, told Reuters.
Challenges ahead
Currently, China is at a critical juncture as it seeks to navigate a precarious economic path.
The looming threat of a massive property market collapse dragging down the financial sector underscores the urgency of the situation.
Economists have outlined three potential paths for China’s way forward.
The first involves a swift and painful crisis that entails writing off debt, addressing industrial overcapacity, and deflating the property bubble.
The second is a more gradual, decades-long process in which China slowly unwinds these excesses at the cost of slower growth.
The third, though seen as unlikely, involves actively transitioning to a consumer-led model through structural reforms that may entail short-term pain but offer the potential for a faster and more robust recovery.
Hurst said that while the time is right for China to take an economic pivot, there also a “great fear of provoking an economic crisis.”
(With inputs from Reuters)
