Although a little over seven months have passed since China’s zero-COVID policy ended, the Chinese economy has not regained momentum as expected. Instead, there are signs of a slowdown coupled with even greater turmoil: Exports collapsed in July and China’s national statistics office said Wednesday that consumer prices had also fallen, leading some to fear the country could be heading into a deflationary spiral .
The problem could lie in China’s political economy and the implementation of the zero-COVID policy, Adam Posen, president of the Peterson Institute for International Economics, wrote in an article for Foreign Affairs.
“This zero-COVID policy as implemented in China has made the livelihood and wealth of the average Chinese feel very insecure,” Posen said. “People reject things like durable goods, shopping, investing in small businesses, things that tie up their wealth, and they prefer things that feel safer and more liquid, like bank accounts.”
Poznan spoke to “Marketplace” host Kai Ryssdal about the changes in China’s political economy. The following is an edited transcript of their conversation.
Kai Ryssdal: I’ll start with the title of this piece. It is called “The End of China’s Economic Miracle”. I notice that there is no question mark at the end of this title. What do you see?
Adam poses: Well, there’s still a legitimate question, but you’re right, the title sticks with me. What I see is a trend that has been going on since the beginning [President Xi Jinping’s] Around the year 2015, there will be ever greater government intervention in the economy. This zero-COVID policy as implemented in China made the livelihood and wealth of the average Chinese feel very insecure. It’s very different from when they cracked down on Ant or Alibaba, so some big oligarchs. This is people’s everyday life.
Ryssdal: You know, it’s funny that you spend as much, maybe even more, time on the politics of China’s economy than on what’s actually happening. And one of the things you point out is that because of the arbitrariness of what President Xi has been doing during the zero COVID era, the Chinese people are just becoming less responsive to their charms, if you will, and doing whatever what it wants feel like they have to do something to survive.
Poses: Yes, and I think it’s very important not so much to pretend I’m an expert on Chinese politics, which you kindly don’t pretend, but to say that political economy matters. And that’s something that’s not just superficial, we’ve seen that in other governments with autocratic regimes, when you manage not to be too interventionist and too political in people’s lives, and people know what I call “the no of politics, no” call it a problem” deal. So if you protest in Tiananmen Square or in Hong Kong, you get crushed, but your day-to-day life – if you’re a non-political person – you can go, you can invest, you can spend. And the economics of it allow for a very clear prediction. One point is what you said, which is that whatever the government’s economic policy of cleaning up the banking system to put cash in people’s pockets, stimulus measures are going to be less effective because people don’t necessarily believe that they will be retained. The other point is that not only have the savings skyrocketed, but the overall savings haven’t changed that much. In particular, people dislike things like durable goods, grocery shopping, investing in small businesses and things that tie up their wealth, and prefer things that feel safer and more liquid, like bank accounts.
Ryssdal: You know, just that, you know, I forgot what you call it –
Poses: No politics, no problem.
Ryssdal: No politics, no problem, right. In China, for over 40 years, there has been an agreement that the government will let you “get rich” as long as you don’t get political. Do you think the deal is over now?
Poses: I think it’s in people’s minds. And they will try to restore it. And we’ve already seen Xi’s Communist Party leaders say, “Oh no, we want a vibrant private sector in China.” Oh, you big tech tycoons, rest easy.” But when you get to that point, it is it’s hard to be believable. Once Xi has so visibly and violently crossed the Rubicon and there is no sign of regret, I don’t think he can get it back.
Ryssdal: One can imagine that this article will be widely read in the halls of Congress and in the White House. And as you point out in this article, people recognize that there may be an opportunity for America here. How do you imagine this?
Poses: I think it’s an opportunity to rethink and move away from the United States. Under the Trump administration, frankly, there was something more accountable, but still, under the Biden administration, there was this very conflictual approach to China. And part of that in the economic arena is excluding people from China, making students and workers feel unwelcome as potential spies, and suspicion of Chinese investors taking over American companies and buying American assets. And I think we want to go the opposite way. When we faced the fascist regimes in the 1930s, during the Cold War through the mid-1980s, it wasn’t clear that we would necessarily outperform them economically; It was clear that our individual property rights and individual livelihood security were better. And I think we can use that in the new conflict between the systemic rivalry between China and the US to say: we welcome Chinese investment, we welcome the Chinese people, we welcome Chinese ideas. And the more we emphasize exit, it won’t be like the Berlin Wall, but the more barriers Xi will put up, and the more he puts up, the more he motivates people to exit.
Ryssdal: China, as you say in this article, now has a case of economic long-COVID, right? That what Xi Jinping did during the zero COVID era will have a lasting impact – and these are your words – it will last for years. And I think we have to conclude our discussion by pointing out that this is not good for the global economy.
Poses: It is not. To be clear, I’m talking about resistance and more instability and slower productivity growth, not China’s collapse at all. But I think the most important thing is that it’s not good for the world. It’s not good for many people in the US who make money selling to China or making money assembling their gear in China. It subtracts. And it’s not as destabilizing as we might fear, because China itself has become more closed off in some ways in recent years. But it shouldn’t be taken as a good thing that China’s economy is weakening.
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