Why Chinese Economy Is Heading For Stagnation, Not Collapse
Nov 6, 2023
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Alicia García-Herrero, an economist specializing in China, discusses why China is facing structured deceleration and the deflationary trend it brings. She highlights the real estate bubble, demographics collapse, lack of economic productivity, and the impact of China's economy on the Belt and Road Initiative.
China is experiencing a structural deceleration in its economy, not a temporary blip or crisis, due to the exhaustion of previous rapid growth and misallocation of resources.
The real estate sector in China is contributing to its economic deceleration, although the impact is not as severe as in other countries with real estate crises, highlighting the difference in factors affecting the Chinese economy.
Deep dives
China's Economic Deceleration and Growth Potential
According to economist Alicia Garcia-Horero, China is experiencing a structural deceleration in its economy, not a temporary blip or crisis. The rapid growth of previous years has exhausted itself, which is a common phenomenon after reaching a certain level of development. While China was previously an outlier in terms of growth, it is now expected to be underwhelming compared to other countries. However, it is unlikely to become the worst-performing economy. By 2035, China's aging population will start to impact its growth, ultimately leading to growth rates similar to Japan's. This deceleration is not solely due to a particular crisis or demographics, but also the misallocation of resources and unproductive investment. The Chinese government is facing the challenge of maintaining growth levels amidst these factors.
The Impact of Real Estate and Excess Savings on China's Economy
The real estate sector in China has become a significant factor influencing economic growth. The slowdown in the sector, including falling housing prices and failing companies, is contributing to China's deceleration. While this has negative implications, such as deflation and a dampened economy, the impact is not as severe as in other countries that experienced real estate crises. Alicia Garcia-Horero highlights the difference between Spain's collapse due to external financing problems and China's situation, where households are sustaining their finances. Excess savings have increased, leading to a lack of consumption and a continued reliance on unproductive investment. As a result, China is facing challenges in channeling its savings into sectors that can boost productivity and sustain growth.
The Role of Policies, Innovation, and Immigration
China's strategy to achieve growth and counter its economic challenges relies heavily on innovation and technology. However, while China has invested significantly in research and development and holds many patents, productivity growth has not matched these investments. Alicia Garcia-Horero emphasizes the importance of necessary institutional reforms and creating conditions that promote productive innovation. In addition, immigration can be a crucial factor in sustaining growth. Countries with effective immigration policies, such as the United States, Canada, and Australia, could maintain growth rates by attracting skilled migrants who contribute to the economy. However, successful integration and alignment of skills with labor market needs are vital for immigration policies to yield the desired positive outcomes.
The Future of the Belt and Road Initiative (BRI) and China's Influence
The future of China's Belt and Road Initiative (BRI) faces challenges as funding diminishes and China withdraws from certain countries due to negative economic conditions. However, Alicia Garcia-Horero suggests that BRI's success should not be solely evaluated based on infrastructure investments or lending. The initiative has increasingly become a foreign policy tool, focusing on geopolitical goals and shaping a narrative of anti-colonialism and a global civilization initiative. While financial constraints may limit the economic impact of the BRI, its influence lies in promoting narratives and alternative norms that resonate with countries seeking alternatives to Western ideologies. Attention should be paid to China's efforts in setting global standards and its push for technological advancement and AI governance, including its potential implications on global dynamics.
Dmitri Alperovitch and guest co-host Patrick Gray interview Alicia García-Herrero, a Spanish-born economist based in the indo-Pacific and who specializes on China. They discussed why China has exhausted its growth potential and is now facing structured deceleration, which will be a major global deflationary trend. Other topics covered: why the real-estate bubble will likely not cause a dire crisis, why stimulus spending will not solve China's fundamental problems, why China has not yet experienced the full impact of its demographics collapse, why their economic productivity is not improving and the impact of their economy on the future of Belt and Road Initiative (BRI)
Preorder link for Dmitri's upcoming book "World on the Brink: How America Can Beat China in the Race for the Twenty-First Century": https://www.amazon.com/dp/B0CF1TKHY2
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