May 28, 2024

China’s Economy Is Not Exceptional

In the late 1990s, Keyu Jin got a taste of what she calls the West’s “simplistic understanding of life in China” while attending high school in New York. She had recently arrived from China, and classmates pestered her with questions: “When will China become a democracy?” “How do you wake up in the morning knowing that you can’t elect your own president?”

Years later, Jin—now an economics professor at the London School of Economics—set out to correct Western stereotypes of China in her 2023 book, The New China Playbook: Beyond Socialism and Capitalism.

In the months since the book’s publication, media outlets have eagerly sought out Jin for her takes on China. The New York Times’ Peter Coy compared her book to “reading Baudelaire in the original French or Mad magazine in the original English” (never mind that almost the entire book draws from Western scholarship published in English about China).

Jin’s book gets many things right. Her rebuttal of the Western notion that China is a mere technological copycat that mimics the West is right on target. She also offers a fascinating portrayal of elite urban Chinese millennials like herself—a generation that grew up surrounded not by siblings but by prosperity and a fusion of modern aspirations and traditional Confucian values.

Yet while parts of Jin’s book are measured—for instance, she writes that the China model is still “trial and error”—the overall tone of The New China Playbook is mistakenly celebratory. In her account, China’s unique system of political economy has powered its magnificent growth. This is deeply disconnected with China’s current reality of a reeling economy, a tanking stock market, and massive capital flight out of the country. In fact, many of China’s problems today are a direct result of the “China playbook” for which Jin so emphatically advocates.

A boy walks in the cold.
A boy walks in the cold.

Wang Fuman walks on a road in Ludian in China’s southwestern Yunnan province on Jan. 12, 2018. A viral photo of 8-year-old Wang with ice-encrusted hair after his hourlong walk to school in freezing temperatures stirred debate about the impact of poverty on children in rural regions. AFP via Getty Images

Any serious book on China’s growth should grapple with the validity of its official GDP data. In 2023, China reported 5.2 percent in GDP growth—a performance flagrantly inconsistent with its high unemployment rate, falling exports, and failing real estate sector. At the lower end of outside analysis, an estimate from Rhodium Group puts the true growth rate at 1.5 percent.

Jin only mentions the data issue in passing. Although she notes that provincial GDP data is often overstated, she still characterizes China’s growth as “miraculous.” Even former Chinese Premier Li Keqiang has questioned the official figures. Li once reportedly stated that he did not trust China’s GDP data, and in 2020, he disclosed that around 40 percent of the population lived on a monthly income of $141, essentially refuting his own government’s pronouncement that it had eliminated absolute poverty.

Li’s skepticism is supported by a wealth of evidence of data manipulations in China. A 2018 paper by Luis R. Martinez, a public policy professor at the University of Chicago, showed that China had one of the largest gaps between reported GDP and estimated economic activities among the 179 countries examined. From 1992 to 2006, Martinez found, there was an “exaggeration bias” of 29 percent in China’s official growth rate. Another study, using tax payments and other data, estimated that between 2008 and 2016, the country’s GDP growth rate was likely overstated by 1.7 percentage points on average.

This is not to say China’s economic achievements are not real. Even if lower than the official figures, alternative estimates of Chinese growth are still incredibly impressive. Yet they would put China in the neighborhood of other East Asian economies, such as post-World War II Japan, South Korea, and Taiwan.

The data issue is not a mere technicality; it undermines the heart of Jin’s argument. She posits that China’s growth is so spectacular that we need to invent a brand-new paradigm to understand it. The Chinese system, she argues, relies on a legacy of Confucianism, its singular ability to harness government power, and state control of finance. That system, she proclaims, is “beyond socialism and capitalism.” Assuming she does not mean communism, which is beyond socialism and capitalism according to Karl Marx, this is a bold and revolutionary thesis.

But if China’s achievement is comparable to other successful economies, as independent data suggests, a less heroic explanation would suffice. China has possessed abundant state power and Confucianism for thousands of years and state ownership since 1949, but it only began to grow after 1978. What changed is that Beijing introduced market reforms, encouraged entrepreneurship, and opened up to foreign capital and trade—topics that receive only sporadic attention in Jin’s book.

Jin attributes China’s economic growth to what she calls the “mayor economy.” In this system, local governments control major resources and market opportunities, but they are just as economically rational and motivated to support efficient projects as any private investor. For an academic economist, this claim is startling. It is directly contradicted by abundant evidence in existing economics literature that China’s financial system favors state-owned enterprises at the expense of private firms and that these enterprises are less productive than private firms.

A man reads a newspaper.
A man reads a newspaper.

A man reads a newspaper bearing the headline “China’s GDP grows at 6.9 percent” while walking along a street in Beijing on Jan.19, 2016. WANG ZHAO/AFP via Getty Images

If we compare different regions within China, the evidence is clear: Regions that are closest to Jin’s state-centric playbook, such as those in China’s northeast, are less productive; regions that are more market-driven, such as Guangdong and Zhejiang, are more dynamic and efficient. Jin’s mayor economy has misallocated capital.

Another massive cost, hidden from those exposed only to China’s glittery urban skylines and infrastructure, is the staggering challenge rural China faces in education and health care. As a 2017 headline in Science magazine states, “One in three Chinese children faces an education apocalypse.”

