What is happening to the Chinese economy

China

Tobias ten Brink

Tobias ten Brink is Professor of Economics and Society in China and Head of the China Global Center at Jacobs University Bremen. His current research focuses on the socio-economic development in China and the international consequences of the rise of the People's Republic, with a focus on economic and social policy as well as the Chinese innovation system, based primarily on approaches from comparative and international political economy.

China's economy and population have grown steadily since the 1980s. To do this, China had to rebuild its economy. What were the driving forces behind this and how was the response to national socio-economic problems?

In a Chinese factory in Huai'an in Jiangsu Province, employees work on the production of printed circuit boards for smartphones. (& copy picture-alliance / dpa, Zhao Qirui / VCG, MAXPPP)

The Chinese economy is a paradox for many in the West. The People's Republic has been able to continuously increase the standard of living and its economic output since the 1980s, with a Communist Party practically steering the greatest economic boom in the history of modernity. In addition, the attempt at national development associated with China's historical heritage combines two aspects that were previously assigned to competing projects of modernity: that of marketization and that of the party state. In fact, this has produced a new type of society, dominated by capitalism, in which the party state relies on markets, but tries to control them more massively than other governments. [1]

Until the end of the 2000s, enthusiasm about the seemingly unlimited business potential that this economic dynamic promised dominated Western companies and economic politicians. In recent years, on the other hand, there has been a significant deterioration in China's international relations with Western countries, including a trade conflict with the USA and escalating hostilities during the corona crisis. One thing in particular is making the western power elites more and more nervous: China's economic model no longer functions solely as the world's workbench, as an inexpensive assembly and manufacturing facility for export products, and as a huge domestic market, on which, for example, German companies sell cars and machines, but strives for it increasingly even for competitive companies and technological competitiveness.

The phase of benevolent attracting foreign direct investments from the 1990s onwards against the background of technological backwardness is now overlaid by the goal of autonomous development promoted by the party state. This includes the large-scale attempt under President Xi Jinping to better control the economy and maintain or deepen close ties with companies. In recent years, technological upgrading and the long-term plan to master modern digital technologies have become more important - with some successes, as studies show. [2] One consequence of the improved technological performance of the domestic economy is also the decreasing demand for foreign investments. The preferential treatment granted to foreign companies until the end of the 2000s, especially tax exemptions, was reduced in this context.

This article highlights some of the driving forces behind the change in the Chinese economic model and shows how the party state reacts to internal socio-economic problems. Another focus is on the Chinese concern about falling into the "middle income trap", i.e. into a prolonged phase of stagnating economic output. This fear has driven considerable measures, especially in the area of ​​the further development of technologies and the qualification of workers, which enhanced China's competitiveness in the world economy - and aroused displeasure at the international level. The further development of the Chinese economy, so the perception of many in the West, endangers an existing, functioning order, namely the liberal, western-dominated world economy. In order to make this understandable, important features of Chinese capitalism are explained first, which serve to explain the historical growth spurt but also more recent growth problems.

The economic boom of the 2000s

Roughly simplified, the Chinese "economic miracle" can be divided into two phases: From the 1980s, the beginning of the reform and opening up of the country, to the turn of the millennium, China benefited enormously from productivity developments that went hand in hand with far-reaching industrialization. Another advantage of the catching up development was the almost inexhaustible supply of inexpensive workers. In addition, China benefited from the phase of liberal globalization: Favorable economic constellations made it possible to orient parts of the economy towards export. A shift in the center of global value creation towards East Asia from the 1980s onwards transformed mainland China into a strategic location on what was once the periphery. A prerequisite for this was technological advances in terms of communication within and between companies, which improved the options for outsourcing relevant work processes. Large western corporations were able to delegate parts of complex production processes to subcontractors in underdeveloped regions. For example, the giant Taiwanese contract manufacturer Foxconn, which assembles smartphones and laptops for Apple, among others, on the Chinese mainland became famous. Western industrial companies thus promoted the industrialization of China. In addition, the authoritarian political administration of the People's Republic contributed to catching-up development by resolutely promoting markets and local businesses.

