China’s economy is in trouble because its authoritarian demons are catching up with it and paralyzing the private sector. China’s economy is in trouble because its growth model exhausted itself and entrenched power structures make it hard to shift gear.
Well balanced essay, really appreciate the desire to critically approach the issue.
Leaving aside that at this conjunction we should all be concentrating in general degrowth, with growth only on certain areas, China is too big to not fret about it. But peddaling too much on the issue of "authoritarianism" is becoming boring and Mr. Tooze is admirable in not giving much, if any weight to this aspect. Ultimately, the best government is the one the is the best administrator and has the best results and I would call the Chinese government quasi meritocratic. Dismissing the extremely captured political class in the US for instance by various lobbies (FIRE, Agri, MIC, Big Pharma) ab initio/ab ovo, Mr. Posen shows his profound bias and appears lame due to the fact that he has swallowed the democracy narrative hook, line, and sinker.
The US is a plutocratic republic that abhoors democracy, both internally and externally, and there are libraries written on the topic, with the best books written by Americans themselves.
As for China, mabe they should start applying land taxes to start with.
From the 1990s, in real estate, in local government management, in business borrowing everyone was just doing what they were told or expected to do. Excessive borrowing is bad, but everybody else was doing it and how do you survive if you drive slower than everybody else? Circa 2008
I remember some of my Hangzhou and Zhejiang government students telling me “…the more risk, the more profit.” I had done a fair amount of real estate development around Chicago,
and I told them no sane developer thinks that way. But I was not operating in the Chinese
environment. Risk was … well, a foreign concept.
I am reminded of the movie Absence of Malice With Sally Field and Paul Newman. Through a series of planted innuendos and false newspaper leads, Newman’s business and reputation are ruined, a friend commits suicide, and an otherwise decent district attorney is forced to resign. In the hearing to discover what happened, Newman comments that there is no one to blame – “everybody was just doing their job.”
We saw that in the US many times, most recently prior to 2008. And there was always the melding of overambition, lack of experience, fraud, ignoring regulations, ignoring enforcement
of regulations, and overweening pride – what we used to call hubris. Perhaps it is a bit too much to call this all the banality of evil, but there it was. No individual act was itself going to bring the
system down, but collectively … a different story.
Systems in the US could be just as dysfunctional as any in China. That in fact is one of the lessons Xi et.al. learned from the American financial crisis. I wonder if the hubris really began about that time. Even for some of my government students, the US was thought to be a shining city on a hill. Then, less so. Mixing metaphors like crazy, once it was discovered the emperor had no clothes, the ancient Chinese superiority was given room to grow. The Chinese learned to pay no attention to that man behind the curtain.
Power corrupts, and Xi’s power seems to be pretty absolute. China went into the Xi era with some big problems but also the confidence to solve problems foreign and domestic. CCP went from victory to victory from … well, if not 1978 then 1989 on. The 1998 Asian crisis? Not a problem. The 1990s Chinese bank and fiscal relations crises - managed. The 2008 financial crisis- not in China. Stimulus worked. Farmer rebellions over land theft? Sufficiently managed. The 2015 stock market crisis – sufficiently massaged. Corruption? Sort of managed. Hong Kong? Some troubles, but finally pacified. Sanctions and tariffs? Trade uber alles.
Tianxia was moving in the Chinese direction. Maybe Mr. Xi began to believe his own press releases, or there was just no stopping the momentum – until he made the series of own goals that made the demographic and debt and environmental problems all the worse. There were – there are – more thoughtful ways to handle the debt and real estate and fiscal relations and employment problems, but these all involve changing the system, per Pettis. Mr. Xi et.al. are dancing as fast as they can, and perhaps they will pull off another slim victory. CCP is nothing if not flexible and resilient. I think one will want to see this next ten years as personal failings that compounded systemic problems. Xi was the right man in the right place at the right time ... until he wasn't.
The Omicron variant was not a "Western Covid variant." It originated in South Africa, which is far from being a Western nation. It is incorrect to state, as Tooze has in several of his essays, that the West failed to control Covid. It is a lie of omission. All the world, with a few exceptions, like China and Australia (a Western nation), failed to control Covid. The non-Western nations with no control are around 5x as populous as the West. Therefore, we may reasonably assume that around 5/6 of the Covid mutations occurred outside the West in the critical pre-vaccine period.
