Gibson: China's prospects are falterning

FreePik photo illustration

Scott Gibson

Guest writer Scott Gibson is a physician who returned to his hometown of McMinnville to practice medicine and raise a family. He served on the McMinnville School Board from 2011 to 2017, when he and his wife, Melody, moved to the outskirts of Amity to open Bella Collina B&B. In addition to medicine and science, he counts history, economics and writing among his interests.

In 1978, China’s new leader declared a program of “economic democracy.” Deng Xiaoping launched China into a capitalist system that few had expected, and with remarkable results.

Since that time, China’s annual gross domestic product growth has averaged 9%, lifting 740 million people out of poverty.

Many observers, myself included, as a curious college student, doubted that “economic democracy” could last without political democracy. Historically, economic growth has fostered expansion of the middle class and growing demands for more freedom and political rights.

More than 40 years later, China’s economy has grown to No. 2 in the world, trailing only that of the United States.

But China still has an authoritarian, one-party system. In fact, under President Xi Jinping, power is more concentrated at the top than in any period since that of Mao Zedong.

It appeared China had threaded the needle in managing to merge capitalism and a single-party system.

Leaders preached that democracy was too cumbersome to enact the changes needed to grow the economy. They did not mention the role played by state-organized theft of intellectual property from Western democracies in China’s remarkable rise.

As long as the economic good times were rolling, the Chinese people continued to tolerate limitations on speech, internet access and political power.

But discontent was bubbling up below the surface. As a result, cracks have developed in China’s economic and political structure.

Recent trends suggest the leadership is responding by curtailing capitalism in order to maintain political dominance.

In 2021, China cracked down on some of its largest companies, particularly tech firms like Alibaba. What was deemed an action against anticompetitive practices wiped out $1.5 trillion in value from tech stocks.

The government described this as a “short-term loss” necessary in order to maintain long-term stability. While the real reason for the crackdown remains obscure, many analysts suggest that these companies were amassing enough economic power to threaten the central government.

Alibaba’s president, Jack Ma, was forced to disappear from public view after he complained publicly about growing regulatory interference. Then Alibaba was slapped with a $2.8 billion fine.

Other CEOs in China took the hint and began lying low.

China has also failed to shed its state-owned enterprises, which account for 30% of its GDP. These companies have amassed huge debts since 2008 as the central government worked to shore them up.

Despite this influx of capital, SOEs have become increasingly dysfunctional. Between 2008 and 2016, the proportion of SOEs considered unhealthy increased 50%.

Chinese banks hold the loans on these poorly performing companies, and their outlook is looking increasingly difficult. The banks assess nonperforming loans at $350 billion, but analysts suspect the real amount is two to four times that, and possibly much more.

The real estate sector exemplifies how the Chinese system warps markets.

Cities made money selling state-owned land to developers, who then pre-sold unfinished apartments to consumers. Over time, 90% of Chinese housing was being pre-sold.

But only 60% of the homes pre-sold between 2013 and 2020 have actually been delivered. So their “owners” have been stuck paying mortgages on apartments not yet built.

This has led to mortgage boycotts. Consumers are increasingly balking on paying on loans for properties they can’t occupy.

In democratic countries, a free press is a hedge against corruption, as it investigates and informs the public of malfeasance. Lacking press freedom, China tries to root out corruption from the top, but with limited success.

In addition to structural economic challenges, demographics are now working against China. The one-child policy was changed to a two-child policy in 2016, then to a three-child policy in 2021.

But little has changed. The fertility rate is now at 1.3 children per woman, a record low.

The working-age population recently peaked, and is expected to drop significantly in the coming years. The drop in workers will curtail future growth even as the number of Chinese elderly rises, putting stress on government outlays.

China’s sclerotic political system is struggling to meet these challenges, even as it consolidates more and more power in the office of the president.

Xi Jinping revealed his new cabinet at the recent party congress. While the audience applauded enthusiastically, the Hang Seng stock market responded by dropping 6 percent.

Every member of the cabinet is a Xi loyalist. None has any economic expertise.

China may be colliding with economic realities that could clamp the brakes on its miracle growth rate. After decades of averaging 9% annual growth, China’s economy is on track to grow only 3% this year.

Economic pain appears to be a cost the communist party is willing to pay to remain in power, as anyone in Hong Kong can attest.

But that brings us back to the fundamental tension in China — can it maintain a single-party, authoritarian system while also maximizing the rewards of a free market system? I suspect it cannot.

History is not on China’s side.

It’s no accident that long-term economic dominance is found in liberal democracies that respect human rights. The freedom to take risks and achieve or fail in a balanced marketplace is fundamental to financial success.

China made strides in this direction, but such liberties are now being curtailed for the sake of maintaining political control in the hands of a few.

Taiwan exemplifies the difference between the two systems.

After Chinese nationalists fled to the island from Mao’s communist army in 1949, they created a robust free-market democracy. Taiwan’s per capita GDP is now more than five times that of China.

With less than 2% of mainland China’s population, Taiwan has become the world’s premier producer of semiconductors and an economic powerhouse. The People’s Republic has invested massively in semiconductor production, but has fallen far short.

Capital investment of $4 used to give China a $1 increase in GDP. Now it takes $8.

America’s companies innovate at half the cost of Chinese firms.

Free markets, a free press, free speech and respect for human rights lead to incentives, innovation and efficiency. Dictatorships have never found a substitute.

Meanwhile, China’s leaders are learning they aren’t immune to popular wrath.

Their zero COVID policy kept infection rates low, but necessitated repeated lockdowns that stifled growth and impoverished millions. When nationwide protests erupted, the government abruptly reversed course in December, ending zero COVID.

Hundreds of thousands of deaths may result, and the political repercussions could be dramatic.

We should be cautious about China, but not exaggerate its power. Only time will tell if it can continue its remarkable economic progress or if it will look more like Putin’s army, with weaknesses far greater than expected.

The most important strength the U.S. has is the one China refuses to permit — personal, political and economic freedom.