Since the days of Deng Xiaoping, economic growth has mattered more than anything for China’s leaders. The 10 per cent annualised growth from 1980 to 2010 was seen as the antidote to the relative stasis of the Mao Zedong era, when the economy grew by only about 6 per cent. But under President Xi Jinping, the pendulum has swung back, with 6.6 per cent average growth from 2013 to 2021, closer to the trajectory under Mao than Deng.
Some of the slowdown was inevitable as small economies are better able than large ones to sustain rapid growth rates. As China’s economy
grew – from about 2 per cent of world GDP in 1980 at the time of the Deng take-off, to 15 per cent when Xi assumed power in 2012 – an arithmetic slowdown became only a matter of time. The surprise was how long it took to occur.
It is possible to quantify the foregone Chinese output from the slowdown. Had annual GDP growth remained on the 10 per cent trajectory under Xi rather than slowing by nearly 3.5 per cent since 2012, the Chinese economy today would be about 40 per cent larger.
Yet, China’s slowdown
is far more than an arithmetic event. Three powerful forces are also at work – a structural transformation of the economy, payback for past excesses and a profound shift in the ideological underpinnings of Chinese governance.
The structural explanation puts an optimistic spin on the slowdown by framing it as the by-product of a strategy to improve the quality of economic growth. By staying the course of hyper growth for too long, China became increasingly afflicted with the “ four uns
” of former premier Wen Jiabao – an economy that was unstable, unbalanced, uncoordinated and ultimately unsustainable.
Rebalancing was the only way out, especially if it led to greener, consumer-led and services-intensive growth that addressed the twin goals of balance and sustainability. If slower growth
was the price, it was well worth paying.
For a while, the structural slowdown appeared to be on track. Services-led growth boosted job creation, and urbanisation provided a powerful impetus to real incomes. Even though consumption still lagged because of a weak social safety net that spawned excess precautionary saving
, there was good reason to believe in the likelihood of a structural transformation.
But the case for a structural slowdown was not without its downside, especially a worrisome weakening in Chinese total factor productivity growth. There were also stiff demographic headwinds from the one-child policy
in effect between 1980 and 2015.
But there is good reason to believe China’s slowdown might also be more of an unavoidable payback for the excesses of the hyper-growth era. This line of reasoning was telegraphed in 2016 by a high-profile interview with an “authoritative person” published on the front page of the People’s Daily, which warned of the potential Japanisation of an increasingly debt-intensive, bubble-supported Chinese economy.
An excessively leveraged Chinese property sector
fits this script, as does the debt-fuelled expansion of state-owned enterprises since the 2008-09 global financial crisis. For China, this became the case for deleveraging, well worth the short-term cost to avoid the longer-term stagnation of Japan-like lost decades.
Finally, a major reversal in the ideological underpinnings of governance is also at play. As the revolutionary founder of a new Chinese state, Mao emphasised ideology over development. For Deng and his successors, it was the opposite. De-emphasis of ideology was necessary to boost economic growth through market-based “ reform and opening up
Then came Xi. Initially, there was hope his “Third Plenum Reforms” of 2013 would usher in a new era of strong economic performance. But the new ideological campaigns carried out under the general rubric of Xi Jinping Thought, including a regulatory clampdown
on once-dynamic internet platform companies and associated restrictions on online gaming
and private tutoring
, as well as a zero-Covid policy that has led to economically damaging lockdowns
, have all but dashed those hopes.
Equally important is Xi’s fixation on national rejuvenation, an outgrowth of his “ Chinese dream
” that has led to a more muscular Chinese foreign policy, in contrast to Deng’s “hide and bide” approach. Not by coincidence, this has fuelled the trade and tech wars with the United States, given rise to China’s “unlimited” partnership
with Russia and stoked tensions over Taiwan. All of these point to the unwinding of globalisation, which has benefited China more than any other country.
My mistake was giving China too much credit for devising a structural antidote to Wen’s “four uns”. That led me to place too much weight on the benign forces of rebalancing as a rationale for higher-quality economic growth. I worried a lot about Japanisation risks, but mainly as symptoms of a failed rebalancing. That led me to double down on rebalancing, arguing that structural transformation was China’s only real option.
My biggest mistake was to minimise the consequences of Xi Jinping Thought
. Xi’s focus on ideology speaks more to the resurrection of Mao’s legacy than continuity with the Deng era. Under Xi, China’s new era is more about the supremacy of the Communist Party, with an associated emphasis on power, control and ideological constraints on the economy.
Unlike the China of Mao, when there wasn’t much growth to sacrifice, there is more at stake today for the world’s second-largest economy. With the upcoming 20th Party Congress likely to usher in an unprecedented third five-year term for Xi, there is good reason to believe China’s growth sacrifice has only just begun.
Stephen S. Roach, a former chairman of Morgan Stanley Asia, is a faculty member at Yale University and the author of the forthcoming “Accidental Conflict: America, China, and the Clash of False Narratives”. Copyright: Project Syndicate