The Chinese economy and its development prospects

  • Jun 14 2022
  • by
  • Analyst AZA
The Chinese economy and its development prospects

The Chinese economy and its development prospects

China has become a major player in the global economy and its future economic performance could have a big impact on the trajectory of global economic growth. The Chinese Communist Party began to realize that it was better to have fifty-one percent control of something more than 100 percent control of a poor country, so they let the economy grow. They still have a very ambitious agenda, and if you look at their targets from 2020 to 2035, they want to double the size of their current GDP, which suggests a growth rate of around 4.7% per year. This means it should be growing faster than 5% now and likely slowing down as the economy grows, which is quite doable given its record. China also wants to become carbon neutral by 2035, and that will require it to get rid of its dependence on cheap energy like coal. The way they want to achieve this is not by weakening the economy, but by doubling their control over Ping Xi Jin.

They will promote public venture capital, which means that the state will choose the winners in the high-tech industry. It's a huge gamble, but it's what the party plans to do. The outlook on the Chinese economy is neither pessimistic nor optimistic. It's a mixed picture and too hasty to conclude that China's economic recovery has come to an end. If you look at the long-term outlook for the Chinese economy, they are still the world's largest emerging economy and there are still encouraging signs in the economy. For example, private consumption is expected to rise or more than double in the next ten years. However, all the real risks facing the Chinese economy are political. The first is geopolitics, which we are now seeing in the war in Ukraine, the second is national politics, and the third is at the political level.

It is useful to take a step back and look at where the Chinese economy is now from a broader historical and comparative perspective. If we judge its economy based on the headlines, then we will have a mental breakdown, because, on March 14, Chinese stocks experienced their biggest drop since 2008, and then the next day, their biggest jump since 2008. Thus, the overall picture is that China is now in a stage of development similar to that of America in the late 19th century. What the President's government is trying to do is call China into the CCP version of the progressive era. In principle, this would ensure fair and sustainable growth. The problem with the administration is that they have not yet figured out exactly how they can achieve this progressive era.

What we saw in the summer of 2001 is the government's attempt to solve the problems of capitalism, so they tried to introduce new top-down commands, and then a few months later, we found out that they went too far and their plan failed. They backfired and are now being corrected. By the end of 2021, you could see the President reflecting on his own mistake, and this year the State Council has taken a very conservative stance. It is very difficult to plan for today's high-income, high-skill, high-tech economy, and that is what China is trying to do. They must allow reforms and markets to continue or they will experience what the Japanese economy has experienced, but it will be different from how the Japanese economy slowed down because China has twenty percent of Japan's income and three times the lead.
China has the lowest educated workforce of any middle-income country. Seventy percent of their workforce has never attended high school, so skills are extremely low. For the economy to grow and prosper, they will have to educate their citizens, and this is forty years of work. The current president of China is a macro manager and doesn't have much economic flair. He does not surround himself with a large number of economically minded people and he does not have such a strong prime minister as other general secretaries in the past. The similarity between China today and America's golden age of the past is that they both have serious problems with corruption. Curbing corruption and fighting poverty have been two of Xi's signature policies since coming to power, so economic and political policies are intertwined and part of his campaign to fight golden age excess.

The difference between China today and America in the past is that America's progressive era included a lot of bottom-up reform, political activism, corruption-exposing journalism, independent prosecutors, and political reforms that destroyed the voting machines. Subsequently, the scope of the government was expanded through welfare reforms, but this was a set of democratic reforms. The Xi government is trying to bring about a progressive era without political reforms. They don't want to go down the path of creating a more vibrant civil society to oversee the government, instead he wants to try to use the strong hand of the state, using teams and campaigns, to solve the problems of capitalism. This is a rather curious experiment, because we have never before in the history of mankind seen a communist country try to solve the problems of capitalism. And that is what he was trying to do in the summer of 2021.

Xi realized that if you try this, investors will freak out and leave the markets, trillions of dollars could be wiped out of China's most valuable companies, so he backed off. Now they are evaluating how to properly solve the problems of capitalism. The political environment in China is a subset of national politics, and national politics is within geopolitics. What happens in Ukraine and the choices China makes will greatly influence the future of geopolitics, which will seep down and influence national politics and political approaches to a range of issues, including shared prosperity, redistribution, technology, and so on. Within the Chinese Communist Party, there is an ideological split between left and right. Left means more authoritarian status and nationalism, and the Chinese have always moved left and right.

The danger of what is happening in Ukraine is that if the dividing line in the world becomes such that China and Russia are on one side, and America and NATO are on the other, this will create a geopolitical environment for China to become even more leftist than ever. Under the current geopolitical conditions, the most rational thing for China would be to try to distance itself from Russia and realize that it must play in the big leagues with the Western world if it has a chance to compete with the West. They will need technology transfer from the West, not support from countries like North Korea and Russia.

The danger of what is happening in Ukraine is that if the dividing line in the world becomes such that China and Russia are on one side, and America and NATO are on the other, this will create a geopolitical environment for China to become even more leftist than ever.


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