The answer is bad public policy. Both Economic Freedom of the World (China ranked #111) and the Index of Economic Freedom (China ranked #151) quantify the nation’s bad policies.
But I have a shortcut way of showing the bad news. When people manage to get rich in China, they often want to escape to countries with better policies and brighter futures.
That’s a proverbial canary in the coal mine.
That’s the bad news. The good news is that the Chinese government knows that changes are needed.
But now we are back to bad news. According to a story in today’s Washington Post by Christian Shepherd and Anna Fifield, the government is proposing more government intervention. Here are some excerpts.
China’s financial authorities unleashed…the most significant stimulus package since the pandemic struck almost five years ago. These measures…include cutting interest rates and supporting the beleaguered property and stock markets… Chinese authorities have been struggling to boost demand and stem a fall in prices amid widespread gloom about the economic outlook. …Recent data has revealed the Chinese economy is slowing faster than expected: Growth in industrial output and retail sales has slowed, while the stock market and investment in real estate took a nosedive. Unemployment is up, and deflation remains an urgent issue.
My two cents is that the so-called stimulus will fail because the Chinese government is trying to keep bubbles inflated.
In other words, the government made mistakes when it created stock and property bubbles, and now it is making mistakes by trying to keep the bubbles from deflating.
China needs more capitalism, not more intervention.
Let’s not look at some other recent articles.
A column in the New York Times last month, authored by Peter Beckley, has more bad news.
China’s boom, as we now know, was unsustainable. It was fueled in large part by years of inefficient stimulus spending at home, which has saddled China with a crushing debt hangover of its own. President Xi Jinping has stifled entrepreneurship, resisted reform and provoked a protectionist response from the United States. Since Mr. Xi took over a decade ago, Chinese economic growth has slowed significantly; some experts believe it is barely growing at all. …China is, of course, not solely responsible for weakness in the global economy, which has been buffeted by a pandemic, wars and trade tensions. But the country is making things worse at a delicate time.
Another article last month confirmed China’s unfortunate trajectory. Here are excerpts from Melissa Lawford’s article in the U.K.-based Telegraph.
Foreign investors have pulled a record £12bn out of China in an economic blow for President Xi Jinping. …It was…a massive swing from the net $10bn pumped into the country during the first three months of the year. …Foreign direct investment in China last turned negative in the autumn of 2023, when investors pulled out $12bn. Chinese companies also invested a record $71bn overseas between April and June, up 80pc year on year. Combined, this meant China suffered a record net outflow of $86bn in direct investment.
Let’s close with an article by Don Boudreaux about the failure of industrial policy.
Written for the American Institute for Economic Research, it includes some discussion of China’s misguided effort to subsidize electric vehicles.
The government in Beijing is keen on picking industrial ‘winners’ for that country, and one such chosen winner in recent years is the electric-vehicle industry. Using a variety of means, Chinese Communist Party officials and mandarins in Beijing have directed substantial resources into EV production… But as matters are developing, this ‘winner’ in China is turning into a loser. …This development is unsurprising. No matter how smart and clever are President Xi and his lieutenants, they cannot work miracles. If the Chinese have no comparative advantage at producing EVs on a scale as large as the one desired by these government officials, diverting resources on this scale into EV production is likely to backfire — as it’s now doing. …It’s impossible for officials in Beijing to know which Chinese industries their EV subsidies are destroying. It’s also impossible for them to know if the advantage that China will gain if and when it gets a comparative advantage at producing EVs will have been worth the cost. Indeed, because the money spent by government officials isn’t their own, and because these officials are not directed in their economic decisions by market prices, it’s almost certain that government-engineered economic outcomes are worse than would be the outcomes generated by freer markets.
By the way, Don’s article also explains that industrial policy in the United States is a big mistake. As a Canadian economist wisely observed, “Governments are not great at picking winners, but losers are great at picking governments.”
But let’s not digress.
Returning to China, I’ll conclude by calling attention to the four-part series I wrote while visiting China in July (see here, here, here, and here).
Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.