Some mention of China's undermined international credibility, given its extremely selfish response to the original Covid outbreak, might have been suitable in this essay. Oh, wait, that undermining didn't really happen because elites around the world do not care about their hoi polloi dying prematurely. Instead, there are multiple ongoing Covid-related cover-ups, led by the Chinese and the Americans. The dog didn't bark, the high and holy trade system is unperturbed.
I particularly love the outbreak of pure Toozian communism in the unironic comparison of the dangerous power of Musk (oh, the poor, beleaguered American deep state) and the dangerous power of the CCP (proud achiever of the Great Famine). Someone needs an editor. Someone needs an anti-communist editor.
Very neat reading as usual! But indeed aren't over-confidence and slowness to react to changing circumstances features of authoritarianism as much as up and downs of the always variable western COVID policies were a feature of their democratic debates?
This one is a strange write-up. There was the real-estate implosion of the early 2000s in the US and the subsequent financial crises, recessions etc and yet when China experiences same, it somehow is related to its politics? At one point, same folks talking authoritarianism complain of unfair practices in trade etc giving them an advantage. Let’s focus on technical stuff.
I’m not sure any of these 3 theories (Pettis/Posen/Tooze) is mutually exclusive -- it was a combination. But overconfidence fuelled by China’s late-2020 rebound, and in contrast with the situation in the West, was articulated in Jan 22 with the government’s claim that it was pursuing a ‘cross-cyclical economic policy’.
Everyone, it turns out, struggles to see round corners
The one thing missing from Tooze’s analysis is an understanding of the recurring internal political dynamics in China. Beijing didn’t pivot quickly when Omicron reached its shores: Hong Kong and Taiwan had already given a clear indication of what was sure to happen on the mainland. The reason Beijing couldn’t abandon Zero Covid sooner, or even prepare people for the need for a higher vaccination rate, was because of the 20th Party Congress. This is indeed where the authoritarian political system showed its weakness. Xi couldn’t shift gears or admit that Omicron required fresh approaches because that would have required too much lateral thinking by people up and down the chain of command, and it would have raised the risk of an uncontrollable series of snafus happening in the lead up to the October 2022 Congress. He had to wait until his higher priority was taken care of, securing his political agenda for the coming decades. Maintaining tight control of the political machinery until the moment the new Standing Committee walked out on stage was more important than how many people - mostly elderly - were likely to die from Omicron. The Covid Zero policy was the most effective way of locking down local cadres and seeing who was “on side” and who wasn’t. The Party was far more concerned with the power transition than it was with preparing for Omicron.
As for the real estate market, the same thing can be said: the Party took far too long to pop the property bubble because it had been too preoccupied with its internal power struggle led by Xi. It was under Xi, in fact, that the crisis was brought to its zenith when his administration allowed property firms to resume pre-sales of unfinished apartments. Why did the Party do that? Because of the importance of political stability. It wasn’t until 2021 that Xi had accumulated enough power to implement the “three red lines”.
I’m not trying to defend Posen here - I agree with Tooze that his analysis is full of bias and flawed assumptions - but it is equally impossible to judge China’s current economic predicament without acknowledging the weakness of its political system. Inflexible policymaking can’t simply be written off to hubris, not in a country as vast and complex as China.
I think Pettis makes the case that Beijing is subject to institutional capture to some extent and that Xi is utilizing political authoritarianism to pursue certain “liberal” or “progressive” economic/financial reforms. A move towards stability and away from growth may be the goal of Xis political consolidations rather than a byproduct.
Example: Xi fired a bunch of technocrats and brought in party apparatchiks to drive financial reform at the local level. Rather than a boorish power grab, this move reflected the fact that the necessary reforms had become obvious and the lack of political power was the main obstacle.
People think of this property collapse as communism's comeuppance. Leaving aside the fact that China really is not communist, they don't realise that it's all the result of an intentional policy to deflate a speculative housing bubble, the hallmark of modern capitalism.
