China is today the world’s largest economy. This is the result of a massive expansion that increased it more than thirty-fold from $202 billion in 1980 to close to $7,000 billion in 2011. Growth rates, fueled by government credit, a controlled currency exchange rate, low-cost manufacturing, and global exports, stayed in the double digits for several decades and still hover around 7 percent. However, they are falling and expected to drop to 3-4 percent over the next few years. In addition, while the country’s overall GDP is $11 trillion, its debt has risen to 260 percent of GDP, compared to 104 percent in the U.S.
China is far from a developed country. Per person GDP is $8,000, just above Peru. The income gap within the country is widening. China has the most billionaires after the U. S. and 1 percent of the population hold 30 percent of the country’s wealth. About one third, 350 million, have reached the middle class, with incomes between $8,000 and $25,000. The remainder, 875 million, are still below, but set to move into cities and rise to the middle class, their incomes expected to rise 15 to 20 percent.
It is these people that make up the backbone of the Chinese economy. They are vibrantly entrepreneurial and aggressively upward moving. Many run sole proprietorships, and there are 40.6 million small businesses. When the government eased the requirement for cash reserves and simplified administrative procedures in 2015, new registrations rose dramatically. While moving the economy forward, the rising middle class will also require (and demand) expanding infrastructure and improved social services. This puts an additional burden on provincial and municipal governments, who are already facing heavy debt.
In addition, the economy is hampered by large-scale government interference, notably the state-owned enterprises (SOEs) that still control 40 percent of the economy and are known for being cumbersome, bureaucratic, and corrupt. In fact, they are a prime example of what economists Daron Acemoglu and James Robinson, in their ground-breaking study Why Nations Fail (2012), call “extractive” as opposed to “inclusive” institutions. Concentrating power in the hands of a narrow elite and placing few constraints on the exercise of this power, such institutions extract resources from the rest of the society, appropriating the resources of many, erecting entry barriers, and suppressing the functioning of markets.
They prevent what Joseph Schumpeter has called “creative destruction,” the way in which economic growth and technological change replace the old with the new. New firms take over, new technologies make existing skills and machines obsolete. The process creates losers as well as winners, endangers old privilege and power structures, potentially toppling governments and upending social patterns—in other words, it presents a major danger to Party rule.
This rule is still strong. Without an independent judiciary and unhindered by private competition, state-owned enterprises control entire industries, most importantly banking, transportation, telecommunications, the media, and real estate. The latter is a prime example on how local governments manipulate the economy, alternatively creating bubbles or slowing the market. That is, they influence demand by willfully installing or removing home purchasing restrictions: preference to local versus out-of-town buyers, restrictions on the number of properties one can own, requirements on the amount of down payments, plus a wide variety of taxes due at purchase (in lieu of the annual property tax): value-added tax, land-value tax, real estate transaction tax, capital gains tax, property tax, education tax, to name but a few.
A rigged economy, combined with a lack of clear property laws and freedom of expression, does not bode well for China as it finds itself now in what economists call the “middle income trap.” This is reached when a country has lost its competitive export edge due to rising wages and increased cost of living, yet is unable to evolve toward higher levels, mainly due to lack of creative destruction but also because of it fails to educate and create opportunities for lower earners. In the 1960s, 106 countries entered the middle income trap, and so far only 13 have made it out—most notably Japan, South Korea, Singapore, and Taiwan, who all seriously democratized in the process and created excellent educational systems with justly enforced laws and free independent media.
Read: Rein, Shaun. 2014. The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia. New York: Wiley.
Shambaugh, David. 2016. China’s Future. Cambridge: Polity Press.
Also check: http://popupchinese.com/lessons/sinica/the-china-meltdown