China and the ‘experts’

The annual National People’s Congress kicked off today with outgoing premier Li Keqiang announcing a 5% real GDP growth target, down from 5.5% before.  The priority, said Li, was the economy, but even so defence expenditure was to rise by 7.2% in 2023.  Li set a target for China’s budget deficit this year at 3% of GDP, while pledging to create 12mn new urban jobs and keep the unemployment rate at roughly 5.5%.  He said China needed to “expand market access” for foreign investors, ‘prop up’ consumption and control risk in the real estate sector. 

On China’s stricken real estate sector, where many companies have defaulted on their debt, Li pledged to help “high-quality, leading real estate enterprises” while continuing to “prevent unregulated expansion”.  Some Western ‘experts’ were mildly positive. I think on the whole the report is geared towards reassuring foreign investors that China is still a good place to do business and so forth,” said Willy Lam, an ‘expert’ in Chinese politics at the Jamestown Foundation think-tank in Washington.

President Xi is taking an unprecedented third term and replacing Li with Li Qiang, a close associate who presided over the lockdown (mess) in Shanghai last year, as the city’s Communist party chief. He previously worked with Xi in Zhejiang province in the 2000s. The Chinese president completed a clean sweep of the Communist party’s top decision-making body, the seven-member Politburo standing committee, in October.

As the NPC begins, once again, Western ‘China’ experts and even many in China itself predict stagnation and even a crash, as the indebted property sector implodes.  China’s population growth has stopped and the workforce is in decline.  Growth is slowing.  China has entered a ‘middle-income trap’.  Indeed, given the huge debt levels in all sectors, China is going to stagnate like Japan has done in the last three decades.  The only way to avoid ‘Japanification’, say these experts, is to ‘rebalance’ the economy from ‘over-investment’ and ‘exports obsession’ to a domestic consumer-led economy as in the West and also reduce the state control of the economy so that the private sector can flourish.

Now I have discussed the validity of these arguments at length in various posts and I refer my readers to these in explaining why much of this ‘expert talk’ is not right. 

But given the NPC meeting and the new guidelines being set by the CPC leaders, let me go over a few of my arguments against the ‘experts’.

First, let’s remind ourselves of China’s past economic performance.  China’s growth rate over the last 20 years alone has been significantly higher than any in the G7 and even in the major ‘emerging’ economies, the so-called BRICS (Brazil, Russia, India and South Africa).  And this faster growth rate has been in the most populous country in the world, not some tiny city state, like Singapore, or even slightly larger Asian economies like Taiwan or Korea.  There is just no comparison.

Ah, but you see, that’s all over now.  China’s growth will now slow to a trickle as in Japan because it is overloaded with excessive debt and because it has not rebalanced the economy towards “the consumer”.

This last argument is particularly galling to me.  Western experts and even Chinese economists parrot out this argument, which comes straight from neoclassical economics and what left Keynesian economist Joan Robinson called ‘bastardised Keynesianism’ – bastardised because Keynes himself emphasised the role of ‘aggregate demand’ which included investment and not just consumption.  And yet the mainstream argues that what matters in a modern economy for growth is boosting consumption. 

This argument can be shown to be nonsense.  It’s productive investment that is the driver of growth in an economy and from that investment flows consumption – not vice versa.

The usual basis for the ‘rebalancing’ view is that personal consumption rates are too low in China and this will hold back demand-led growth. For example, take this view by Chen Zhiwu, a professor in Chinese finance and economy at the University of Hong Kong. Chen argues that, under Xi, major reforms towards a larger private sector, consumer-led economy have been sidelined. “The 60 reforms would have largely expanded the role of consumption and private initiatives,” he says. “However, the market-oriented reform agenda has been largely sidelined . . . resulting in a larger role for the state and a shrunken role for the private sector.”  According to Chen, this will mean China’s economy will stagnate from hereon.

Another prominent and widely-followed Western analyst, Michael Pettis, who is based in Shanghai, makes a similar argument, namely that what will push China into Japanese-style stagnation is the failure to expand personal consumption and continue to expand investment through rising debt.  And Keynesian guru Paul Krugman joins this chorus, talking of China’s “wildly unbalanced” economy, which Krugman claims: “For reasons I don’t fully understand, policymakers have been reluctant to allow the full benefits of past economic growth to pass through to households, and that has led to low consumer demand.” Unfortunately, sections of the Chinese leadership, particularly their economists in the finance sector, accept this annoyingly stupid argument from the Western experts.  

