It was a tough year for the Chinese economy. The country's stock market, partly in response to the troubled real estate sector, recently hit its lowest level in five years. While economic data from China is not always reliable, there has also been a long-standing deflationary trend in consumer prices. So what does it mean for the rest of the world if one of the largest economies scales back economic change?
According to Adam Posen, president of the Peterson Institute for International Economics, this could mean aggressive moves by China that could anger trading partners, such as introducing electric vehicles to the global market.
“This creates tensions between the U.S. and China and other countries and China,” Posen said. “Because this is seen as another way for China to export its way out of its problems rather than deal with the lack of domestic demand.”
“Marketplace” host Kai Ryssdal spoke with Posen about the state of the Chinese economy. The following is an edited transcript of their conversation.
Adam Posen: The Chinese economy has fundamentally deteriorated in recent years. And on top of that, they have this real estate problem that keeps driving them down. It's not a catastrophe, but it undermines growth in a variety of ways in addition to long-term demographic trends.
Kai Ryssdal: OK, we'll get into each of these, or at least most of them, in a moment. But I want to pick up where you and I left off last time, which was in August. Well, you had a part of it –
Poses: Foreign Affairs.
Ryssdal: Foreign Affairs, thank you very much, titled “The End of China’s Economic Miracle.” And I asked you what fundamental difference it makes to the rest of us. And I want you to remind people why you believe this is an important moment, not just for the Chinese economy, but for the global economy.
Poses: China is, of course, one of the largest economies in the world, either the largest or the second largest. They are a crucial part of industrial processes and consumer brands and business networks around the world. So if we have a slower-growing China, there are fewer options globally for a range of investments, including our 401(k)s. And most importantly, the Chinese Communist Party's economic leadership is likely to become increasingly aggressive on the economic front when it has problems at home.
Ryssdal: What happened in the Chinese economy? Because, as you know better than most, things ran smoothly for several decades.
Poses: As you said, it was buzzing for decades in a historically unprecedented way. I think three things happened. China has a disastrous birth rate for a variety of reasons, including its previous “one child” policy and its sexism toward women. The other two things are, firstly, the burst real estate bubble. It wasn't even that big of a bubble, but rather that they were shoveling huge amounts of money to real estate developers through local governments in strange connections with local banks. And it couldn't go on forever because they were building more homes than they had people. The third thing that you and I talked about last August, and I think I called the peak of China's growth at the end, was after COVID-19 and after President Xi Jinping consolidated power in the last few years before COVID The Communist Party has been much more aggressive toward the average Chinese household and toward the average Chinese small business in terms of arbitrary decisions. As a result, people consume less, invest less in small businesses and keep their money in cash-like assets. And this is exacerbated by the real estate problem.
Ryssdal: All right, let's talk about the US-China geostrategic relationship now and in the future. It's tense. You said earlier that you expected the Chinese to act in a more destabilizing manner economically, which nobody needs between the world's No. 1 and 2 economic powers. What could that look like? And what should President Joe Biden do about it?
Poses: I think the biggest thing that we're going to see now, and are already seeing, Kai, is that there's a tremendous amount of electric vehicles and other cars in the world markets that are made in China or by Chinese subsidiaries. I think there is also attention that the Chinese yuan is losing value. And the Chinese government, I think, has wisely put on the brakes to prevent it from falling too quickly, but that also creates tensions between the US and China and other countries and China because this is seen as a different way of exporting China will find a way out of its problems rather than dealing with the lack of domestic demand.
Ryssdal: So I thank you for naming the top of the Chinese economy, because that can be difficult. However, here is the question: what now? Is there a way Xi can change that? What does the ground look like? Discuss.
Poses: Yeah, I think the floor isn't that bad. You know, a lower growth China grows at a positive 3% instead of a positive 5%. I think in the end Xi will take a lot of stimulus measures, even if he is very cautious about it at the moment. And I think they're going to be largely ineffective in the sense that they're getting a lot less for their money than they did in the past. Finally, I think the most important changes are the extent to which people are leaving China. I mean, how much capital is left? Are people leaving? We are seeing news reports about Chinese people suddenly coming to the United States as refugees and migrants. Frankly, I think it would be wise for US and Western governments to welcome these outflows rather than trying to dam them up in China.
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