Since the reform and opening up, China’s economy has become highly decentralized. The central government grants a lot of autonomy to the local governments to drive local development, while it controls the behavior of the local governments and sets national priorities through controlling the promotion of the local officials. A main KPI is GDP numbers. It is no coincidence that Chinese officials are obsessed with raising GDP numbers by any means necessary.
The reckless over-investment in property market and manufacturing sector that China is facing today is the direct consequence of the lack of control, or planning, from the central government.
The clearest example of the lack of central planning on the technology front is the case of semi-conductor. When Taiwan’s TSMC broke through the 80nm barrier in 2004, China’s SMIC was only one year lagging behind. The gap has only grown larger since the past decade and now China is desperately trying to catch up.
To be clear, such laissez faire attitude has been central in driving innovation and the fierce competition allowed Chinese companies to leap and advance significantly faster than many other countries. However, the lack of planning also means they end up eating their own, as we are seeing happening today.
This is also why you see so much amazing development, productivity and technological advances in China since the past decade, but at the same time, we are working longer hours, the retirement age has gone up, the increase in productivity has not translated into wage growth and increase in purchasing power. And why China is having deflation today - because people are afraid of losing their jobs in the coming months and prefer to save. The post-Covid recovery just never happened, and the economic downturn has made everyone cautious about spending on unnecessary stuff. The term 消费降级 (consumption downgrade) has almost become an everyday terminology that everyone hears from the news, social media etc. None of this is a coincidence, and very much conforms to what we understand about an economy that adheres to neoclassical economics.
Just give people free money and they’ll spend it and heat up the economy.
Here’s the problem. The Chinese government has fully bought into the neoliberal ideology. In order to issue more currency, they have to earn export revenues first and put the foreign currencies on the asset side of the central bank balance sheet to offset the liability side when they issue more money. This is so they can reduce their deficit spending to less than 3% as advised by the IMF.
That’s why instead of the central government directly injecting new money to finance China’s infrastructure development, the local governments had to borrow massively, first through shadow banks (LGFVs), then after 2015, through issuing municipal bonds. The government is highly allergic to the concept of deficit spending. It’s all about fiscal responsibilities as taught by the Western academia. And why so many local governments are heavily in debt since Covid and the property market imploding.
The problem is the lack of central planning.
Since the reform and opening up, China’s economy has become highly decentralized. The central government grants a lot of autonomy to the local governments to drive local development, while it controls the behavior of the local governments and sets national priorities through controlling the promotion of the local officials. A main KPI is GDP numbers. It is no coincidence that Chinese officials are obsessed with raising GDP numbers by any means necessary.
The reckless over-investment in property market and manufacturing sector that China is facing today is the direct consequence of the lack of control, or planning, from the central government.
The clearest example of the lack of central planning on the technology front is the case of semi-conductor. When Taiwan’s TSMC broke through the 80nm barrier in 2004, China’s SMIC was only one year lagging behind. The gap has only grown larger since the past decade and now China is desperately trying to catch up.
To be clear, such laissez faire attitude has been central in driving innovation and the fierce competition allowed Chinese companies to leap and advance significantly faster than many other countries. However, the lack of planning also means they end up eating their own, as we are seeing happening today.
This is also why you see so much amazing development, productivity and technological advances in China since the past decade, but at the same time, we are working longer hours, the retirement age has gone up, the increase in productivity has not translated into wage growth and increase in purchasing power. And why China is having deflation today - because people are afraid of losing their jobs in the coming months and prefer to save. The post-Covid recovery just never happened, and the economic downturn has made everyone cautious about spending on unnecessary stuff. The term 消费降级 (consumption downgrade) has almost become an everyday terminology that everyone hears from the news, social media etc. None of this is a coincidence, and very much conforms to what we understand about an economy that adheres to neoclassical economics.
Here’s the problem. The Chinese government has fully bought into the neoliberal ideology. In order to issue more currency, they have to earn export revenues first and put the foreign currencies on the asset side of the central bank balance sheet to offset the liability side when they issue more money. This is so they can reduce their deficit spending to less than 3% as advised by the IMF.
That’s why instead of the central government directly injecting new money to finance China’s infrastructure development, the local governments had to borrow massively, first through shadow banks (LGFVs), then after 2015, through issuing municipal bonds. The government is highly allergic to the concept of deficit spending. It’s all about fiscal responsibilities as taught by the Western academia. And why so many local governments are heavily in debt since Covid and the property market imploding.