Two quick observations on an excellent take. The first is that Taiwan resolutely avoided the Chinese approach, staying partially open the entire Covid period, with much more success than the West. Its example was ignored and could have been a better alternative to both the West and China. Second, a grave weakness of excessive leverage in an economic system is that it makes actors in that system extremely vulnerable to the inevitable occurrence of policy errors in an economic system. I agree that neither Pettis nor Posen has an adequate explanation for why 2023 has turned into a year of weakness and disappointment for the Chinese growth miracle. But, policy errors were bound to happen at some point. The Omicron variant, with the benefit of hindsight, dissolved a lot of the confidence of potential home purchasers in the infallibility of the Chinese government at a time when covid had disrupted the building rhythm of China's real estate industry separate from, and in addition to, the problems created by the Three Red Lines. Your take presents the arrival of the Omicron variant as one of China's Minsky Moments for its heavily leveraged real estate sector. I suspect that they are more likely to occur under Pettis' argument than under Posen's argument.
Xi is taking a turn toward the re-Stalinization of the economy, which involves damping the private sector while reinvigorating state owned companies. His focus is no longer on promoting economic growth broadly, but in advancing scientific and technological know-how which will have military applications, very likely in preparation for the coming war over Taiwan and beyond. His policies are also forcing international companies to de-risk, by converting local operations into Chinese businesses as a hedge against the state moving against their assets. Foreign companies under the new security law cannot any longer collect routine business information without being accused of spying, so we are seeing a flight of foreign capital. Xi will allow local governments to default on their massive indebtedness, and will do nothing about the large youth unemployment, telling youth instead to "eat bitterness," or suck it up and endure. The ensuing collapse of the economy will provide the precondition and the pretext for the state to move massively into the business of nationalization, expropriation without compensation. Party committee's placed in private businesses of all kind to monitor their operations will seize control as nationalization is put into effect. The turn will be historic, on the scale of Stalin's sudden discarding of the market friendly NEP (Lenin's New Economic Policy 1921-29) in favor of a centrally planned economy. The two models discussed here ignore the ideological underpinnings of Xi's policy at their peril.
China totally failed the beginning of the pandemic by being secretive about it and so letting it escape into the wider world. No warning for other governments when they already had the data of how contagious it was.
'...if it had deferred its high-risk plan to deflate the housing bubble until after COVD was brought under control around the world...'
Que esperen sentados!
Precisely because, by that point, there was no evidence that it had been, nor would ever be, a goal for the West- the heroic Chinese effort offered the opportunity to suppress following waves and mutational opportunities, and achieve a less damaging 'normal'- but the 'world' had already moved on to the war footing.
Well balanced essay, really appreciate the desire to critically approach the issue.
Leaving aside that at this conjunction we should all be concentrating in general degrowth, with growth only on certain areas, China is too big to not fret about it. But peddaling too much on the issue of "authoritarianism" is becoming boring and Mr. Tooze is admirable in not giving much, if any weight to this aspect. Ultimately, the best government is the one the is the best administrator and has the best results and I would call the Chinese government quasi meritocratic. Dismissing the extremely captured political class in the US for instance by various lobbies (FIRE, Agri, MIC, Big Pharma) ab initio/ab ovo, Mr. Posen shows his profound bias and appears lame due to the fact that he has swallowed the democracy narrative hook, line, and sinker.
The US is a plutocratic republic that abhoors democracy, both internally and externally, and there are libraries written on the topic, with the best books written by Americans themselves.
As for China, mabe they should start applying land taxes to start with.
The idea that Western countries practice anything like a rule of law is a laugh.
From the 1990s, in real estate, in local government management, in business borrowing everyone was just doing what they were told or expected to do. Excessive borrowing is bad, but everybody else was doing it and how do you survive if you drive slower than everybody else? Circa 2008
I remember some of my Hangzhou and Zhejiang government students telling me “…the more risk, the more profit.” I had done a fair amount of real estate development around Chicago,
and I told them no sane developer thinks that way. But I was not operating in the Chinese
environment. Risk was … well, a foreign concept.
I am reminded of the movie Absence of Malice With Sally Field and Paul Newman. Through a series of planted innuendos and false newspaper leads, Newman’s business and reputation are ruined, a friend commits suicide, and an otherwise decent district attorney is forced to resign. In the hearing to discover what happened, Newman comments that there is no one to blame – “everybody was just doing their job.”
We saw that in the US many times, most recently prior to 2008. And there was always the melding of overambition, lack of experience, fraud, ignoring regulations, ignoring enforcement
of regulations, and overweening pride – what we used to call hubris. Perhaps it is a bit too much to call this all the banality of evil, but there it was. No individual act was itself going to bring the
system down, but collectively … a different story.
