May 2024

Finding the faultlines

A recent Democracy Forum round-table discussion highlighted weaknesses in China’s internal economic policies, their causes and potentially wide-ranging effects

Can a Marxist-Leninist culture such as China sustain a modern superpower economy?  Ultimately, it can only hope to do so if it devolves power back from the centre, and shifts focus more towards economic development than concentration of political power.

These were some of the ideas shared at an April 29th round-table discussion hosted by London-based not-for-profit The Democracy Forum, which reflected on the faultlines in Beijing’s internal economic policies, how these have emerged and how failure to correct them could have serious global repercussions.  

China’s economic prospects, said TDF President Lord Bruce in his introduction to the debate, are diminished by a rapidly shrinking workforce, while the systemic crisis in the property market, which drives a fifth of GDP, will take years to resolve. Lacklustre consumer demand has pushed the domestic economy into a deflationary spiral, persisting for three quarters in a row, while Foreign Direct Investment has fallen to its lowest level since 1993 and China’s benchmark stock index, the CSI, has lost 32% since the start of 2021.

tdf china economy
IN DISCUSSION: Panellists at TDF’s April 29th round-table

In the context of this sobering backdrop, Lord Bruce referenced President Xi’s address last month to delegates of the National People’s Congress and Chinese People’s Political Consultative Conference, outlining a programme which Chinese officials are calling ‘new productive forces’, emphasising technological innovation to improve productivity and investing in manufacturing to strengthen self-reliance. But is Xi’s real desire for China to be leader of the next industrial revolution, forging a new path in industries of the future? This goal is likely to be thwarted by reluctance of China’s consumers to spend, said Lord Bruce, by the historic underachievement of productivity, and by the growing alarm of China’s trading partners at the prospect of their domestic industries undermined by the dumping of manufactured goods as China seeks to export its deflation.

In thinking that industrial policy and innovation are the same thing, the CCP is conflating two things that are diametrically opposite

Considering the central topic of the debate were discussants George Magnus, a Research Associate at Oxford University’s China Centre and former Chief Economist at UBS; Dr Xin Sun, Senior Lecturer in Chinese and East Asian Business at King’s College London; and Dr Yuka Kobayashi, Lecturer (Assistant Professor) in China and International Politics at the School of Oriental & African Studies (SOAS).

Author and former BBC Asia correspondent Humphrey Hawksley, who chaired the discussion, began by highlighting the pact between the Chinese Communist Party and the country’s citizens: that in exchange for their silence on who governs them and how, the economy and living standards will continue to improve. But what if that does not happen?

China’s Belt & Road Initiative has seen better days

Offering a broad overview of China’s economic model, Dr Xin Sun said the fiscal challenges in China today are not to do with missteps by the government, or even situations such as the real estate bubble or Covid pandemic, but are, rather, linked to the economic growth model China has relied on over the past few decades. Yet the so-called ‘China model’ is a misleading term, as itis not really unique to China but has been adopted repeatedly by other countries, for example by Germany in the late 19th century, as well as Japan and other East Asian countries during the post-war period.The two pillars of this economic model are a strong developmental state, which extracts resources from society and turns them into  effective investment in public goods, infrastructure, etc, and a vibrant, efficient private sector, which mobilises these resources, taking advantage of cheap domestic labour and capital, and using technology developed by other countries to compete in the global market. But the model has intrinsic problems, said Dr Sun, namely that its productivity growth will at some time reach stagnation point and thus have to rely on stimulated demand such as debts or war. China is an example of this, with its reliance now on massive debt, and so it is vulnerable to crises.

President Xi
During his March 5 address to delegates of the National People’s Congress and Chinese People’s Political Consultative Conference, President Xi outlined a programme of ‘new productive forces’

To a suggestion from the chair that an authoritarian dictatorship like China cannot develop until it becomes more free, Dr Xin responded that a strong state imposing control over civil society could offer some economic advantages, such as resisting wage demands from labour unions.

On the issue of China’s now dysfunctional economic model, George Magnus argued that one of the problems is the state’s ideological inclination towards ‘supply-side reforms’, which aim at expanding production and the output of China’s large firms, rather than trying to improve the income structure of the economy, which would fuel better consumption. China’s leadership knows it has reached a fork in the road, said Magnus, and they have decided that the old-school model of stimulating the economy through real estate and infrastructure spending is finished. Nor will they embrace liberal or market reforms.

So this is where ‘new productive forces’ come in, which is strongly rooted in Marxist thinking and, from a CCP point of view, has to do with societal development, modernisation and political structure in the country., achieved through gains in science and technology. Unfortunately, Magnus added, the government, in thinking that industrial policy and innovation are the same thing, is conflating two things that are diametrically opposite. Industrial policy is a ‘vertical’ concept, involving picking winners, industries and sectors, whereas innovation is more ‘horizontal’, involving the creation of laws, regulations, competition environments, etc. So, Magnus concluded, China’s undoubted technological excellence may not be the answer to the government’s (ideological) objectives and aspirations.

For Dr Yuka Kobayashi, one other aspect of the faultlines under discussion was geopolitics, an area that is becoming more and more intertwined with the economy, given that we now have terms such as ‘economic security’ and ‘supply chain resilience’.  This is coming from what China is doing domestically, and from its industrial policies. The driving forces around China’s economy are very much dictated by geopolitics, Dr Kobayashi argued, and having a reverse kind of influence on geopolitics, and also concurrently around norms such as regulation, competition, etc, around which we think economic activity should function. There is, therefore, competition between very different camps when it comes to authoritarian and democratic ideas about economic norms, such as how we deal with trade, services, data, etc. 

So there are deeply divergent ideas about how the economy should function, which emerged when China joined the WTO, with very different ideas about what a socialist market economy actually is. Dr Kobayashi spoke of the ‘China dream’ of how trade should be conducted, saying this is being projected along the Belt and Road Initiative, which is very central to the philosophies surrounding Xi Jinping. Today, we are seeing a very geopolitically charged economy – not only in China but also in, for example, Brussels – with something of a backtrack away from a globalising economy towards supply chain resilience. So we are seeing an interesting faultline emerge geopolitically, which is impacting but also reflecting what China is doing domestically. On the question of whether the Belt and Road has hit a wall, Dr Kobayashi said it has seen better days. There is a lot of push-back both by certain host nations and domestically, with ever more questioning in China about where the funds are going, and why infrastructure is being built abroad when there is so much demand domestically.

MJ Akbar is the author of several books, including Doolally Sahib and the Black Zamindar: Racism and Revenge in the British Raj, and Gandhi: A Life in Three Campaigns

To watch the full discussion, tune in to