How can anybody claim that the mature ‘consumer-led’ economies of the G7 have been successful in achieving steady and fast economic growth, or that real wages and consumption growth have been stronger there?  Indeed, in the G7, consumption has failed to drive economic growth; and wages have stagnated in real terms over the last ten years (and are now falling), while real wages in China have shot up.  Moreover, these consumer-led economies have been hit by regular and recurring slumps in production that have lost trillions is output and incomes for their populations.

There are two points here.  First, investment-led economies actually deliver faster growth in consumption.  China has the highest ratio of gross investment to GDP among the major economies (all data from hereon come from the World Bank). 

And investment growth is also the fastest.

Sure, investment growth is slowing in China, but the slowdown is even worse from a low level in the G7 economies.  ‘Japanification’ actually means falling real investment growth.  China is nowhere near that.

What does this mean for GDP growth? China’s ‘over-invested’ economy has more than four times faster than the consumer-led OECD economies and 40% faster than India. 

Much was made of zero COVID ‘disaster’ policy in China.  But apart from saving millions of lives, China still did not enter a slump in 2020 unlike all the G7 economies in 2020.

Second, does this mean that consumption in China by households is too low or even falling?  At this point, the China experts trot out this graphic.

Then the argument comes: China needs to get its consumption share up to Western levels or it will not be able to grow and stay locked in a ‘middle income’ trap. 

But this is not the graphic that tells the real story.  This is the graphic that does.

Surprise! The ‘over-invested’, ‘wildly unbalanced’ Chinese economy has delivered by far the faster consumption growth for its people – nearly four times faster than the consumer-led US, nine times faster than Japanification and even 50% faster than India.  What this suggests that if China were to ‘rebalance’ its economy towards the consumer and reduce investment; and also reduce the public sector and ‘free up’ the private sector (the sector that provides most consumer goods in China), China’s growth rate would fall even more than it has done in recent years!

As it is, the consumption to GDP share graph is misleading.  First, this measure of consumption excludes the social wage, particularly health and education, social care and public services.  In countries like the US, much of this social consumption has to be paid for and so appears in the consumption share.  That is not the case for much of social consumption in China.  China has a long way to go in social consumption, but it is way ahead of its emerging market peers in many areas and not so far behind leading G7 economies, who started more than 100 years before.

Second, the graph shows consumption as a share of value-added (GDP) ie to the ‘final consumer’.  In the US, consumption would seem to constitute 70% of GDP.  However, if you look at ‘gross product’ which includes all the intermediate value-added products not counted in GDP, then consumption is only 36% of the total product; the rest constitutes demand from capital for parts, materials, intermediate goods and services.  It is investment that is the swing factor and driver of demand, not consumption by workers.

What is true is that ‘productive’ investment growth has fallen back in China.  Investment in new technology, manufacturing etc has given way to investment in unproductive assets, particularly real estate.  In my view, successive Chinese governments made a big mistake in trying to meet the housing needs of its burgeoning urban population by creating a housing for sale market, with mortgages and private developers being left to deliver. Instead of local governments launching housing projects themselves to house people for rent, they sold state assets (land) to capitalist developers who proceeded to borrow heavily to build projects.  Soon housing was no longer “for living but for speculation” (Xi quote).  Private sector debt rocketed – just as in the real estate bubble in the West.  It all came to a head in the COVID pandemic as developers and their investors went bust.

The real estate crisis has remained unresolved.  It is interesting to see what the Western experts reckon is the solution.  This is what Michael Pettis says: “Unfortunately, it will require a revival of speculative buying to prevent further contraction in the property sector and real estate prices, something which would only make things worse in the medium to long term.”  (Tweet, 5 March). So the answer to the property crash is more speculation even if it makes things worse in the future!

That’s not my solution.  What the Chinese government needs to do is take over these large developers and bring them back into public ownership, complete the projects and switch to building for rent.  The government should end debt payments to foreign investors and only meet obligations to small investors; and transfer housing out of the mortgage and private finance system. 

The real estate sector has got so large in China as a share of investment and output that it has seriously degraded overall growth.  This is where the economy does need rebalancing. Outgoing PM Li said that China needed to “expand market access” for foreign investors, ‘prop up’ consumption and control risk in the real estate sector.  Li pledged to help “high-quality, leading real estate enterprises” while continuing to “prevent unregulated expansion”. 

