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Nouriel Roubini sees the shift back towards state capitalism in China as their biggest risk to the country's future growth and development

Economy / opinion
Nouriel Roubini sees the shift back towards state capitalism in China as their biggest risk to the country's future growth and development
China Development Forum

At this year’s China Development Forum (the highest-level annual meeting between senior Chinese policymakers and top CEOs, current and former policymakers, and academics like me), the discussion focused squarely on the risk of China falling into the dreaded “middle-income trap.” After all, few emerging economies have successfully joined the ranks of high-income countries.

Will China be an exception to this pattern? Following 30-plus years in which China achieved annual growth rates close to 10%, its economy has slowed sharply this decade. Even last year, with the strong rebound from the “zero-COVID” era, officially measured growth was only 5.2%. Worse, the International Monetary Fund estimates that China’s growth will fall to 3.4% per year by 2028, and, given its current policies, many analysts expect its potential growth rate to be only 3% by the end of this decade. If that happens, China will indeed find itself in the middle-income trap.

Moreover, China’s problems are structural, rather than cyclical. Among other factors, its slowdown is due to rapid aging, a busted real-estate bubble, a massive overhang of private and public debt (now close to 300% of GDP), and a shift from market-oriented reforms back toward state capitalism. Credit-fueled investment has grown excessive as state-owned banks lend to state-owned enterprises (SOEs) and local governments. At the same time, the government has been bashing the tech sector and other private enterprises, eroding business confidence and private investment.

In this new period of deglobalisation and protectionism, China appears to have hit the limits to export-led growth. The West’s geopolitically motivated technology sanctions are constraining the growth of its high-tech sectors and reducing inflows of foreign direct investment (FDI); and the combination of a high domestic household savings rate and low consumption rates (owing to weak social insurance and the low share of household income) is further hampering growth.

The old Chinese growth model is broken. Initially, China’s low (and thus internationally competitive) wages meant it could rely on light manufacturing and exports, before pursuing massive investments in infrastructure and real estate. Now, Chinese authorities are advocating high-quality growth based on technologically advanced manufacturing and exports (electric vehicles, solar panels, and other green- and high-tech products) led by financial incentives to already-bloated SOEs. But without a matching increase in domestic demand – especially private consumption – over-investment in these sectors will lead to over-capacity and dumping in global markets.

China’s excess supply (relative to domestic demand) is already producing deflationary pressures, heightening the risk of secular stagnation. When China was smaller and poorer, a sharp increase in its exports was manageable in global markets. But now that it is the world’s second-largest economy, any dumping of its excess capacity will be met by even more draconian tariffs and protectionism targeting Chinese goods.

China therefore needs a new growth model concentrated on domestic services – rather than goods – and private consumption. Services as a share of GDP are too low by global standards, and though Chinese policymakers continue to talk about boosting domestic demand, they seem unwilling to adopt the fiscal and other policies required to boost private consumption and reduce precautionary household savings. The situation demands larger pension benefits, greater health-care provision, unemployment insurance, permanent urban residency for rural migrant workers who currently lack access to public services, higher real (inflation-adjusted) wages, and measures to redistribute SOE profits to households so that they can spend more.

While China obviously needs to boost private-sector confidence and revive growth with a more sustainable economic model, it is not clear that Chinese leaders fully appreciate the challenges they face. While President Xi Jinping has overseen the move back to state capitalism over the last decade, Premier Li Qiang, a known market-oriented reformer, appears to have been sidelined. Li neither held the customary press conference following the recent National People’s Congress nor met with the full foreign delegation at the latest China Development Forum. Instead, Xi himself hosted a smaller delegation of foreign business leaders.

The most charitable interpretation of these signals is that Xi now realises he needs to engage the private sector and international multinational corporations to restore their confidence and boost FDI, private sector-led growth, and private consumption. Since Li is still around, perhaps he is pushing quietly for “opening-up and reforms,” while keeping a low profile to show deference to Xi.

But many observers have a more pessimistic interpretation. They note that after sidelining market-oriented technocrats such as Li, former Premier Li Keqiang, former People’s Bank of China Governor Yi Gang, advisers like Liu He and Wang Qishan, and a variety of financial regulators, Xi has created new party committees on economic and financial affairs that supersede government bodies. He has surrounded himself with advisers like He Lifeng, the vice premier for the economy, and Zheng Shanjie, the new head of the National Development and Reform Commission, who are sympathetic to the obsolete dogma of state capitalism.

Lofty statements and mantras about reforms and attracting foreign investment mean little. What matters are the actual policies that China pursues over the next year, which will show whether it can circumvent the middle-income trap and return to the path of more robust growth.

*Nouriel Roubini, Professor Emeritus of Economics at New York University’s Stern School of Business, is Chief Economist at Atlas Capital Team and the author of Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them (Little, Brown and Company, 2022). Copyright: Project Syndicate, 2024, published here with permission.

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The enigma that is China is, as the article opines, at the end of the current economic cycle. It was finally brought to a head by covid, but it was coming to an end before that, as many could plainly see. Their return to their socialist/communist roots under Xi, has given a very 'distracted west' time to get their own house in order, although, many would argue quite the opposite.

Having been through quite a few countries very early on in my own life journey, taught me one thing - the west is definitely the best. We're not perfect, don't get me wrong, but the ability to have [many] choices in one's life is far & away the better version of life than what most other countries call normal. When I say most other countries I'm talking about the other 150 plus that we never hear much about, rather than the 50 odd that we do here much about. This is lazy journalism but it's been going on forever.

What we are watching at home [inside those 50 odd countries] is the rise of a very ungrateful lot in positions of influence, teaching young people that we are bad & that everything we've done is bad & that they & their friends should get out there & shout & scream as loud as they can about just how bad the the big bad white boys are/have been & that the new world is green, very green & f.......g green.

Sadly, these immature ones [& I include their false teachers] have literally no idea how lucky they are, nor it seems, want to learn it. They just want to goof off & shout & scream as loud as they can to the well-organised & assembled, television cameras, which reinforces my view [& many others] how utterly stupid they look to the rest of the world.

To all those who were out & about this week, who think that NZ is part of the big bad boys club, I suggest a year in China or Russia as part of your ongoing education, where you cannot behave anything like you can here, without being shot, imprisoned, beaten up or worse, tortured.

And for those of you who don't believe me, I invite you to catch a plane to Vladivostok [& keep going west] & prove me wrong.