In their 2020 book, Invisible China, development economist Scott Rozelle and researcher Natalie Hell paint an alarming picture of the state of rural China. Based on detailed survey data and years of careful field research, their team “found that over half of rural babies are undernourished, and more than half of toddlers are so developmentally delayed that their IQs may never exceed 90,” they write. Many rural children also suffer from intestinal worms and vision problems. As Rozelle told Science, “This is the biggest problem China is facing that nobody’s ever heard about.”

This isn’t a secret to the government. In 2007, the state-owned China Daily published an article with the headline: “Ghost of illiteracy returns to haunt country.” Based on Education Ministry data, the number of illiterate Chinese people increased by more than 30 million between 2000 and 2005. The state, pervasive everywhere else, has not been nearly as active in tackling these issues.

This is the fundamental problem of Jin’s mayor economy: The mayors, while busy picking and choosing business projects, neglect to provide and strengthen essential public goods such as education and health care, a duty only a government is responsible for. China is not at all “beyond socialism and capitalism.” Rural China is stuck in laissez-faire ways that leave citizens to fend for themselves.

This China appears invisible to Jin, whose book does not even nod at the problem. Instead, Jin reserves her strongest critique of the Chinese system for its paternalistic style of financial management. The state, she writes, bails out investors and shields them from market risks, undermining normal market functioning. Although she argues that this is misguided, she cushions her critique by characterizing the policy as an understandable byproduct of China’s attempts to manage risks.

Paternalism is the least of the system’s problems. Jin ignores the prevalence of insider trading and debilitating corruption in China’s regulatory process. Nor does she address the far larger issue that China’s state-owned banks have clouded its growth prospects by fueling a deeply troubled real estate sector, funding inefficient state-owned enterprises, and putting China’s debt-to-GDP ratio close to 300 percent, one of the highest among major economies.

Chinese savers and investors would be fortunate if the state were truly paternalistic. In reality, the state has long permitted or even encouraged risk-taking. For example, the peer-to-peer lending platforms, which first launched in 2007 and ended disastrously for the life savings of millions of people, initially enjoyed tacit government support; some were even affiliated with state-owned enterprises. In 2015, the mouthpiece of the Chinese Communist Party (CCP), the People’s Daily, repeatedly talked up the stock market and exhorted citizens to pour their money into it just before it crashed.

Today, the Chinese government is more powerful than ever, and President Xi Jinping’s “Chinese dream” is an unabashed assertion of Confucianism. China is closer to Jin’s playbook than at any time in recent history, and this is now the single biggest risk factor facing its economy.

Under Xi’s powerful leadership, China’s once vibrant private sector is struggling. The CCP has established branches in private enterprises; allocated more and more capital to state-affiliated firms rather than the private sector; cracked down on Alibaba and other crown jewels of China’s high-tech sector; dismantled a sizable private education sector; and in 2022 put the country under draconian COVID-19 lockdowns that decimated the economy.

Jin dismisses the rule of law as irrelevant for China, but business executives seem to disagree. The sweeping crackdowns on the private sector and arbitrary detentions have contributed to foreign and domestic capital exiting China en masse and a slowing in private investments. Recently, there has been a surge of Chinese immigrants attempting to illegally enter the United States, many of them middle-class professionals fearing repression at home.

As China faces rising uncertainty, Jin is still cautiously optimistic. She acknowledges that U.S. export controls have reduced technology flows to China but believes Beijing can find success by investing heavily in technology. Jin cites China’s past successes under the techno-nationalism of Mao Zedong’s “Two Bombs and One Satellite” program, in which China developed atomic and hydrogen bombs and launched a satellite, all in complete isolation from the rest of the world.

But these historic advancements came at a cost. Under Mao, the economy stagnated, and millions of peasants starved to death. An elemental economics lesson starts with a trade-off between guns and butter. Mao’s techno-nationalism went for guns at the massive expense of butter (or rice). Invoking Mao is hardly a comforting forecast.

Jin is confident that China’s political system is best for the country, arguing that Chinese people, with their Confucian values, have a cultural affinity with autocracy. She cites the latest World Values Survey for 2017-22, in which 93 percent of Chinese respondents placed security ahead of freedom, compared with 28 percent of U.S. respondents. But this is a selective use of the data. Many respondents from democratic societies also valued security ahead of freedom. This includes Taiwan (86 percent) and Japan (82 percent), both of which have a Confucian tradition, proving that Confucianism and democracy are fully compatible.

Democracy, human rights, and the rule of law are not a Western fixation. They are also relevant to the lives and aspirations of Chinese people—just like economic growth and personal security. Eight years before Jin came to the United States, millions of Chinese citizens demonstrated in Beijing and other cities to demand democracy and the rule of law. As Jin’s book went to the press, massive protests broke out in China against the government’s draconian zero-COVID controls. Some protested on human rights grounds.

Consider this expression of Chinese people’s aspirations for the future: “There will need to be new mechanisms adopted to reflect choices from the bottom up rather than the top down; better processes to integrate debate, expertise, a diverse set of skills; and broad-based participation to cater to and balance society’s various needs.”

That was written by Jin herself, and I agree completely. While Jin is silent on what mechanisms can accomplish this task, let me do so in the form of a question: How would future Chinese people wake up in the morning knowing that they couldn’t elect their own president?

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