“Westerners are wrong about the real state of the Chinese economy” – L’Express

The liberalization and opening-up reforms initiated by Deng Xiaoping in 1978 propelled the Chinese economy, in the space of forty years, into dazzling growth, making China the second world power after the United States. But since Xi Jinping came to power in 2012 and the Covid-19 pandemic, its progress has been more timid, to the point that many Western specialists interpret this slowdown as a sign of a system running out of steam.

However, Nicholas R. Lardy, a leading expert on the Chinese economy at the Peterson Institute for International Economics, does not share this pessimism. According to him, many specialists tend to underestimate the real state of the Chinese economy. Although it has certainly moved away from what has made it successful since 1978, namely the liberalization of markets and the development of private companies to the detriment of state companies, the Middle Kingdom “still has potential significant which would allow it to catch up with the United States”, explains the author of The States Strikes Back: The End of Economic Reform in China? (2019).

L’Express: China announced last week growth of 5.3% for the first quarter of the year, exceeding all forecasts. Does this announcement surprise you?

Nicholas R. Lardy: Being more optimistic than most analysts on China, this growth rate is not a surprise to me. I actually think that the Chinese economy is much more resilient than what we think in the West.

This rate of economic growth is explained by the continued high level of consumption, which increased by 8.3% in the first quarter, surpassing the growth of GDP and disposable income. This figure proves that, contrary to what many analysts suggest, consumer confidence remains very high. Since the end of the pandemic, the growth of spending has exceeded that of income, and logically savings rates have fallen. All of this speaks to consumer optimism.

For these reasons, I do not subscribe to the idea that the Chinese economy is going through some sort of malaise.

How can we explain, therefore, the pessimism of Western analyzes on China’s economic trajectory since 2019?

It is difficult for me to give you a clear explanation. However, it seems that the theory of a lack of consumer confidence has become dominant among experts, and through repetition, has come to be accepted as obvious.

This theory is reinforced by the results of surveys and polls carried out in China, which indicate a significant decline in consumer confidence. Personally, I am very skeptical about the validity and interpretation of these surveys. In the United States for example, although many economic indicators are green, such as the low unemployment rate, the reduction in inflation or the increase in real wages, consumer confidence surveys give very negative results.

This discrepancy between the results of confidence surveys and the reality of the economic situation is explained by the fact that the negative responses of respondents in fact reflect dissatisfaction with the government rather than economic deterioration. This is why if we break down the responses, respondents who vote Republican are even more negative than the rest of the sample, because it is a way for them to demonstrate a rejection of the Biden administration.

Surveys on Chinese confidence suffer from the same flaws. A large part of the population may express their dissatisfaction with Xi Jinping’s handling of the pandemic through negative responses in polls, regardless of whether their personal economic situation has improved. Opinions expressed in surveys may be influenced by political considerations rather than economic facts.

However, you yourself say that China’s economic situation since the beginning of the 2010s has deteriorated compared to the previous three decades?

In 1978, Deng Xiaoping launched a major program of economic reforms, opening China to global markets and drastically reducing state intervention in the economy. Until around 2012, China’s private sector expanded very rapidly, far outpacing public investment. The marginal contribution of these companies to the economy was growing at an even faster rate, making a significant increase in productivity possible. This liberalization of the Chinese economy has helped make the country the economic and commercial power that it is today.

But after 2012, the pace of private investment growth began to decelerate, and total factor productivity [NDLR : part de la croissance économique qui n’est pas expliquée par l’augmentation du volume du capital et du travail] has weakened considerably.

Xi Jinping’s rise to power marked a change, with initial promises of ambitious reforms ultimately failing to materialize. Rather than continuing to do what had made China successful since the opening of its economy, the emphasis was placed on strengthening the public sector. Financial institutions increasingly favored lending to state-owned enterprises, although the latter were over-indebted and underproductive.

This is one of the reasons which explains the slowdown in Chinese growth since 2012. But I remain convinced that China still has significant potential which would allow it to catch up with the United States, provided that the Chinese leaders adopt liberal, market-oriented economic policies.

China does not seem to be moving in this direction…

Yes, you are certainly right. In any case, the Chinese government’s economic policy gives no indication of liberalization, on the contrary. Just look at the “government work report” presented at the National People’s Congress. There is nothing, or very little, on the reform of public enterprises, on the need to subject them to greater financial discipline…

I also observe that there are very few bankruptcies and very little merger and acquisition activity in China. This means that inefficient businesses do not disappear as they should. China must rid itself of interventionism that directs resources toward less efficient state-owned enterprises and requires increased public spending, as well as protectionist measures that limit competitiveness and innovation.

There are many obstacles to the implementation of such reforms: strong institutional resistance, short-term social consequences that the government is not capable of assuming… This partly explains why Xi Jinping supports a growth model. state-led, although China has never been more successful than when it abandoned this model.

Doesn’t China’s economic success also depend on its ability to liberalize and democratize politically?

I am not one of those who think that economic development requires a democratic and liberal political framework. Since 1978, we have clearly seen that the Chinese regime has succeeded in combining a market economy with an illiberal political regime. For this reason, I think that Westerners must abandon the idea that China could, in the medium term, liberalize itself politically.

The fact remains that Westerners are wrong about the real state of the Chinese economy. The United States and Europe must accept that China will play an increasingly important and decisive role in the global system. For the moment, the American position is to try by all means to slow down Chinese growth, by restricting its access to technology for example. I believe this approach is not only ineffective, but it takes us further away from implementing a realistic strategy to adapt to the rise of China as a major economic power.