US-China trade war inactivity could lead to the ‘worst recession in recent Chinese history’, says scholar

China’s inability to “take the opportunity to do the right thing” during the trade war with the United States could cost the country dearly in form of a recession that “will become the worst in recent Chinese history”, according to a leading political economy scholar.

Minxin Pei, a professor of government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States, believes China’s strong control of the economy will eventually backfire.

“So far, it shows that China is not taking the opportunity to do the right thing,” said Pei. “China is willing to make some concessions by buying more goods, perhaps also improve intellectual property protection, but that does not improve China’s economy structurally.

“It is natural for economy to go through a boom or bust cycle … China has been trying to avoid this cycle so it has built a lot of distortion. There is no free lunch. Some day, some people will have to pay. History shows that the bust will come – the longer you delay, the bigger the cost it will be. The next recession will become the worst in recent Chinese history.”

Pei, the author of China’s Crony Capitalism: The Dynamics of Regime Decay, believes China is unable to seriously loosen its grip on economy or curtail the state sector because it is not prepared to make political changes.

“These economic changes will involve radical political changes. For example, if the Chinese government loosen its grip on the economy, the Communist Party will employ fewer people – millions of people may lose their jobs in the state-owned enterprises,” said Pei on the sidelines of last week’s Credit Suisse’s Asia Investment Conference in Hong Kong.

“We do not see signs that China is responding to the trade war in the way that is opening up more to the outside world, and even to its own entrepreneurs. The political logic of retaining political control is overwhelming.”

China, according to Pei, grasped the opportunity in late the 1990s when the country’s economic growth slowed significantly after the Asian financial crisis as it shut down inefficient state-owned enterprises and joined the World Trade Organisation. However, the case will be different this time, he said. In late the 1990s, China had a much younger demographic structure, labour costs were lower and debt level was also significantly less, while externally, the relationship with the US was much less hostile, explained Pei.