Aug 7, 2023 - Economy & Business

"Economic long COVID" could mean China's economy is weaker than it looks

Illustration of a stock trend line rising above the stars of China's flag, then bouncing and tangling between the stars before trending downward

Illustration: Annelise Capossela/Axios

The Chinese economy is in worse long-term shape than is widely understood, a prominent American economist is arguing, in ways that cannot be easily fixed. It is "economic long COVID," featuring a persistent dearth of investment and consumer demand, writes Adam S. Posen in Foreign Affairs.

Why it matters: Belief in a Chinese economic juggernaut has been a core assumption in the mainstream understanding of the global economy and diplomatic landscape for a generation. If it's no longer true, China's position on the world stage is weaker than is commonly understood.

The argument: Dating to roughly 2015, and especially since the onset of the pandemic in 2020, the Chinese government has acted increasingly capricious and arbitrary in restricting economic activity, writes Posen, who is president of the Peterson Institute for International Economics.

  • This is causing Chinese citizens and businesses alike to hoard cash rather than spend or invest, he argues.
  • Deposits in Chinese banks have soared since 2015, Posen calculates, while private-sector consumption of durable goods is down by around a third and private investment is down by two-thirds.

What they're saying: "China's body economic has not regained its vitality and remains sluggish even now that the acute phase—three years of exceedingly strict and costly zero-COVID lockdown measures—has ended," he writes.

  • "The condition is systemic, and the only reliable cure—credibly assuring ordinary Chinese people and companies that there are limits on the government's intrusion into economic life—cannot be delivered," Posen writes.
  • That, he argues, will limit the government's ability to stimulate the economy, because consumers will be inclined to save any financial boost they receive from the government, and businesses will be reluctant to invest even when bank lending is more freely available.

This is a common feature of autocratic regimes, he argues — that they can achieve strong growth while letting the private sector largely act freely, but eventually tighten the screws of government control in counterproductive ways.

Yes, but: It's increasingly hard to know exactly what is happening in the inner workings of the world's second-largest economy because the government is clamping down on consultants and statistics-providers whose conclusions might be politically inconvenient.

  • The Financial Times reported that Chinese economists are under intense pressure to withhold negative analysis of conditions.
  • "The regulator doesn't want to hear negative comments about the economy in public," an unnamed adviser to China's central bank told the FT. "They wanted us to interpret bad news from a positive light."

That sort of thing, Posen tells Axios, is "part and parcel of reversion to the authoritarian mean on economic policy."

  • "This is likely to further undermine the impact of any stimulus measures undertaken," he says.
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