China's capitalism

Since the 2000s, central economic institutions have come together to form a variant of state-permeated capitalism that is successful according to quantitative economic efficiency criteria. [3] The constant reinvestment of capital and the goal of profit maximization prevailed in the People's Republic against the background of a shift in control capacities from state authorities to the management of countless companies. A mixed economy governs these relationships. While reformed state-owned enterprises continue to dominate important sectors of the economy such as heavy industry, the transport and energy sectors, state-affiliated private and mixed enterprises have gained in importance, particularly at sub-national levels.

A peculiarity of this economic model lies in the importance of private-public growth or upgrading coalitions: In contrast to earlier forms of state capitalism, the state here does not primarily act as a centrally controlling unit. State influence is also and especially based on close local coalitions, typically consisting of representatives of local governments and local companies. The local growth coalitions are in a competition for locations with other local alliances and outbid each other in attracting and investing industrial and related infrastructural investments. [4] This established a setting in which local political decision-makers developed economic behavior similar to private owners. Due to the permanent competition between the local coalitions, this coordination mechanism did not primarily lead to the deprivation of pensions or corruption, which hindered development, but had an economically productive effect. Despite all the diversity of industrial production regimes in different parts of the country, these growth coalitions, which are committed to GDP fetishism and which also do not provide any participation rights for the working population, have proven to be a beneficial basis for the development path, which is strongly based on industrial value creation processes.

Long-term strategies through special financial conditions

In addition to the growth coalitions, other institutional features promoted a comparatively coherent economic model. This includes productive cross-effects between the spheres of corporate control and investment financing: Large companies are controlled to a high degree by national, often party-state actors, while the influence of transnational investors on these companies is low. Complementary to this is an outstanding role for nationally controlled credit institutions, which make a considerable contribution to corporate financing. The investment finance secured by national credit institutions provides large national corporations, including many state-owned corporations, ample and special conditions with funding, which enables them to pursue relatively secure medium to long-term strategies. [5]

All in all, large Chinese companies could rely not only on having preferred in-country channels for investment finance, but also on the fact that control of their companies was in a few, well-connected local hands. They also trusted that their good connections to government agencies ensure that foreign companies bring technological innovations into the country - as part of "technology transfer for market access" swap deals - but are prevented by appropriate restrictions from exploiting their development advantages and thus local ones To oust companies. [6] In addition, Chinese corporations and local authorities tried to organize a technology transfer, for example through joint ventures (JV), but not always very successfully. A classic example are international automobile manufacturers who, since the 1980s, have only been allowed to set up production in China together with a JV partner. [7]

Declining economic growth and new challenges

After the global crisis of 2008/09 and the related major economic stimulus programs by the Chinese government, it was still possible to achieve relatively high growth rates in gross domestic product in an international comparison. But the values ​​of the 2000s were no longer reached. Against this background, challenges for the economic model were thematized in both Chinese and Western research, with very heterogeneous findings. Some authors expect a significant destabilization of the economic model, for example through over-indebtedness. [8] Others, on the other hand, cite reasons for fundamentally maintaining economic performance. [9] In contrast, the Chinese government presents the lower growth rates as the "new normal" of more leisurely but higher quality growth.

Three of the central challenges for the economic model can be outlined as follows: First, there was a destabilization of the investment finance system. Examples of this are problems of overcapacity and over-indebtedness, which can only be controlled to a limited extent. Economic scandals in northeastern Liaoning Province (including trading in political mandates and falsifying official statistics), which are linked to the abundant financial resources available to large companies, can serve as an example. The "supply-side structural reforms" directed against this downside of the system were aimed at eliminating the problems of industrial overcapacity and over-indebtedness of companies and the indebtedness of associated local governments from the end of 2015. However, the measures to reduce indebtedness by companies and local governments do not seem to be taking effect everywhere. Industrial metropolises with particularly high debt burdens such as Shenyang and Wuhan were therefore supported by funds from the central government.

Loss of autonomy and anti-corruption measures under Xi Jinping

The associated recentralization of power under Xi Jinping, aimed at strengthening the party apparatus, should be understood in this context as an attempt to eliminate these instabilities. The party power in politics and business has been strengthened since 2013 through the rebuilding or upgrading of existing structures, for example through the Central Leadership Group for the comprehensive deepening of the reforms. [11] In addition, much to the displeasure of the West, state companies in particular are supported and private companies are more strictly regulated, even giants like the Internet company Alibaba. Whether the goal of greater socio-economic stability can be achieved in this way is questionable, because at the same time, a declining willingness to invest at the local level was observed in the years before the corona crisis.

