2024 headlines were mixed. China’s GDP is growing, although the accurate rate is always a material of the discussion. Youth unemploymentwhich shocked policy makers
when it peaked at 21.3 percent in June 2023, it dropped to 17.6 percent. And the crisis in the property market finally seems to be easing, with transactions picking up after that of the government bold intervention for the support of the industry, which is directly and indirectly responsible one third of the Chinese economy.
And yet, the dynamism that characterized the Chinese economy over the past three decades seems to be missing. Consumption development is slow as anxious Chinese households maintain high savings rates. Likewise, foreign investor confidence is in “all time low.” As prices fall, fears of a deflationary spiral are rising, recalling the prolonged stagnation it caught Japan starting in the 1990s. In this context, some now argue that China’s economy has already peaked.
But such estimates are not particularly reliable. For starters, they mainly reflect the perspective of multinationals, interested in their own profits, or foreign businesses and governments that have an opposing view of Chinese development. This helps to explain why observers tend to focus on specific areas, such as luxury goods or electric vehicleswhich represent a small part of a vast and complex economy and are cut off from the challenges facing most of China’s 1.4 billion people and the government that runs their lives.
A second problem with much of the analysis of China’s economy is that it is not evidence-based. For example, international policymakers tend to fixate on consumption, which is low in China, even though the assumption that domestic consumption will boost growth is highly debatable. In fact, low consumption may reflect a wide range of problems, which would not automatically be solved by inducing Chinese people to consume more.
Similarly, the obsession with deflationary risks stems from the assumption that deflation contributes to poor economic performance. But researchers have struggled to find hard evidence that deflation causes economic downturns, rather than just being a symptom of them, or that deflationary monetary policies boost growth. And in China and Japandeflation and economic stagnation are more likely to be caused by other issues such as rapid aging of the population.
Confusion about the causes and effects of economic trends can lead to wrong and even counterproductive policy responses. Consider cuts in interest rates on savings deposits: the idea is that reducing the yield on savings will encourage Chinese households to save less and spend more. But most Chinese would only end up poorer. Add to this the declining value of real estate (the main alternative means of saving) and, far from spending more, Chinese households may be motivated to increase their savings. They may even think twice about having more children, exacerbating China’s deepening demographic crisis.
Another problem with assessments of China’s economic health is that they tend to treat China as a “normal” modern economy and assume that the policy tools familiar to Western economies are equally useful. But this ignores the fact that China has very different fundamentals. Lack of savings is an example. Another is land ownership: 55 percent of China total land area it is agricultural and either directly controlled by local governments or leased to farmers. Even the privately owned townhouse does not include the land on which it is built, which is owned by the local government and leased to the homeowner.
There are other limitations. In most countries, people can choose where they live based on considerations such as job opportunities and lifestyle preferences. In China, strict internal immigration controls make it very difficult for most people—except the wealthiest and most educated—to move to a different part of the country. In some areas of Shanghai, housing can only be sold to Chinese citizens with local residence permits under the hukou household registration system.
Furthermore, while students in most middle- and high-income countries are allowed to discover their talents and interests gradually and decide whether to apply to university after high school, Chinese students do not have this luxury and must invest and commit in academics much earlier in life due to the competitive and centralized education system. Such limitations – of which there are many more –dictate the economic life of ordinary Chinese people. They also limit overall GDP growth by undermining the efficient allocation of capital and labor.
Instead of using “normal” policy tools, such as interest rates and fiscal spending, to address low consumption or deflationary pressures, China needs fundamental reforms that address the structural issues underlying these problems. Allowing for a more market-driven distribution of land, money, and labor would give over a billion people the opportunity to be more productive and earn more money. This would lead to higher consumption and investment, increased confidence and, above all, a better quality of life.
Such reforms would be extremely complex, underscoring the need for careful planning and implementation. But getting them right would pay huge dividends. China has achieved remarkable growth over decades by transitioning from a command economy to a quasi-market-based system. Eliminate the rest legacies of the restrictive planned economy could lead to another wave of high growth.
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This article originally appeared on Project Syndicate.
