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This is the most serious economic test for China since Deng Xiaoping began his most ambitious reforms in the 1990s. Last year, the country achieved 5% growth, but the pillars of its decades-long miracle are tottering. the craziest real estate boom in history has turned into bankruptcy, and the global free-trade formula that China has used to enrich itself is disintegrating. As our report explains, President Xi Jinping’s reaction is to redouble his efforts to restructure the Chinese economy. Utopianism, central planning, and obsession with security, this defines China’s ambition to dominate the industries of tomorrow. But his contradictions mean he will disappoint other Chinese and galvanize the wrath of the rest of the world.
Compared to 12 months ago, let alone previous years, the mood in China is gloomy. Although commercial production rebounded in March, consumers are depressed, deflation lurks, and many sellers are disillusioned. Behind this angst lie deeper fears about the situation in China. Vulnerabilities. It is expected to lose 20% of its workforce within 2050. It will take years to reach the crisis in the real estate sector, which accounts for a fifth of GDP. This would hurt cash-strapped local governments, which relied on land sales for profits and thriving real estate for growth. Relations with the United States are more stable, as evidenced by a phone call between Xi and President Joe Biden this week. But they are still fragile. Chinese officials are confident that the U. S. will further limit Chinese imports and penalize more Chinese companies, regardless of who wins the White House in November.
China’s reaction is a strategy built around what officials call “new productive forces. “This avoids the traditional direction of a large patronage stimulus to revive the economy (the kind of deception that the decadent West resorts to). Instead, Xi needs state strength to boost high-tech manufacturing, which will create high-productivity jobs, make China self-reliant, and protect it from U. S. aggression. China will move from metal and skyscrapers to a golden age of mass production of electric cars, batteries, biomanufacturing and a drone. -based on a “low-altitude economy”.
The scope of this plan is impressive. We estimate that annual investment in the “new productive forces” has reached $1. 6 trillion, one-fifth of all investment and double what it was five years ago in nominal terms. This equates to 43% of all business investment in the U. S. In the U. S. , 2023. La capacity of factories in some sectors could increase by more than 75% through 2030. Some of this investment will be made through world-class corporations eager to create value, but much of it will be driven through subsidies and implicit or particular directives from the state. Foreign corporations are welcome, many have already been burned in China. Xi’s ultimate purpose is to oppose the balance of power in the global economy. Not only will China escape its dependence on Western technology, but it will also nevertheless control much of the key intellectual assets in new industries and tax rents accordingly. Multinationals will come to China to learn, not teach.
However, Xi’s plan is fundamentally flawed. One of its flaws is that it neglects customers. Although its spending dwarfs assets and the new productive forces, it accounts for only 37% of GDP, well below global standards. Restoring confidence in the context of a housing crisis and thus boosting customer spending for stimulus measures. Encouraging customers to save less requires greater social security and health care, as well as reforms that open up public facilities to all urban immigrants. Xi’s reluctance to adopt this technique reflects his austere mentality. He hates the concept of bailing out speculative real estate corporations or giving gifts to citizens. Young people need to be less pampered and willing to “eat bitterness,” he said last year.
Another disadvantage is that weak domestic demand means that some of the new production will have to be exported. Unfortunately, the world has abandoned the flexible industry of the 2000s, in part because of China’s mercantilism. In reality, the U. S. will block complex imports from China, or those manufactured through Chinese corporations elsewhere. Europe is panicking at the thought of Chinese vehicle fleets destroying its automakers. Chinese officials say they can redirect their exports to the Global South. But if the trade progression of emerging countries is compromised through a new “China shock”, they too will be suspicious. China accounts for 31% of the world’s productive industry. In an era of protectionism, how far can this figure go?
The final flaw is Mr. M’s unrealistic view. Xi of the marketers, the dynamos of the last 30 years. Investment in politically advantaged sectors is soaring, but the underlying mechanism of capitalist risk-taking has been damaged. Many bosses complain about Mr. Xi and worry about purges or even arrest. Relative stock market valuations are at their lowest point in 25 years; Foreign corporations are cautious; There are signs of capital flight and emigration of tycoons. If marketers break free from their chains, innovation will suffer and resources will be wasted.
China may be like Japan in the 1990s, gripped by deflation and a housing crisis. Worse, his unbalanced style of expansion could simply destroy foreign trade. If this is the case, it could lead to even more geopolitical tensions. The United States and its allies do not deserve to rejoice in this scenario. If China stagnated and wasn’t happy, it may be even more belligerent than if it were on the rise.
If those flaws are obvious, why doesn’t China replace course?One explanation for why is that Xi is not listening. For much of the past 30 years, China has been open to outside perspectives on economic reform. Its technocrats studied the world’s most productive economies. and organized vigorous technical discussions. Under Xi’s centralist regime, economic experts have been sidelined and comments made through leaders have turned into flattery. The other explanation for why it is given through Xi is that national security now takes precedence over prosperity. China will have to get prepared for the war that awaits it with the United States, even if it has a price to pay. This is a profound change from the 1990s and its negative effects will be felt in China and around the world.
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This article appeared in the Executives segment of the print edition under the headline “China’s Risky Reset. “
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Published as early as September 1843 to engage in “a serious struggle between the intelligence that presses and an unworthy and timid one that hinders our progress. “