Is the Chinese Economy Drifting, Tanking or Changing?

As per usual, these downward trends are coupled with doubts about China’s real growth rate. This suspicion is both recurring and irrelevant. Not only are many statistics skewed, especially at a local level, but much of China’s GDP is in any case a result of constant stimulus fostered by all levels of government: augmented net government borrowing has been nearing 11% per year since 2016. Indeed, what matters most is the leeway the central government has to support the economy – especially if the latter does indeed go from drifting to tanking. China has key assets and advantages that it can mobilize: foreign currency reserves (with a small rebound since 2017 due to the fight against hot money outflow), a still slightly positive current account balance, huge household savings that are still largely captured by a state financial system practicing financial repression at the expense of savers, and a central government budget policy, which is under control (unlike local finances). These should be sufficient to dispel the recurring doomsday predictions of a crash.

Yet if these resources can be used in the short term to prop up the economy in front of a trade war, how would it play out in the long term for the Chinese economy? Would it result in more unsustainable projects, more financial and real estate speculation, more state-owned enterprises? The Chinese government is probably aware of this risk, as it has so far released only limited stimuli to the economy - essentially bonds, and more targeted credit for private companies.

Others have expressed concerns motivated by economic liberalism, essentially targeting the Party-state’s capture of financial resources and spending. In their view, the divide between public and private consumption, rather than the investment/consumption ratio, is now the main problem. According to another liberal economist, public expenditure has increased from 23% to 46% of GDP. Taxes of all kinds, such as employer-side payroll taxes for social insurance, have shot up. This can partly be explained by the fact that the Xi-Li team is adamant about actually enforcing policies that often used to remain theoretical in the past. Meanwhile, Total Factor Productivity (TFP) is stagnating, after decades of sectoral transfers and technology-based increases. The finance and real estate sectors, which are usually connected to officialdom, are its main beneficiaries. Some critics go as far as discussing the actual cost of a 20 million people workforce for the Chinese Communist Party (CCP), and do so at their own peril.

The overall case for liberal reform can be summed up as follows: China has the same GDP per capita as Brazil, but its household consumption is equivalent to Nigeria’s (according to World Bank statistics). A 32% employer-side payroll tax for social insurance is not so far off from… that of France. Local debt is estimated anywhere between 17 and 40 trillion renminbis – i.e. between 2.5 and 6 trillion dollars, or between 23% and 57% of China’s GDP. The new two-child policy is not sufficient to prevent a striking decline of the birth rate: China’s population will start decreasing before 2030. Cutting public and state enterprises employment, and more generally the public expenses that have a low multiplier effect, is as important in the medium term as a stimulus package is in the short term.

Their claim rests on the following 56789 slogan: "the private economy contributes more than 50% of tax revenues, more than 60% of GDP, more than 70% of technological innovation, more than 80% of urban employment, more than 90% of new jobs."In short, some are trying to highlight the fact that private firms are disproportionately penalized in China’s hybrid economy, with its dominant one-party-state and its credit crunch.

It may seem ludicrous to see the Chinese economy as overloaded with public and social expenditures, threatened by an epochal drop in its potential growth rate. China remains – along with Germany – the world’s leading exporter. It enjoys a current account surplus and fascinates other countries with the Belt & Road initiative, its own version of the Marshall Plan. Above all, its size and its strong state seem to protect it against any economic meltdown: China has survived socio-economic downturns in the past. A truce in the China-US trade conflict would immediately spark a psychological uptick and a growth rebound in 2019. Yet the measures advocated by liberal economists and partly condoned by some leaders are both a hedge against a possibly declining international environment, and a longer-term choice to pursue the marketization of the economy.
 
Could this be sufficient to end the move backwards of China’s economic policy, which has been ongoing in the past five years? This question, which has significant political implications, remains unanswered for now.