Systems in the US could be just as dysfunctional as any in China. That in fact is one of the lessons Xi et.al. learned from the American financial crisis. I wonder if the hubris really began about that time. Even for some of my government students, the US was thought to be a shining city on a hill. Then, less so. Mixing metaphors like crazy, once it was discovered the emperor had no clothes, the ancient Chinese superiority was given room to grow. The Chinese learned to pay no attention to that man behind the curtain.
Power corrupts, and Xi’s power seems to be pretty absolute. China went into the Xi era with some big problems but also the confidence to solve problems foreign and domestic. CCP went from victory to victory from … well, if not 1978 then 1989 on. The 1998 Asian crisis? Not a problem. The 1990s Chinese bank and fiscal relations crises - managed. The 2008 financial crisis- not in China. Stimulus worked. Farmer rebellions over land theft? Sufficiently managed. The 2015 stock market crisis – sufficiently massaged. Corruption? Sort of managed. Hong Kong? Some troubles, but finally pacified. Sanctions and tariffs? Trade uber alles.
Tianxia was moving in the Chinese direction. Maybe Mr. Xi began to believe his own press releases, or there was just no stopping the momentum – until he made the series of own goals that made the demographic and debt and environmental problems all the worse. There were – there are – more thoughtful ways to handle the debt and real estate and fiscal relations and employment problems, but these all involve changing the system, per Pettis. Mr. Xi et.al. are dancing as fast as they can, and perhaps they will pull off another slim victory. CCP is nothing if not flexible and resilient. I think one will want to see this next ten years as personal failings that compounded systemic problems. Xi was the right man in the right place at the right time ... until he wasn't.
The Omicron variant was not a "Western Covid variant." It originated in South Africa, which is far from being a Western nation. It is incorrect to state, as Tooze has in several of his essays, that the West failed to control Covid. It is a lie of omission. All the world, with a few exceptions, like China and Australia (a Western nation), failed to control Covid. The non-Western nations with no control are around 5x as populous as the West. Therefore, we may reasonably assume that around 5/6 of the Covid mutations occurred outside the West in the critical pre-vaccine period.
Some mention of China's undermined international credibility, given its extremely selfish response to the original Covid outbreak, might have been suitable in this essay. Oh, wait, that undermining didn't really happen because elites around the world do not care about their hoi polloi dying prematurely. Instead, there are multiple ongoing Covid-related cover-ups, led by the Chinese and the Americans. The dog didn't bark, the high and holy trade system is unperturbed.
I particularly love the outbreak of pure Toozian communism in the unironic comparison of the dangerous power of Musk (oh, the poor, beleaguered American deep state) and the dangerous power of the CCP (proud achiever of the Great Famine). Someone needs an editor. Someone needs an anti-communist editor.
Very neat reading as usual! But indeed aren't over-confidence and slowness to react to changing circumstances features of authoritarianism as much as up and downs of the always variable western COVID policies were a feature of their democratic debates?
This one is a strange write-up. There was the real-estate implosion of the early 2000s in the US and the subsequent financial crises, recessions etc and yet when China experiences same, it somehow is related to its politics? At one point, same folks talking authoritarianism complain of unfair practices in trade etc giving them an advantage. Let’s focus on technical stuff.
I’m not sure any of these 3 theories (Pettis/Posen/Tooze) is mutually exclusive -- it was a combination. But overconfidence fuelled by China’s late-2020 rebound, and in contrast with the situation in the West, was articulated in Jan 22 with the government’s claim that it was pursuing a ‘cross-cyclical economic policy’.
Everyone, it turns out, struggles to see round corners
The one thing missing from Tooze’s analysis is an understanding of the recurring internal political dynamics in China. Beijing didn’t pivot quickly when Omicron reached its shores: Hong Kong and Taiwan had already given a clear indication of what was sure to happen on the mainland. The reason Beijing couldn’t abandon Zero Covid sooner, or even prepare people for the need for a higher vaccination rate, was because of the 20th Party Congress. This is indeed where the authoritarian political system showed its weakness. Xi couldn’t shift gears or admit that Omicron required fresh approaches because that would have required too much lateral thinking by people up and down the chain of command, and it would have raised the risk of an uncontrollable series of snafus happening in the lead up to the October 2022 Congress. He had to wait until his higher priority was taken care of, securing his political agenda for the coming decades. Maintaining tight control of the political machinery until the moment the new Standing Committee walked out on stage was more important than how many people - mostly elderly - were likely to die from Omicron. The Covid Zero policy was the most effective way of locking down local cadres and seeing who was “on side” and who wasn’t. The Party was far more concerned with the power transition than it was with preparing for Omicron.
