Noah Smith, a Substacker known for his sharp insights on economics, and Matt Klein, a contributor providing economic analysis of China, delve into the complexities of China's economy. They discuss the concept of 'Peak China' and draw fascinating parallels with Japan's economic history. The conversation touches on China's advancements in semiconductors and electric vehicles, the implications for global competition, and potential shifts in US-China relations under a new administration. Their engaging dialogue also includes a humorous detour into music's reflection on China's future.
China's economy is experiencing a slowdown due to limited development in the service sector and dominance of government-controlled industries, hindering consumer spending and income distribution.
China's relative economic growth rate has peaked, with demographic challenges and low productivity growth posing hurdles to sustained expansion, raising concerns about future industrial competitiveness and global economic weight.
China's peak and decline may last for an extended period, resembling the economic stories of other powers like the US, Germany, and Britain, with capital deepening and infrastructure projects leading to depreciation over time.
Deep dives
Chinese Economy: Slowing Growth and Pandemic Impact
The Chinese economy has been gradually slowing down over the past decade, with growth rates reaching a peak in 2010 and subsequently declining to around six to seven percent. The pandemic further disrupted the economy, with lockdowns and restrictions initially successful but eventually leading to mass protests. Despite the hope for a rebound and removal of restrictions, the economy has not seen the expected growth, with indicators like retail sales and industrial production performing poorly.
Structural Challenges and Ideological Hurdles
One of the challenges facing China's economy is the limited development of its service sector and the dominance of industries controlled by the government. This preference for state control and concentration of economic activity inhibits the growth of consumer spending and leads to skewed income distribution. Ideological debates within Chinese policymaking also shape economic decision-making, with concerns about overreliance on consumer demand and the belief that excessive government support will weaken productivity and work ethic.
Peak China and the Future Outlook
China's relative economic growth rate has peaked, and the country is unlikely to return to the double-digit growth levels of the past. Demographic challenges, such as an aging population and declining labor force, as well as low productivity growth, pose significant headwinds to sustained economic expansion. While China may continue to grow economically, concerns about its future industrial competitiveness and global economic weight are subject to debate. The semiconductor industry and the development of advanced technologies may become key areas of competition, while other sectors like automotive manufacturing may find equilibrium based on proximity to domestic markets.
China's peak and decline
China's peak and decline can last for a long time, similar to other powers like the US, Germany, and Britain. China's capital deepening and infrastructure projects may lead to depreciation over time. China's quick and cheap construction methods may result in faster depreciation compared to Japan's well-built structures. The real estate bubble and reliance on real estate for savings and local government financing in China resemble Japanification more closely than Japan's own experience. Overall, China's trajectory seems more similar to Japan's economic story.
US-China relations and the future
The future of US-China relations and the impact of a potential second Trump term are uncertain. While rhetoric might be hostile, previous actions suggest a more lenient stance towards China. Changes in personnel can significantly affect policy and international relationships. The potential lack of coordination among democratic countries could weaken their ability to project power and have implications for the global economy. Strategies for China and Russia to influence US policy may come into play. The song 'Wolf Totem' by The Hu is suggested as an analogy to the shift in US-China relations.
