China and its economy operate very differently from liberal systems where stimulus packages are exceptional. It is therefore complicated to analyze it through the prism of Western terminologies, warns Michael Pettis, professor of finance at Peking University, for whom the Chinese economy is working thanks to a permanent stimulus plan.
Every year in March, the Chinese authorities announce and systematically realize the growth rate of the Gross Domestic Product for the coming year. In a liberal system, this would be much more complex.
The finance professor explains that China is experiencing two types of growth. The first, generated by consumption, export and investment, usually accounts for only a small portion. “Then there’s the growth that China needs for political reasons, which allows it to guarantee low unemployment and boost the economic activity of the different provinces. It’s a kind of artificially fixed GDP.”
Production instead of consumption
To reach the level of this fixed GDP, the government invests massively, for example in real estate or infrastructure to generate this famous growth. In liberal systems, economic activity generally depends on demand, the importance of which leads to wealth creation and an increase in the economy. The ultimate aim of the recovery plans is therefore to stimulate consumption.
In China, economic activity is created by investment itself. The government spends on growth. In a crisis, such as that of the coronavirus, China boosts production without worrying about demand. This model naturally leads to overproduction.
For example, the railway ministry declared two years ago that it was facing a major problem, says Michael Pettis. Now that every medium-sized city is connected to the rail network, it had become difficult to justify the investment in rail expansion, the engine of part of economic growth.
“If you were to announce in Switzerland that all places will be served by rail, that would be a triumph, not a problem. The fact that it is a problem in China underlines the real purpose of rail construction in this country: it is a way to generate more economic activity.”
Faced with the saturation in the country, the authorities are looking for alternatives, such as the new Silk Roads, which will allow the export of the infrastructure investment model that has run out in China, explains Jean-François Dufour, director of the consultancy “DCA Chine Analysis”.
“The other idea is to switch to digital and industry 2.0 to both avoid the saturation effect, but also to facilitate the transition to a more modern industry, which remains the main strategic objective of the Chinese authorities in the 2050 horizon.”
Three investment peaks
However, three interventions in China’s history qualify as recovery plans. After the Asian financial crisis of 1998, Beijing opened the floodgates further to limit the damage. In 2008, with the subprime crisis, the Communist Party released more than 580 billion francs, a debt China still cannot pay. In 2020, after the Covid-19 pandemic, more intervention was also needed.
Jean-François Dufour supports Michael Pettis’ formula according to which “there is a permanent recovery plan, of which these three events are peaks because the economic situation had to press the accelerator.”
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A huge debt
Concerns remain about the debt generated by this ongoing management of the economy. China’s exceeds its GDP by 300%. Despite the statements of the authorities, deleveraging has been suspended. Faced with tensions with the United States and the health crisis, the party’s priority is to ensure its short-term dominance.
No one, either in China or elsewhere, knows where the limits of the system are, believes Jean-François Dufour. “Knowing that any government that comes will immediately manage the crisis by passing its long-term management on to those who will follow, no one will be able to commit to the soundness of the Chinese economy by 2050.” Conversely, there have been predictions of an imminent collapse for 20 years, but it is not happening.”
China thus defies predictions and rules of the game, partly because no country has an interest in holding it accountable or seeing its economy collapse, which would have harmful international consequences. So the world is participating in the Chinese economic experiment, waiting to see where it will lead.
>> Listen to the episode about the Chinese economic system of the series “Recovery plans” in the program Tout un monde: