China has proudly proclaimed itself to be a Communist country ever since Mao Zedong came to power in the late 1940s. I understand the term “Communism” in the context of a country like China to mean a socialist (state-directed and controlled) economic system with the additional element of political repression allowing no dissent from official orthodoxy.
China’s economic history is a bit more complex than just 75 years of tightly-controlled socialism. Its economy languished (including the usual mass deaths and starvation) for the first 40 or so years of Communist rule. Next, under party leader Deng Xiaoping and successors from the mid-1980s for about 30+ years, China allowed a substantial private economy to emerge and flourish. During those years it experienced rapid economic growth, and in that very short period of time its economy became the second largest in the world after the U.S. (however, more like 70th place if ranked by per capita GDP). Then in 2013, current strongman Xi Jinping came to power. In the most recent decade under Xi’s rule, the political repression has been greatly ramped up, the central planners have reasserted their pre-eminence, and the private economy has been gradually strangled.
So how is China faring under its most recent regimen of tightly-controlled socialism, central planning, and state-directed investment? I’ve had several posts over the past couple of years tracking China’s progress, or lack thereof, for example here (from August 2023) and here (from May 2024). It’s time for another one, particularly given the relevance of China’s economic results to consideration of policies advocated by the candidates (particularly Harris) in our current election.
The May 2024 post is good background for today’s consideration. That post cited contrasting articles about China from the New York Times in April 2024, and from Lawrence Person in May. The Times took note of ongoing decline in the rate of growth in China, but said that its economy “grew more than expected” in the first quarter due to government efforts to “stimulate growth.” The efforts to stimulate growth notably included “investing heavily in its manufacturing sector, including a binge of new factories.” In other words, they had adopted the tried and true classical strategy of Stalin, namely to build big factories to manufacture what appeared to be the prestige product of the day. (In Stalin’s Soviet Union, that was steel; in today’s China, it’s semi-conductor chips and EVs.)
Person took a more realistic (some might say cynical) look:
China has launched a massive $47 billion fund, the largest in its history, to bolster its semiconductor industry and establish a local supply chain. . . . Do you remember the last time I covered where the money went to in those previous phases [of China’s plans to create a state-directed chip-making industry]? The money went to companies like Wuhan Hongxin Semiconductor Manufacturing Co. Result? “Hongxin’s unfinished plant in the . . . city of Wuhan now stands abandoned. Its founders have vanished, despite owing contractors and investors billions of yuan.”
Person continued with many more examples of state-directed factories failing and ending up empty and unused.
Fast forward a few months, and bad conditions are getting harder to conceal. For second quarter 2024 data, here is the New York Times from July 14:
Economic growth slumped in China through the spring after a strong start this year, according to data released on Monday, as a real estate crash caused consumers to spend more cautiously.
But the genius Chinese central planners think they have the answer to slumping growth: directing more capital from the state to the building of yet more factories to send goods to the export markets:
China has tried to offset the real estate downturn by building more factories — new investments in manufacturing surged 9.5 percent in the first half of this year — and stepping up exports.
And as things have gotten even worse during the third quarter, China has come up with an even better idea: “stimulus”! From BlockZeit, September 16:
China is seemingly weighing over its plan to trigger its $1.4 trillion economic stimulus package.
“Stimulus” is the second stupidest economic idea to come out of the West after socialism. In the context of a country in economic distress, the term means “borrow as much money as you can get away with and waste it as fast as you can on uneconomic projects.” How anybody has decided that this is a good idea is beyond me.
Semafor provided some details of what China planned to do with a portion of the newly borrowed money in this piece from August 5:
China announced a huge $42 billion stimulus package designed to end a period of weak consumer spending post-pandemic and boost its lagging economic growth. In a document released Saturday, the government lays out a plan to overhaul tourism, boost childcare and health services, and create low carbon “smart cities” to help juice spending. The government will also spend billions to finance a mass equipment and appliance trade-in scheme to bolster manufacturing.
And then there is China’s real estate market, in a deep crisis now persisting for five years or more. Rather than let the market re-set, China comes up with one plan after another for state-supported bailouts. From CNN, May 17:
He Lifeng, vice premier and the Communist Party’s top economic official, said Friday that municipal governments should buy unsold homes and convert them into affordable social housing, in a plan that has been trailed as a major solution for the country’s crisis-ridden property sector. In a coordinated move, the People’s Bank of China (PBOC) announced that it will set up a nationwide program to provide 300 billion yuan ($41.5 billion) in loans to fund state purchases of unsold homes.
The recent period of state-directed capital, “stimulus” and bailouts has seen a corresponding collapse in startups in the private sector. From Fortune, September 16:
The number of new companies that are started in China annually has collapsed as fundraising by Chinese venture capital firms has similarly imploded. A recent Financial Times report described a dire Chinese startup landscape, with founders, investors, and VCs offering bleak comments on condition of anonymity. "The whole industry has just died before our eyes," a Beijing-based executive told the FT. "The entrepreneurial spirit is dead. It is very sad to see." According to data from IT Juzi cited in the report, the number of companies founded in China so far this year is just 260, on track to dip below 2023's tally of 1,202 and a 99% decline from a peak of 51,302 in 2018.
So far, China continues to report at least some economic growth, on the order of 5% per year. That figure is completely untrustworthy. It is likely that “growth” is near zero or indeed negative. Much of what is recorded as “growth” is just the government wasting borrowed money on uneconomic projects.
And before we get too scornful of China, we should recognize that the Biden/Harris economy bears much resemblance to China’s. For some reason, the word “stimulus” has not been used much to characterize the Biden/Harris economic policies, but as a practical matter we very much have a “stimulus”-type economy. By that I mean, we borrow vast sums and waste them on uneconomic government-backed projects, which then get counted at full value into GDP. Think the Green New Deal, Inflation Reduction Act, and vastly increased spending on health care. The large majority of recorded job growth in the past few years has been government or government-funded jobs. From the Wall Street Journal, May 3: “The Government-Spending Jobs Boom. Most new jobs are in healthcare, government and social assistance.”:
Government, healthcare and social assistance accounted for about 95,000 of last month’s new jobs. Over the last year these industries have made up nearly 60% of the country’s 2.8 million in job growth. They made up less than 30% of the new jobs during the first three years of the Trump Presidency before the pandemic. President Biden boasts that he’s leading a U.S. manufacturing comeback. But manufacturing has added a mere 20,000 jobs over the last year. That’s a fraction of the number in healthcare (765,000), government (618,000) and social assistance (257,000). At the same time, employment in mining and transportation and warehousing has been flat.
Expect more of same if Harris gets elected.
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