The Chinese economy has seen only slight growth over the past two years. The immediate causes, including the decline in the real estate sector and the “zero Covid” policy that also curbed private sector investment, are well known. However, the roots of the recession are systemic, and local companies and analysts, as well as governments and businesses around the world, are waiting to see what plans Beijing wants to put the economy on a more stable path. Not long ago, between 2010 and 2019, China's average annual GDP growth was 7.7%. But today, Beijing is unable to implement even basic policy reforms that would guarantee three to four percent growth.
China has had a trade surplus for more than two decades, but in 2022 and 2023, due to a slowdown in domestic demand, the country's exports exceeded its imports by a shocking $1.7 trillion. A year earlier, in 2021, President Xi Jinping declared that China had become a “moderately prosperous society.”
After more than two decades of strong investment-led growth, China now needs consumption-led growth. Additional returns on investment will be diminishing unless China can consume more at home. However, the opposite has happened in the past two years. Since Chinese companies cannot sell goods to domestic customers, excess production is exported abroad, they wrote Foreign affairs In their article published in the columns of Daniel H. Rosen and Logan Wright, A Rhodium group Founding owners.
The United States, the European Union, Japan, and other developed and developing countries fear this trend will continue – meaning China is preparing to export out of the economic slowdown. Beijing refuses to prioritize domestic demand, has publicly disparaged proposals to boost consumption and pledged to continue supporting industries that drive Chinese export growth. Such economic policies will lead to larger trade surpluses and foreign trade deficits, undermining foreign competition and threatening to destroy Western companies and unemployed Western workers.
The performance of the National People's Assembly, which ended on March 11 – which practically corresponds to our parliamentary session – increases rather than alleviates the legitimate concerns of foreign countries. With the economic situation requiring structural reforms, China's leaders have demonstrated a policy of delaying necessary changes and deepening the economy's external exposure.
To protect their economies from damage from cheap Chinese exports, governments will likely impose tariffs on Chinese goods produced below cost.
The escalation of trade conflicts is an inevitable consequence of China's current economic policies, and it is not limited to relations between China and advanced economies. Disagreements are already brewing between Beijing and several other members of the multilateral forum known as BRICS (Brazil, Russia, India, China and South Africa). Earlier this month, Brazil launched an investigation into Chinese steel imports. India has introduced anti-dumping regulations more than any other country in the world to limit imports from China. Recently, the South African Trade Commission completed an assessment of Chinese imports and confirmed that dumping had occurred. While developed and developing economies alike are taking measures against China's high export volume, Beijing appears to be simply ignoring the problem. As China's overproduction prompts foreign governments to take increasingly harsh countermeasures, neither the Chinese economy nor the global trading system can withstand the resulting confrontation.
Worrying trends
Not only does Beijing appear unwilling to address domestic economic imbalances, it may not even have the capacity to do so. This is particularly worrying. For decades, economists have been calling on China to move in the direction of boosting domestic consumption by addressing constraints on individual consumption, including insufficient household income. In order to restore balance to the local economy and reduce the country's trade surplus
In addition to slowing investment in real estate and infrastructure, Beijing must also encourage consumption.
However, China is currently in a weak position to plan such changes. The country collects only 14% of GDP from tax revenues (this figure increases by about 4 to 6 percentage points if other revenues, such as social security contributions are taken into account), which is well below the OECD average (34 %). Importantly, most of this revenue comes from value-added taxes on manufacturing and other corporate taxes, rather than from taxes on personal income and domestic consumption. In the current tax system, a shift to a consumption-based economy would lead to a significant decline in tax revenues, which would undermine Beijing's ability to implement policy.
The need for tax reform is clear; Xi himself acknowledged the problem in his policy platform announced in 2013. The fact that there is no such reform on the horizon is further evidence that Beijing is stepping on the gas and continuing with an outdated growth model. Every year, as in every country in the world, the IMF consults with Chinese officials on economic policy, makes recommendations, and then issues a report on how Beijing feels about the proposed changes.
In previous years, Chinese officials agreed with the International Monetary Fund on the need for financial reform. But this year, Beijing told the IMF that the tax system was “fundamentally built” and that Beijing's goals were to focus on high-quality development.
Instead of directly increasing budget revenues.
Not only does China reject specific reforms that would promote more sustainable trade relations with the rest of the world, it rejects the need for reforms at all.
China also faces constraints in modernizing its industrial policy. Even if Beijing gives in to foreign pressure and makes concerted efforts to limit investment in electric cars, batteries, solar panels and other industries, companies and factories that benefited from previous government support will not disappear. Moreover, the central government's campaign is unlikely to change local lending decisions, as local officials face expectations of maintaining employment levels and ensuring financial stability.
(Cover image: A Chinese street vendor depicting Chinese President Xi Jinping, “ In front of a “China Dream” sign on April 9, 2017 in Shijiazhuang, Hebei Province, China. (Photo: Kevin Fryer/Getty Images)
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