China’s economy, long a source of global dynamism, is changing into a source of instability. Growth, still rapid by international standards, is gradually decelerating, as a nearly three-decade-old investment and export-led strategy delivers diminishing returns. Yet the Communist Party, beholden to — or composed of — interest groups that benefit from the status quo, has not shifted decisively toward more reliance on consumer demand and investment by private firms. Instead, Beijing continues to goose short-term growth with loans to bloated state-owned banks and industries.
One especially politically risky effect has been a flood of cheap Chinese steel exports — prompting retaliatory noises from Washington and worker protests in Europe and lending credibility to the campaign of Donald Trump. Financier George Soros has warned that China’s buildup of public and private debt may prove as unsustainable as the U.S. housing bubble whose burst helped cast the world into recession eight years ago.
For months, Chinese officials have played down the issues, while fumbling to assert their legendary but obviously exaggerated control over the economy. Now comes a lengthy interview on the front page of the official People’s Daily, in which an “authoritative” unnamed source validates pessimism about China’s situation. The debt buildup is like “growing a tree in the air,” the source said, and is creating “systemic financial risks” that could be “deadly.” The implication: Time is running out to speed structural reforms, and someone high up in official circles is being granted unusual space in the media to ring the alarm.
To be sure, such intriguing utterances have appeared before, inspiring hopes of a true policy shift, that then failed to pan out. Beijing remains deeply wedded to its state industries and infrastructure projects, including $770 billion worth (over three years) announced this week. At a minimum, though, the People’s Daily article hinted at some sort of internal discussion, which not only China but also the world desperately needs.
The United States can and should try to push China in the right direction, through both diplomacy and pressure, such as the use of legal powers it has within the World Trade Organization and under U.S. trade law. Example: China badly wants official designation as a “market economy” by the WTO, which, among other benefits for Beijing, would make it harder to pursue cases against China for steel dumping and other unfair practices. Washington and its European partners are slow-walking that decision now, and they should be.
The Clinton administration deepened economic engagement with China two decades ago on the premise that it would gradually mold China into a responsible participant in the rules-based global trading system. In hindsight, the United States underestimated China’s rulers’ nationalism and their overriding concern for political power. The irony is that the Chinese people would benefit more than anyone else from an economic overhaul — one geared more toward their consumer needs, which U.S. and other producers would be freer to meet in efficiency — boosting competition with Chinese firms. Reform could help prevent a “hard landing” for China, thus sparing the global economy turmoil, as well.
Indeed, if China wants to stave off a protectionist turn in the United States and Europe, getting its own house in order would be a good way to do it. The People’s Daily’s “authoritative” source seems to realize that. Does President Xi Jinping?