Lessons From China On The Planned Economy

It’s hard to learn what’s going on in China, and it’s getting harder. Data series that show anything unfavorable are suppressed or discontinued, and journalists who might write something negative are increasingly unwelcome. But there is every reason to think that China’s forty-year economic boom at the minimum is stalling out, and indeed its economy may be headed for a major crash.

The Wall Street Journal has two significant pieces on this subject in the last two days: from yesterday, a long front-page news article with the headline “China’s 40-Year Boom Is Over. What Comes Next?”; and today, a lead editorial “The Electric-Vehicle Bubble Starts to Deflate.” (Both are probably behind the pay wall.).

But before discussing those in more detail, let’s review the important background. China’s economy took off in the 1980s when then-leader Deng Xiaoping loosened state controls and allowed a private sector to grow and flourish. Current leader Xi Jinping, who assumed power in 2013, has reversed that policy and increasingly tightened state control and direction of the economy, particularly since his second term began in 2018.

Are there any lessons that we in the U.S. and the rest of the West should be learning here?

I had a post back in March 2021 titled “Is China About To Win The Battle For The Future?” That piece contained a collection of quotes from various pundits, mostly on the left, asserting that China was “winning” this battle; but I then asserted that “China’s system has enormous disadvantages, mostly self-inflicted by the ruling Communist Party, that show every prospect of greatly hindering and undermining its ongoing economic advance.” In a further piece in September 2021, I stated that “the last few months have seen China suddenly doubling down on the most counter-productive aspects of its economic system.” The latter piece relied on reporting from both the Wall Street Journal and the Epoch Times as to a significant change in the business environment in China in 2021. From the Epoch Times piece (of September 22, 2021):

Be it e-commerce, entertainment, education, or gaming, few areas of Chinese society have been left unscathed amid Beijing’s torrent of regulatory activity in recent months. . . . The cascading crackdowns have been swift and puzzling, with some likening the Party’s attempts at social engineering to that which occurred during the Cultural Revolution, a decade-long period from 1966 when the regime’s first helmsman, Mao Zedong, sought to reassert his control within the Party by launching a mass campaign to destroy traditions, beliefs, and social mores. A “profound revolution” is underway in China, declares nationalist essayist Li Guangman, a former editor for an obscure state newspaper. In a recent commentary quickly promoted on prominent Chinese state media websites, he hailed the regime’s campaign as a “return to the original intent of the Chinese Communist Party (CCP) ... and the essence of socialism. . . .”

Now we are two years farther on. Yesterday’s WSJ piece brings us up to date on how Xi’s vision of pervasive state control and regulatory crackdowns is working out:

The economic model that took the country from poverty to great-power status seems broken, and everywhere are signs of distress. . . . With private investment weak and exports flagging, officials say they have little choice but to keep borrowing and building to stimulate their economies. . . . The outlook has darkened considerably in recent months. Manufacturing activity has contracted, exports have declined, and youth unemployment has reached record highs. One of the country’s largest surviving property developers, Country Garden Holdings, is on the cusp of a possible default as the overall economy slips into deflation.

The piece is sprinkled with descriptions of multiple instances of state enterprises building obviously useless projects to keep up an illusion of productive economic activity. For example:

A high-speed rail station in Danzhou, a city in China’s southern province of Hainan, cost $5.5 million to build but was never put into use because passenger demand was so low, according to Chinese media reports. The Hainan government said keeping the station open would incur “massive losses.” . . . Guizhou, one of the poorest provinces in the country with GDP per capita of less than $7,200 last year, boasts more than 1,700 bridges and 11 airports, more than the total number of airports in China’s top four cities.

Now go over to today’s editorial to learn about an even much bigger mis-direction of capital by state command, namely the heavily-subsidized rush to produce electric cars:

A plethora of Chinese EV start-ups launched in the past decade, fueled by government support, including consumer incentives and direct financing. Auto makers churned out EVs to suck up subsidies.

And how is that working out?

About 400 Chinese electric-car makers have failed in the past several years as Beijing reduced industry subsidies while ramping up production mandates. Scrap-yards around China are littered with EVs whose technology has become outdated. . . . Chinese government support inflated EV investment and misallocated capital that could have been put to more productive uses. Now comes the destruction that invariably follows the government creation. . . .

The Journal properly notes that the EV crash in China should be taken as a lesson by the Biden Administration as to the likely end of its own state-directed commands to produce EVs:

[China’s EV woes] may be a harbinger for the U.S. as the Biden Administration emulates China’s EV industrial policy. . . . Business failures are inevitable in a dynamic economy, but government will be mainly responsible for the destruction that results from its force-fed EV transition—and the damage may only just be starting.

That’s good as far as it goes. But come on — how about the additional trillions getting thrown into “green energy” more generally: solar arrays, wind farms, battery storage, massive new transmission lines, new heating systems for buildings, etc., etc., etc.? All of this is unproductive, which at some point will be recognized. And all of it will need to get discarded, and the economic resources re-directed back into something useful.

As illustrated by the Journal’s news story, China has become somewhat wealthy, which has given it the ability to keep up the illusion of productiveness for years, issuing debt to support make-work projects even as its economy hollows out. The United States, far more wealthy, can keep up the illusion for much longer. But not forever.