Really, can Li square the circle? China’s private sector has mushroomed in the last two decades.  It has led to an unhealthy expansion of billionaires and rising inequality of wealth and incomes.  And just as in the West, as the profitability of productive capital fell, the capitalist sector switched into unproductive investment areas, like finance and real estate.  Debt has rocketed.  This has increased the risk of economic crises as in the West. 

Contrary to the views of the Western experts and Li, it’s not less investment and more consumption; not less public and more private investment that China needs to sustain its previous economic success, but the opposite. 

9 thoughts on “China and the ‘experts’

  1. Neoliberal economics insistence on the $10 Walmart T-shirt as a solution to all problems and that investing in production is going to lead to collapse…..

    This as financialization further removes the western economies from production, you can’t make this stuff up.!

    Deeper still to the “consumption” narrative is the ridiculous insistence on China’s service industry be expanded over it’s manufacturing, another common refrain from mainstream economics. If anything Xi is preparing for a rapid expansion of BRI, not a teppid withdrawl from the policy.

    “But Ukraine war!” they say, “BRI will not happen at all”. Really? Losing Europe’s market seems a temporary setback considering all of Russia’s agri and fuel surpluses are earmarked eastward. By the time expansion into Asia reaches it’s peak in the next 5 years I doubt the EU nations will still be on board rejecting BRI.

    If Xi could just to a “land reform” with the housing crisis and just use the opportunity to give housing to people the result would be China in the best economic situation going forward for any country in the last 75+ years.

    The west still obsessed with “Degrowth” and limiting both production and consumption, it’s a real laugh.

  2. Very interesting discussion, thank you. However your proposal to dispossess Western investors in Chinese property companies seems a bit drastic. Not only are there legal issues but Western business sentiment would be deeply affected – who will they squeeze next, and how ? Or have I missed your ingenious way to make it all work out ?

  3. “What the Chinese government needs to do is take over these large developers and bring them back into public ownership, complete the projects and switch to building for rent. The government should end debt payments to foreign investors and only meet obligations to small investors; and transfer housing out of the mortgage and private finance system.”

    They already are doing that. Evergrande’s CEO is torching his personal fortune as we speak in order to finish the projects because he knows what a bailout really means in China: the government will really take over his company, installing Party members at the executive board. The government can also buy the shares on the cheap in order to also take control of shareholder’s board, as it is doing right now on some big, strategic private companies.

    Engels’s prediction turned out to be correct: shareholder capitalism has made its expropriation by the workers easier, not harder — provided a communist revolution happens first.

    The only reason the CPC hasn’t let its real estate sector to crumble at once, but instead is managing a controlled demolition, is because it is waging a war against the American Empire right now, so it cannot let the financial front weaken so much so suddenly. Also, it is much more socially peaceful/less traumatic to let the capitalists hang themselves by torching their fortunes willingly first than go straight for the throat and expropriate them through a State decree and violently execute them in public square and show the Chinese people how evil the government is. It is more didactic to show the people the contradictions of capital than to try to accelerate the timetable.

    China has something the USSR didn’t have: time.


    We should have a long-term vision when analyzing China. After all, that’s how the CPC analyzes China — one of the advantages of not having to cajole the masses with bombastic and unrealistic promises during electoral cycles of just 4-5 years.

    For example, the Western intellectuals claim China has a demographic problem: negative birth rates and an ageing population.

    But then they claim Zero Covid was an epic failure and they should open up and “let it rip”.

    Well, if they adopted the laissez faire approach of the USA and other Western nations, it would have lost, by the very Western models, at least 14 million people — and that’s assuming it had the same performance as the USA, which has a First World healthcare system.

    If China has a structural demographic issue, then saving 14 million lives to the least is very well worth the investment of some percentage points in GDP growth for three or four years, because the average human being lives much longer than that. If demographics is a problem, then Zero Covid was an enormous success not only from the pure humanist point of view, but also from a cold, calculating, economic point of view.

    Unless, of course, those Western intellectuals are lying to their teeth, and China either doesn’t have a demographic problem, or its Zero Covid was a success, or both. In doubt, I always stick with the simplest explanation.


    My guess as to why these Western intellectuals are so fascinated with this “middle income trap” theories (with all of their sophistication and variations) comes from the fact that most, if not all, of them come from finance. Finance guys do what they were born, raised and trained to do: to look the world from a finance point of view.

    So, what would a finance guy first look in China right now? Its huge savings, of course. He will look at where the money is, much like, in the First World countries post-2008, they were salivating over the social security funds and universal healthcare systems’ costs. So, if a finance guy sees that huge amount of money sat at bank accounts from the average Chinese savings accounts, he wants a slice of that cake. If the Chinese use those savings to keep the Real Estate and whatever other financial sector of the Chinese economy afloat, the finance guy’s bosses get the pie, and the finance guy himself gets a piece of that pie.


