The week saw the release of two disconcerting data points from China, the second-largest economy in the world, casting a cloud on the post-reopening momentum.
Nobel Prize-winning economist Paul Krugman in a recent New York Times op-ed offered his take on the state of the Chinese economy.
What Happened: China is now stumbling after decades of miraculous growth as the abandoning of the “zero COVID” policy hasn't produced the expected economic surge, said Kurgman in the op-ed published Thursday.
“China is now experiencing deflation, inspiring comparisons with Japan's slowdown in the 1990s,” the economist said.
Light At End Of Tunnel? China's economic woes are “more systemic,” said Krugman. China, in many ways, suppresses private consumption, thus driving up savings that need to be invested somehow, the economist said.
This worked some 15 or 20 years back when China's GDP grew about 10% a year, he said, adding that “a rapidly growing economy can make good use of huge amounts of capital.”
As China grew richer, the scope for rapid productivity gains narrowed and at the same time working-age population also stopped growing and began to decelerate, Krugman noted. The nations's GDP growth has now tapered to 4% and even with the falling rate, the country is trying to invest more than 40% of the GDP, which just isn't possible, he said.
This fundamental issue has persisted for more than a decade now but China tried to cover it with its “immensely bloated real estate sector,” Krugman said. This strategy, though, was unsustainable, he added.
The economist said fundamental reforms are needed to lift the economy. “China's government has been weirdly resistant to reforms that might make its growth sustainable,” he said.
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Where Does This Leave US At: Krugman noted that the Biden administration has taken a hard stance toward China. These include promoting domestic chip production in the U.S. to reduce reliance on China and banning high-tech investments in China, he said.
“Trying to reduce that superpower's ability to do harm makes sense, even if it makes many people nervous,” the economist said.
Krugman sees China pushing through long-needed reforms that put more income in the hands of families so that rising consumption can take the place of unsustainable investment.
“But you don't have to study much history to be aware that autocratic regimes sometimes respond to domestic difficulties by trying to distract the population with foreign adventurism,” Krugman said. Apparently, the economist sees China aggravating tensions with other countries
“I'm not saying that will happen. But realistically, China's domestic problems make it more, not less, of a danger to global security.”
The iShares MSCI China ETF MCHI, an index tracking Chinese stocks available for international investors, fell 1.31% to $46.60 in premarket trading, according to Benzinga Pro data.
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