China’s Economic Mirage: From rapid growth to decline amidst debt and hegemony

China has come a long way on the economic front since it began wide and deep reforms during the presidential tenure of Deng Xiaoping. It opened its floodgates to US and European investment for creating mega capacity factories to churn out a variety of manufactured goods at purportedly very low labour cost. The investing countries were taken in by the glib and clever promises made by Deng Xiaoping which induced the investors to make big investments for greater gains through global sale of the manufactured goods. But little did they realise at that time that the Chinese would stealthily absorb their patented technologies by carrying out minor modifications through technical twists.

The Chinese established huge production units and a large number of industrial parks dedicated to specific products with electricity, water and many raw materials available at subsidised rates. The cost of the subsidies was borne by the government. But more than this, the manufactured products were sold in the global market at discounted rates to secure multiple orders from all over and the cost of this discounting was also borne by the government. The government met the cost of such subsidies and discounting by humongous borrowing from banks. Thus the grand economic progress of China from 1990 to  2010 was financed by internal and external debt. And heavily debt financed economic growth is anything but sustainable. The growth model was export oriented and was an unhealthy, unviable admixture of capitalist system and communist governance framework, the former foisted on the latter.

The inevitable had to happen. The model lasted for a few years recording a blistering economic growth rate of 10 to 12 per cent per annum, particularly between 2002 and 2012 and catapulted China to the status of the second largest economy and then began stagnation and a discernible decline of its economy after 2021. The current condition of the Chinese economy is characterised by real estate sector bust, huge capacity underutilisation of factories, energy shortage, rising unemployment touching 20 per cent on the urban side and falling economic growth rate. The government’s strategic step to restrict inflation by avoiding printing of additional paper currency caused deep distress among the population due to limited cash available with people. This cash strapped condition of people was accentuated by the communist government imposing limits on maintainable bank balance of account holders thus eroding their spending power.

What does this forebode for the Chinese economy? 

China did become the virtual factory of the world and built seemingly permanent global supply chains for a large number of products. But its rising economic power was attended by increasing hegemonic tendencies and actions. Through the Belt and Roads Initiative, it loaned money to many countries only to later take over their assets due to default in debt repayment and even establish its small military bases at their ports. This led to strained political relationships with many such countries. China’s dubious role in the generation and spread of Covid-19 pandemic further stained its earlier image as a friendly trading country. Post Covid, China no longer held this image and many countries, notably India, Australia and Italy clamped trade restrictions on some Chinese products. Many countries including Italy withdrew from the BRI. China today holds the image of a land grabbing, hegemonic nation whose tacit trading tools and tactics have tarnished its earlier positive image of a friendly trading partner of the world. It stands badly exposed. The result of this is seen in protectionism policies across the globe— imposition of import tariffs by many countries and development of local manufacturing facilities.

China’s economic future is anything but bright because of the following reasons

1. Contracting population in the productive age group due to strict implementation of one child policy for 3 decades
2. Debt based explosive economic growth which is contradictory to natural economic principles and is unsustainable. Failure of many banking institutions is a grim reality of present China.
3. Global recession caused by wars or war like situations at many places across the globe.
4. Increasing public resentment against the repressive Communist regime leading to denting of individual entrepreneurship. Many Chinese wealthy businessmen are seen to be relocating out of China.
5. Recent deflation in the economy manifested in falling prices of goods and services. This is evidenced by the declining Consumer Price Index. This indicates that factories are producing goods to increase their falling capacity utilisation but consumers don’t have enough money to buy them.
6. Huge investment of money is locked up in big infrastructure projects like bullet trains and other civil infrastructure items which are yielding poor returns because of people’s declining spending power.

China’s economic miracle was and had to be short lived because of undemocratic, people unfriendly policies pursued by the Communist regime and the situation getting exacerbated with the regime’s hegemonic designs and actions in the international space. Things have turned out to be bad both on external and internal fronts of the Chinese economy. These are expected to remain so unless there come wide attitudinal, policy and structural changes in the regime which seems quite unlikely.