Challenges to the Chinese Economy: Economic Duality and

April 17, 2024

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China's 2023 economic performance was not completely satisfactory. Although it remained unique in the global economy with a GDP growth rate of over 5%, and accounted for more than 30% of the world's economic growth, the Chinese people were unsatisfied, as they felt that their income had not increased, and they had encountered certain microeconomic difficulties. These sentiments were related to the "de-risking" strategies of the Western world, and also to the structure of the Chinese economy.

China's GDP growth is robust, driven by the rapid development of new industries such as renewable energy production, electric vehicle manufacturing, and other emerging sectors. Despite this impressive growth, traditional fields in China are grappling with overcapacity issue and struggling with exports problems due to the fact that market competition drives down prices. As a result, corporate profits have dropped significantly. As debt repayment burdens have become heavier, many small and medium-sized enterprises are eager to deleverage.

China's development presents a dual structure, with emerging sectors leading the way while traditional ones falter. In light of this, China's economic recovery and future development cannot rely solely on the high-tech field. Other economic sectors are also important for a society's normal functioning. To use a different analogy, but with similar logic, the United States once believed that as long as it maintained advantage in the financial sector and with new technologies, the deindustrialization of other sectors wasn't a concern. However, as deindustrialization reached a threshold, it became clear that advanced technologies cannot be scaled up for mass production without the support of a robust manufacturing supply chain, and cannot be quickly transformed into products for mass consumption. In the same way, if an advanced manufacturing industry is highly developed, but the basic manufacturing industry is neglected and unable to meet consumer demands, then the society and the greater economy will be in trouble.

When China carried out reforms in the past, they always focused on the supply side, believing that if they compensated for shortcomings, the economy would naturally resume development by itself. However, this perception is rooted in China's experience with a shortage economy. Nowadays, the biggest threat the Chinese economy faces is overcapacity, and reforms need to target the demand side, because without sufficient demand, only stimulating the supply side cannot solve the problem. China has a population of over 1.4 billion, but only around 400 million people are in the middle class. If this group could be doubled, China would become the largest consumer market in the world. When that happens, difficulties in the traditional manufacturing sector will be alleviated. If we can assert that China's modern challenge lies on the demand side of the economy, resultant financial policies should also consider the plight of these traditional industries and provide them with the necessary support, so that people operating traditional industries can enter the middle class. At the same time, China should also encourage more investment in developing areas to make the rural population wealthier, thereby strengthening the purchasing power of the domestic consumer class.

When it comes to China's external economic challenges, it is evident that the "de-risking" strategies of Western countries present hurdles for the Chinese economy. These challenges stem from Western countries' traditional stratagem of assembling tactical alliances and creating competitive landscapes. The West is path-dependent and seeks to revive its influence in the post-Cold War era by "uniting" Northern coalitions that include EU nations and Japan, while simultaneously containing nations such as China, Russia, Iran, and North Korea.

Western countries face similar situations characterized by severe deindustrialization and excessive financial development that may have spillover effects into the development of other industries. Their development strategies are similar, as they all aim to restore the supply chain. However, they are competing rather than complementing each other. Instead of allowing different economies to exert their respective comparative advantages in accordance with market principles, the West seeks to create a coalition of different economies based on geopolitical considerations and ideological similarities. If this artificial coalition manages to survive, it would greatly reduce the efficiency of the participating economies. As a result, this coalition may lead to increased production costs in these economies, potentially impacting their competitiveness in the global market over time.

Although Western countries still have some technological advantages and seek to use this edge to "stop or delay China's rise," China is actually in a strong position relative to most Western countries. Taking the US sanctions against Huawei as an example, not only did the United States mobilize the bulk of its entire country to impose sanctions on Huawei, it also teamed up with other Western countries to cut the Chinese tech giant off from technologies including microchips. However, when Huawei launched the Mate 60 Pro using its own advanced chips, it sparked concerns among politicians in Western countries.

This change in basic assumptions is evident to all countries in the Global South. When the United States led other Western countries to impose comprehensive sanctions on Russia, no Southern country participated in the sanctions. They did not want to align themselves with Western countries. Through the Belt and Road Initiative, economic cooperation between China and Southern countries is constantly deepening. This cooperation is based on complementarity, allowing both parties to leverage their respective comparative advantages in cooperation. Economic cooperation between China and other Southern countries will accelerate in the future. The world economy has undergone a significant transformation, with the GDP of the BRICS countries already surpassing that of the G7 based on purchasing power parity. After the expansion, BRICS Plus will represent a more powerful and important role in the global economy, and will likely become more attractive to other Southern countries. The cooperation between BRICS Plus countries and other Southern countries is incrementally creating more wealth, while the United States' attempt to build alliances with other Western countries only allows wealth to flow within these countries. It is simply a redistribution among members. Thus, these two development models will likely follow a predictable trajectory for the near future.

 

(This is a transcribed speech that has been edited for clarity with the approval of the speaker.)

 

 

Please note: The above contents only represent the views of the author, and do not necessarily represent the views or positions of Taihe Institute.

 

This article is from the March issue of TI Observer (TIO), which examines the way to maintain growth momentum to achieve major development goals is explored in this issue. If you are interested in knowing more about the February issue, please click here:

http://www.taiheinstitute.org/Content/2024/03-29/1317317024.html

 

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