Failure of the China Economics Field

China is not collapsing. Its very serious economic problems did not emerge this year or last year or in the past five years. No credibility: economists recently discovering these problems. Worse: financial channel commentators screeching stimulus or death. China’s economy has been off course for at least 14 years and continues to slowly grind to a halt. To make clear how useless new China bears are, here’s the timeline.

Late 2002: As Hu Jintao prepares to become General Secretary of the Communist Party, monetary policy loosens and fresh industrial policy emerges, deemphasizing competition and emphasizing state goals compared to his predecessor Jiang Zemin. This is subtle. 

2003-2007: This is not subtle. China’s domestic investment surges, unbalancing the economy. It is welcomed by most, because GDP also surges and the heavy costs don’t have to be faced for years, so who cares?

2009: Oops. It’s always the case (including for the US now) that leveraging for no good reason ends badly. China’s return on capital plummets during 6 years of overspending, then the global financial crisis hits. Since reform is off the table, the response is to incur an absurd amount of debt.

One measure shows a Chinese debt increase equivalent to one-third of GDP in a single year (a bit worse than the US during the pandemic.) This is done through monetary channels far more than the hyped fiscal channels. There’s a chance to break the debt addiction after the crisis ended but it isn’t taken.

At the time, most “experts” praise the forceful response, as if China’s financial system suddenly became adept at allocating huge amounts of capital. Shockingly, the money is very unwisely spent. The binge might still be good for global stock markets, it’s terrible for China itself. Who could have known? 2009 turns out to be the pivotal year in ensuring the country gets old before it gets rich.

2014: The same people who loved Hu Jintao in 2004 and 2009 are for some reason glad he’s gone. They failed to recognize his policies as harmful, yet praise the new regime led by Xi Jinping for changing them. But there’s no reason to expect changes will actually occur; this is selective thinking masquerading as analysis.

2019: China’s official GDP growth opens the decade at 10.6% and closes it at 6%. The numbers are smoothed by the government and almost surely slower than reported by the end.

There’s no source of improvement for the 2020’s, quite the opposite. Policy is stagnant, the debt burden is still rising, and demographics are starting to bite. China’s working age-population has been shrinking since 2013. Annual dips are small but they’re adding up and they’ll continue for at least a generation, probably more.

China’s problems were clear by 2012, as the economy slowed, debt soared, and demographics looked to falter. 2019 is the last year to retain professional credibility by accepting the true trajectory.

2020-2022: The carnage wrought by COVID and zero-COVID causes people to ignore the economic deterioration of the 2010’s.

2023: Many analysts forecast a China boom, and a very brief boom is plausible. It half-materializes. The first-half GDP pace more than doubles over 2022, but the second half looks worse. More important (to them), many experts look bad. They’ve been wildly wrong about China’s economic performance boosting stocks. Beijing must stimulate! It’s the only way to save their reputations the economy.

In fact, if stimulus wasn’t warranted in 2022, it’s certainly not now. The true change is those who’ve been blind to the extent of China’s flaws all this time now coming out of the woodwork to say how bad things are. What was their view ten years ago? Or even five. Most of what’s grabbing August headlines is long after-the-fact description. If we wanted a historian, we’d have asked for one.

In 2019, China’s economy was four years older, four years more indebted, and four years more entrenched in bad policy than it was in 2015. Repeat for 2023 and 2019. There was no crisis then, there isn’t one today. There’s only failure, of China’s economic decision-making and of many people claiming to understand those decisions for the past 20 years.