As for the real estate market, the same thing can be said: the Party took far too long to pop the property bubble because it had been too preoccupied with its internal power struggle led by Xi. It was under Xi, in fact, that the crisis was brought to its zenith when his administration allowed property firms to resume pre-sales of unfinished apartments. Why did the Party do that? Because of the importance of political stability. It wasn’t until 2021 that Xi had accumulated enough power to implement the “three red lines”.
I’m not trying to defend Posen here - I agree with Tooze that his analysis is full of bias and flawed assumptions - but it is equally impossible to judge China’s current economic predicament without acknowledging the weakness of its political system. Inflexible policymaking can’t simply be written off to hubris, not in a country as vast and complex as China.
#1 Michael Pettis fan here:
I think Pettis makes the case that Beijing is subject to institutional capture to some extent and that Xi is utilizing political authoritarianism to pursue certain “liberal” or “progressive” economic/financial reforms. A move towards stability and away from growth may be the goal of Xis political consolidations rather than a byproduct.
Example: Xi fired a bunch of technocrats and brought in party apparatchiks to drive financial reform at the local level. Rather than a boorish power grab, this move reflected the fact that the necessary reforms had become obvious and the lack of political power was the main obstacle.
Enjoying this series. Thank you.
People think of this property collapse as communism's comeuppance. Leaving aside the fact that China really is not communist, they don't realise that it's all the result of an intentional policy to deflate a speculative housing bubble, the hallmark of modern capitalism.
Two quick observations on an excellent take. The first is that Taiwan resolutely avoided the Chinese approach, staying partially open the entire Covid period, with much more success than the West. Its example was ignored and could have been a better alternative to both the West and China. Second, a grave weakness of excessive leverage in an economic system is that it makes actors in that system extremely vulnerable to the inevitable occurrence of policy errors in an economic system. I agree that neither Pettis nor Posen has an adequate explanation for why 2023 has turned into a year of weakness and disappointment for the Chinese growth miracle. But, policy errors were bound to happen at some point. The Omicron variant, with the benefit of hindsight, dissolved a lot of the confidence of potential home purchasers in the infallibility of the Chinese government at a time when covid had disrupted the building rhythm of China's real estate industry separate from, and in addition to, the problems created by the Three Red Lines. Your take presents the arrival of the Omicron variant as one of China's Minsky Moments for its heavily leveraged real estate sector. I suspect that they are more likely to occur under Pettis' argument than under Posen's argument.
The idea that the reason that China was hit hard by Omicron because they did not "vaccinate" properly is laughable.
Xi is taking a turn toward the re-Stalinization of the economy, which involves damping the private sector while reinvigorating state owned companies. His focus is no longer on promoting economic growth broadly, but in advancing scientific and technological know-how which will have military applications, very likely in preparation for the coming war over Taiwan and beyond. His policies are also forcing international companies to de-risk, by converting local operations into Chinese businesses as a hedge against the state moving against their assets. Foreign companies under the new security law cannot any longer collect routine business information without being accused of spying, so we are seeing a flight of foreign capital. Xi will allow local governments to default on their massive indebtedness, and will do nothing about the large youth unemployment, telling youth instead to "eat bitterness," or suck it up and endure. The ensuing collapse of the economy will provide the precondition and the pretext for the state to move massively into the business of nationalization, expropriation without compensation. Party committee's placed in private businesses of all kind to monitor their operations will seize control as nationalization is put into effect. The turn will be historic, on the scale of Stalin's sudden discarding of the market friendly NEP (Lenin's New Economic Policy 1921-29) in favor of a centrally planned economy. The two models discussed here ignore the ideological underpinnings of Xi's policy at their peril.
China totally failed the beginning of the pandemic by being secretive about it and so letting it escape into the wider world. No warning for other governments when they already had the data of how contagious it was.
Excellent overview of a complex situation!
'...if it had deferred its high-risk plan to deflate the housing bubble until after COVD was brought under control around the world...'
Que esperen sentados!
Precisely because, by that point, there was no evidence that it had been, nor would ever be, a goal for the West- the heroic Chinese effort offered the opportunity to suppress following waves and mutational opportunities, and achieve a less damaging 'normal'- but the 'world' had already moved on to the war footing.