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China’s centralized economic system is headed for trouble.

• Posted by freeamfva jack August 4, 2022 Filed in Other #China business latest news  14 views
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  China's centralized economic system is headed for trouble.

   

  Americans have legitimate concerns about China-and, with House Speaker Nancy Pelosi's visit to Taiwan sparking new tensions, those concerns are only growing-but what many fail to see is that Beijing is not the economic juggernaut it is often believed to be. On the contrary, China's economy has become increasingly fragile. To use a word heavily overworked these days, its problems are systemic.To get more china economy latest news, you can visit shine news official website.

  The root of the fears lies in China's impressive growth record. Some 40 years ago, China was one of the poorest and most backward countries in the world. But Deng Xiaoping's decision to open China to trade and foreign investment changed everything quickly. By the mid-1980s, the country's economy was growing at stupendous double-digit rates, in real terms. From then until 2010, real growth averaged just under 10 percent a year, outpacing just about every other economy in the world. (During that time, the United States saw 2.8 percent real growth a year.) China's rate of expansion decelerated after 2010 but still outdistanced almost every other economy, even considering the effects of Covid-19. The country is now the world's premier manufacturer and by some standards is already the world's largest trading nation. Its economy has climbed from a mere 3.2 percent of America's in 1980 to more than 70 percent today. Given this past performance, it is easy to understand why so many worry that China will soon blow past the United States to become the world's dominant economy.

  Perhaps even more distressing than China's meteoric rise is the questions it has raised about America's approach to economic organization. China's purposeful, centralized approach, some say, might even be superior to America's seemingly chaotic market-based system. For years, many journalists returned from China full of praise for how Beijing's centralized planning had marshalled the nation's intellectual, labor, and natural resources to create huge ports seemingly overnight and whole cities in what shortly before were farmer's fields. After the planners in Beijing decided that the country needed high-speed rail, Western observers soon marveled at the phalanxes of powerful locomotives zipping along extensive webs of track. The stark contrast with the budget battles and political wangling that goes on in the United States made China's focused purpose seem all the more unsettling.
  Impressive as this past is, China and its system are nonetheless poised for troubles. Partly, this has to do with the country's changing state of development. While the Chinese economy remained underdeveloped, planners had little trouble seeing the path ahead. All they needed to do was look at what the developed world had: roads, ports, rail links, and the construction of decent housing and reliable public utilities. Such obvious moves paid handsome economic returns. But as China's economy has advanced and just about caught up to the fully developed economies, the planners no longer have a clear model. Now, like any economy on the forefront of development, they must guess at future needs-a much harder task, and one that Beijing has not demonstrated it can do well.

  China's centralized plans have increasingly gone awry. Part of the problem is that the planners have had trouble adjusting to the new reality. Instead of embracing the growth of services and other more advanced activities, they have frequently doubled down on the kinds of early development projects that once paid such high dividends but are no longer as urgent. Misguided central direction has given China roads, bridges, and high-speed rail links to nowhere. After decades of emphasis on housing, the Ministry of Statistics now estimates that some 65 million housing units are unoccupied in China, fully 20 percent of the country's entire housing stock. A growing list of misguided projects has wasted resources and left a legacy of debt.

  The failure of the giant property developer Evergrande serves as a dramatic example. Much of the media attention has put the blame on the company's management. The managers are certainly not free of blame, but the bulk of the problem stems from an inappropriate government emphasis on residential construction, something that has become more and more obvious as other property companies find that they cannot service the debt they incurred following these government directives. At last count, the questionable debt already announced verges on some 10 percent of China's gross domestic product.

  It is at the cutting edge of development, where there are no models, that market-based systems show their advantages. Without central direction, markets rely on a great diversity of decisions by individuals and companies. Because each of these actors makes independent efforts to envision the unknown future, the economy effectively spreads its bets across a wide variety of efforts. Most fail. There is considerable waste. But without the focused marshalling of resources typical of Chinese-like central planning, that waste tends to happen on a smaller scale. Indeed, large-scale failures in a market-based system tend to occur only when some central authority nudges market participants in one direction, as when government encouragement to lend to those with lower credit scores on favorable terms brought on the financial crisis of 2008-09. Still more important in meeting future challenges is how a market system's great diversity of efforts increases the chance that one or more of these independent projects will indeed capture future needs and score big, both for those who devised it and for the whole economy. Of course, if the central planners manage to capture a future need, their success can be huge, but their focused effort makes that hit a lot less likely.

  We can see proof of the difference, albeit dimly, in the relative growth of debt in China. It is true that Beijing has kept the central government's debt burden light, certainly lighter than has Washington, but it is not this debt that finances the planners' projects. That burden falls instead on private firms, state owned enterprises (SOEs), and provincial governments, making the relevant debt measure the total of public and private debt. From 2010 to 2020, the most recent year for which complete data are available, this composite debt measure in China grew 23 percent per year-far faster than the nominal economy, which grew about 8 percent per year. Total debt rose from 180 percent of the nation's gross domestic product (GDP) in 2010 to almost 300 percent at last measure. This exploding debt overhang offers a rough estimate of the waste created by centralized mistakes. Compare it to the United States, where the equivalent debt aggregate grew about 5.6 percent a year. To be sure, that's faster than the 4 percent average growth of the nominal economy, but the gap between the two is much narrower than China's. The accumulated outstanding debt as a percent of U.S. GDP has risen just 14 percentage points during this time. Mistakes are apparent, but on a much smaller scale than China's centralized arrangements.

  For all the growing evidence of the centralized system's weaknesses, President Xi Jinping strangely has pushed for greater centralization. Already his central planners, showing a lack of sensitivity to China's more advanced state of development, have pushed the same sorts of infrastructure projects that once worked so well but are more questionable now. True, the planning authority has also focused on more advanced activities. The Made in China 2025 plan, for example, stresses electric vehicles, biotech, aerospace, and artificial intelligence. But China retains the manufacturing focus from the earliest days of its opening and continues to ignore the undeniable developmental trend toward services present in other advanced economies. And the concentration-though it certainly garners positive press-carries risks. Especially where technology is concerned, there is no telling when something new will render today's "next big thing" obsolete. Should something like this happen-and it is far from unlikely-the record shows that China's central planners will have a hard time changing course.