Thread by @wjhurst

Along with most other scholars of my generation, I've been studying political #economy in #China for more than 25 years.

What's happening there is not so simple as 'party's over'.

For a little context and analysis, here is a brief 🧵:

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#Politics @CamGeopolitics @NCUSCR

China experienced rapid economic growth in the 1980s, but with declining government revenue, high inflation, and significant political/social upheaval.
Growth was driven mainly by expansion of non-plan activities ('growing out of the plan').
All this changed in 1994.

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In 1994, China's government enacted both fiscal and monetary reform.
Fiscal reform centralised revenues, balanced Beijing's budget, but left local governments with tons of unfunded mandates.

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Monetary reform, inter alia, made the RMB at least somewhat convertible for the first time. This opened the floodgates for foreign direct investment (FDI) and greatly facilitated growth in Chinese exports.

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The next 15 years saw a tremendous boom, driven by FDI & exports, & focused in 'export-processing manufacturing'.
This drove GDP growth rates of 10% or more, but also led to sharp and widespread social dislocation (not least among the tens of millions losing jobs in SOEs).

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The export-led boom ended abruptly in 2008 with the world financial crisis. Exports declined very sharply in that year and in 2009 and many sectors never recovered. Millions of jobs were lost and the process of offshoring lower value-added production accelerated.

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Still, China famously averted recession in 2008/9. It did this by adopting a policy of truly impressive levels of demand stimulus in the form of government spending, grants, and policy-directed lending.

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All this lending staved off recession, but it seriously undermined the banks that the Chinese government had spend much of the period from roughly 1995-2005 trying desperately (and ultimately successfully) to recapitalise and stabilise).

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Combined with Hu Jintao's crack down from 2006 on excessive/illicit local taxes and fees, the lending helped drive rapid inflation of serious asset price bubbles, especially in real estate and housing.

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Indeed, by 2011, multiple sources indicate that Chinese local governments were deriving at least 70% of their revenue from land use transfers, real estate transfer taxes, & the like. Other data indicated that upwards of 60% of Chinese household wealth was in real estate.

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60% of household wealth in real estate is really high. The comparable figure in the US from around 2005 or 2006 (height of its bubble) was 30%. And this was more than a decade ago.

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Around the same time (2010 or so), the Chinese government also began speaking publicly about the need to: 1) increase consumption; 2) upgrade to higher value-added sectors; 3) improve aggregate return on investment; and 4) rein in the bubbles, especially in real estate.

12/25

This was the genesis of the 'Made in China 2025' programme (about upgrading and increasing consumption), the 'One Belt, One Road' Initiative (about seeking higher investment returns, as well as extending soft power), and other major policies.

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The problem has long been that more government spending and loose lending only make the bubbles worse, crowd out consumption, and don't especially promote the most productive investment or foster sufficient innovation for across-the-board upgrading.

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But lack of continued spending and lending could seriously destabilise the economy, even to the point of provoking a crisis. We saw a similar moment of real dilemmas and difficulties in 2015. We're seeing essentially something similar now. But Covid also intervened.

15/25

During the pandemic, China's central government response ensured that local government budgets were not directly at immediate risk, but #ZeroCovid also effectively killed consumption for more than 2 1/2 years and made international trade and investment dramatically harder.

16/25

The trade wars beginning around 2017 have also persisted, drawing in countries beyond the US & prompting tighter & broader restrictions, e.g. like those linked to the #CHIPS Act.
China wants very much to re-engage economically, but it isn't so easy & gains have been slow.

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The situation in China today is thus not a surprise or a suddenly erupting crisis. Rather, it's the result of a long slow burn and a confluence of many factors. The bottom line, though, is a fundamental dilemma: short-term remedy versus long-term structural shift.

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The only way to fix things immediately would be massive injection of central government cash. This could backstop and clear bad debts in the real estate sector, bail out insolvent shadow banks, boost aggregate demand and forestall economic slow-down, etc.

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It could also continue promoting the growth of important new higher value-added sectors, from green tech & EVs, to AI and e-commerce. But this would come at very significant cost to longer-term structural goals.

20/25

Massive new spending and/or lending now would make those asset price bubbles even worse. It would continue to crowd out consumption and more productive investments. And it would make it more difficult & costly down the road (maybe even prohibitively so) to do this again.

21/25

Sadly lost in the shuffle is China's re-engagement (at least economically and socially) with the rest of the world.
This won't happen if the Chinese economy is in decline (or crisis) and won't be prioritised if its government opts of massive new stimulus.

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Ultimately, inflection points and critical junctures can only be clearly spotted in hindsight.
But, what we're seeing in China is not the start of something new and probably not the very end of an unwinding of export-led growth that began 15 years ago.

23/25

We'll likely see serious debate (or at least evidence that it's happening behind the scenes) and possibly a meaningful shift in at least short-term economic policy in China over the coming days and weeks.

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But any really big macro-level change will be slower in coming & harder to see in real-time.

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