Second, this is related to another challenge: the government's major anti-corruption campaigns since 2013. [12] Rampant corruption in the 2010s was an expression of a legitimation crisis for the Communist Party. In the Chinese discussion, the phenomenon of "favoritism" (renren weiqin) Great attention, which shook confidence in the efficiency of the party-state organization. The fight against this very corruption, which serves to stabilize the party state, at the same time destabilized the non-liberal coordination mechanism of the local growth coalitions, which up to now have been able to operate almost unhindered. In recent years, this has resulted in self-restraint and a loss of autonomy in local administrations. It is unlikely that this will permanently paralyze the growth coalitions. However, this development has worsened the business climate, which is also disadvantageous for many foreign companies that are active in China or want to become one.

Fear of the "middle income trap"

Thirdly, the Chinese power elite sees itself threatened by the problem of the so-called "middle income trap" [13]: the strong growth in China has been accompanied by rising wages and a higher standard of living - from 1998 to 2010 real wages for industrial workers rose annually by about 10%. [14] But this also increased production costs, which made competitiveness less competitive. This results in the following scenario: The national economy can no longer keep up with the low-wage countries, but is also not yet sufficiently developed to compete with the most highly developed industrialized countries in terms of the technological quality of the products. Economic stagnation would be the result. Such a situation has already brought a number of other economies into the same situation, including emerging markets such as Brazil and Mexico. The government is therefore trying more vigorously than ever before to circumvent the "middle-income trap" through upgrading measures and to make the leap to an industrialized nation with high average incomes. Progress in productivity is primarily sought through technological development. Extensive programs in the field of technology development such as the "Made in China 2025" strategy were the result, supplemented by increasing expenditure on education. [15]

The result: In many areas such as entertainment electronics, internet technology, artificial intelligence or electric cars, Chinese companies have overcome their technological backwardness through a high learning pace. The spectrum in which China can still benefit from Western investments and the associated technology imports is narrowing. In other words, the Chinese economy has advanced from the world's extended workbench to a serious competitor. [16]

outlook

After the phase of extremely high growth in the 2000s, the Chinese economic model is confronted with a number of challenges - even before the corona crisis. [17] The economic policy reaction to this, especially since the 2010s: a much tougher pace by the Chinese government in attempting economic regulation and resolute upgrading activities to initiate the transition to an innovation-driven development phase, also and especially to avoid the trap of middle incomes. It is still too early to provide a final assessment of the change in the Chinese economic model. But one thing is certain: what is comparatively easy to legitimize within the country meets with rejection in the West, if not with active resistance.

Viewed objectively, China, as an economic power that was catching up, was able to benefit from the developmental lead of the dominant economies, similar to other economies in earlier development phases. Until 2008, conflicts between China and the western economies - over trade imbalances, exchange rates, violations of industrial property rights, etc. - could be limited. But not in the long run, because the Chinese economic development brings with it a shift in forces: It is true that many Chinese companies are still integrated as subordinate parts in the transnational production networks of large western companies, and the latter also generate the majority of the profits.But companies in the developed economies have created new competitors over the last few decades as they have tried to profit from the growth in mainland China.

It should therefore not come as a surprise that Chinese companies or the political power elites closely associated with them try in various ways to reduce their former, subordinate importance as the workbench of the world and become more competitive in certain areas such as digital technologies. All of this leads to a new, more conflictual situation - whether deliberately brought about by the Chinese government, as many in the West think, or not.

The fact that the Chinese economy is the first of the major economies to pick up speed again in the wake of the corona crisis does not reduce the potential for conflict. The upswing in China has recently spurred exports of electronic products, for example. It is foreseeable that Western states will not allow the financial resources from economic stimulus packages, with which they actually want to increase domestic demand, to be transferred indefinitely to the People's Republic. In this respect, it is also questionable whether the smooth transition to a more harmonious relationship desired by the Chinese government will really take place under the new US President Biden.