    Last but not least, the challenges of China ahead.

    My take on the size of the private sector in China is this: as long as the central government is still able to make very precise predictions on the economy (GDP growth, industrial output growth, investment rates etc. etc.) in a way its statistical and expectations are always correct, everything is alright because that is a sign the CPC hasn’t lost its capacity of planning.

    They are predicting a +5% growth this year. If they miss it by a lot — doesn’t matter if for better or for worse — then I would be very worried, because that would mean the private sector has reached a critical mass now capable of operating beyond the CPC’s control.

    I gave the CPC a pass during the pandemic because, albeit not a black swan event in the long term, it is one in the short term (year-on-year predictions), and, either way, since China was only founded in 1949, it didn’t have a planning model that accommodated pandemics. I still will not be as rigid for this year (2023) because the Chinese CDC predicts another peak of the pandemic for July, so a larger margin of error is allowed, but more precision is required.

    When the pandemic is declared over by the central government, I will expect perfect precision (including here a precise margin of error).

  4. From films, the present for a bride to start a family and a home in the sixties was The Little Red book (and a Flying Pigeon bicycle). In the 1980s, it was ‘white’ goods such as a top loading washing machine. By the 1990s, a man would need to provide TV and a microwave. My family had to arrange for an electrician to visit to upgrade the household fuse. In the 2000s, it was a car, and now it is a house (the house is really a collective family effort to save and buy). And Chinese people live longer to consume these ‘luxuries’.

  5. Let’s be clear, all this massive amount of mainly state-directed Chinese investment is not building bridges to nowhere and using more unqualified workers to bash out more shoddy goods at more and more primitive machines.

    Firstly, China has vastly more industrial robots than any other country. And what is more important, last year they overtook the US in the density of industrial robots (robots per 10 000 workers). (

    Secondly, China has now leapt ahead of the USA in the research of 37 of 44 critical technologies. (

    Undoubtedly, if China were a socialist country, less investment would be wasted. Still, even with an authoritarian regime, a state dominated economy makes good use of much of the investment.

  6. Michael I am sure that you will agree the rate of profit is the final arbiter. In 2011 the Chinese Complex Rate of Return was 9.09%, by 2019 it had fallen to 5.26% and despite the boost to exports during 2022 the rate of return for 2022 was still only, 5.38% in spitting distance to 2019. In contrast the rate of profit shot up in the USA during 2022. This is the biggest problem facing the CCP.

    You are right about consumption. In the USA the top 10% of income earners spend as much on goods and services as do the bottom 80%. Much of the income of the top 10% derive from capital gains and that depends not only on the surplus value produced by US workers but the transfer of value from the dominated and dependent economies. Hence consumption derived growth is a gift only open to imperialist countries. (Of course the USA is seeking to rebuild its own manufacturing base and we will see where this state-led investment leads to. It is worth keeping an eye on it. In fact some of the conditions placed on these investments by the Biden Administration, such as the recognition of trade union rights and child-care provision goes beyond anything that has been proposed in China.)

    Talking of profits, I have calculated the revenue and operating income for 90% of the US tech corporations covering the 4th Quarter (equal to 30% of total non-financial corporate profits). Revenue fell by 5.1% yoy, income by 22.4% and profit margins from 34% to 28%. Given price movements the fall in profits is above 30% in real terms. So while China has reverted back to 2019 in terms of profitability the USA is about to. We will know more on March 30 when the BEA releases its much delayed report estimating corporate profits for non-financial corporations.

    1. Not being an economist, I depend economists like you for reliable information. Have i been (mis?) led (not by you) that rather than a Biden-led US state investment in productive enterprise, the government (i.e. Biden-NATO) has pressured its European “allies” to offshore their industrial capital to the US and concentrate on providing war supplies to…..USofNato-kraine?

  7. Good post. Where are the champions of the public sector, in China?
    As for debt: the issue for a currency-issuing govt. is allocation of available resources, not debt.

  8. You criticize the recipe that China must “rebalance the economy towards ‘the consumer’.” But blaming this recipe on outgoing Li Keqiang is incorrect. A basic document, Xi Jinping’s report to the 20th Congress last October, declares, “We will work to expand domestic demand and better leverage the fundamental role of consumption in stimulating economic growth and the key role of investment in improving the supply structure.”

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