President Joe Biden brought tremendous advantages to his Woodside, California, meeting with Chinese President Xi Jinping. The U.S. economy, though not in the best condition, is in much better shape than China’s. Less apparent, but an even greater American advantage, is the evidence that most of China’s economic problems are products of its top-down, command-and-control approach to economic management. While Biden may not fully understand this, Xi and his party seem blind to the source of China’s troubles and thus are highly unlikely to remedy them.

China’s economic woes are well documented. Widespread failures among residential property developers have weakened the country’s financial system, prompted a decline in real estate values, and otherwise robbed the nation of what was once a great spur to growth. The drop in real estate values has so damaged household wealth that Chinese consumers remain reluctant to spend. Exports, still a vital part of the economy, have declined for months. Various gauges of production and economic activity reveal a slowing economy at best, while recent measures of manufacturing activity point to outright decline. China cannot employ its young people, especially recent graduates. At last measure, youth unemployment was over 20 percent; this figure is so embarrassing to Beijing that the government has stopped publishing the statistic. Meantime, private business in China shows a marked reluctance to modernize or expand. At the least, the economy will fall significantly short of Beijing’s annual target of 5 percent real growth.

Chinese authorities have laid the blame for the catastrophe in property development on the managements of failed firms. Surely, these deserve some blame, but most belongs to Beijing. It was Beijing’s central planners, after all, who continued actively to promote residential real estate development far beyond the economy’s needs. For years, these officials streamlined licensing and arranged easy financing for both developers and homebuyers. They encouraged local governments to partner with developers. In response, developers leveraged themselves and took on more and more dubious projects. The promotion was so extensive that residential real estate development rose to almost 30 percent of the economy, by some measures. Then in 2020, Xi and the planners decided to shift emphasis and abruptly removed the support. Overextended, the developers began to fail. A less centrally planned system could never have gone as far with the promotion as China, nor could it have changed direction so suddenly.

The damage done by China’s centrally planned direction will not be limited to this collapse. Take, for instance, the problem with exports and the associated decline in manufacturing activity. True, some of this problem is outside Beijing’s control. The U.S. economy is slowing, and much of Europe is already in recession. Since Europe and America are China’s largest markets, an export shortfall was unavoidable. But China’s vulnerability also has much to do with government policy. Though Beijing’s rhetoric has repeatedly stressed the economy’s need to become more domestically oriented, in practice the planners have continued to support exports. A more market-oriented economy would have naturally responded to China’s growing wealth and made the adjustment. But China’s planning kept the export emphasis and left the country especially vulnerable to events in Europe and America.

Then there is China’s youth unemployment problem. For years, Beijing prepared for the economy’s technological advancement and full development by encouraging the nation’s youth to attend university, and in particular to study engineering and other STEM subjects. Government money built up the universities for this effort and buttressed student finances. In the West, journalists and government officials stood in awe—and not a little fear—of the numbers of Chinese engineering graduates. But because the central planners kept pushing exports, China never developed a service sector capable of employing these clever young graduates. These young people now cannot find work. Meantime, China suffers from a lack of manufacturing workers.

A seemingly irresistible temptation for central planning has brought China still other ills. Hong Kong’s misfortune is the most dramatic example. In 1997, when Britain ceded its former colony to Beijing’s control, China’s leaders promised to protect many of the city’s economic and political freedoms. They talked about “one country, two systems.” But after Xi took power, Beijing reneged on that promise and encroached on the city’s liberties. Troops and police suppressed the Hong Kong protests of 2019. And though it may still be easier to move money in and out of Hong Kong than, say, Shanghai, most of the features that had long attracted businesses to Hong Kong disappeared. According to Hong Kong’s Census and Statistical Department, the number of American firms with a regional headquarters in the city has dropped by some 30 percent from the peak. Without the city’s financial might and business links at China’s disposal, Beijing had stolen yet another engine of growth and rendered its own economy that much more dependent on foreign investing and Western financial arrangements.

The same command-and-control ethos has done less dramatic but no less significant harm elsewhere. Under Xi, Beijing has taken an increasingly and unnecessarily heavy-handed approach to trade relations. Some years ago, Beijing tried to squelch Japan’s complaints about Chinese policy by cutting off exports of rare earth elements to that country. When Australia made official inquiries into the origins of the Covid-19 pandemic, Beijing cut off its access to Chinese markets. When the United States and Europe complained of Beijing’s insistence that every foreign operation in China must have a Chinese partner that will then be privy to all its technological and trade secrets, Beijing refused even to negotiate. And when Donald Trump’s tariffs put China under pressure, Chinese leaders first promised to make concessions but then quickly reneged. During the pandemic, Beijing, in a seemingly arbitrary way, blocked delivery of contracted products, including surgical masks and medical inputs. More recently, Beijing has increased its surveillance of foreign firms, unnerving just about every foreign operation in the country with raids, including, most recently, two American firms, Bain & Co. and Mintz, leading in the second case to fines and the detainment of several employees.

All this has convinced Western and Japanese businesses that economic links to China are less reliable, riskier, and impose more uncertainty than they had once thought. Buyers from Europe, America, and Japan have begun to look beyond China. No doubt the decline in Chinese exports reflects this trend as much as it does Western economic slowdowns. But the harm goes further. Foreign firms long-established in China are moving operations to India, Vietnam, Latin America, or back home. Foreign operations in China have ceased re-investing profits in their Chinese operations and for almost two years now have repatriated those earnings. China is losing not just the economic activity and wealth brought by these operations but also access to financial flows, as well as foreign technological and business expertise.

Beijing’s high-handed behavior has earned the enmity of governments in the West and in Japan. Washington has banned the sale of certain technologies to Chinese buyers. Many Europeans and Japanese have gone along with the American restrictions. Biden has also banned many potential American investments in Chinese technology. In time, China will find a way around these restrictions, but for now they will impede the country’s economic development. Doubtless, this turn to hostility would have arisen anyway in response to China’s increasing dominance in Asia, but by resisting its aggressive impulses, Beijing might have delayed its onset and enjoyed the economic benefit of open trade and investment for a while longer.

If China is to overcome the loss of exports, foreign investment, and foreign technological expertise, it will need a big domestic push—but even here, Beijing’s policies and practices have muddled matters. Beginning about five years ago, President Xi, with seemingly no regard for the economic implications, decided to return to the nation’s Communist roots. He described the economic freedoms put in place by Deng Xiaoping in the late 1970s as transitory means to rebuild the economy that were no longer needed. Accordingly, he began to criticize private domestic Chinese business, telling them to stop their pursuit of profits and instead to follow the Chinese Communist Party’s agenda. His government published guidelines to “educate private businesspeople to weaponize their minds with socialist ideology.” He used control of state-owned financial institutions to deny companies financing for expansion, especially those showing insufficient fealty to socialism, including Jack Ma’s otherwise wildly successful Alibaba Group. Not surprisingly, China now suffers from a dearth of investment spending by private firms. For now, Xi has retreated from this harsh rhetoric, recently referring to businessmen and women as “our own people,” but the wariness his past rhetoric engendered remains. Private domestic capital spending in China continues to decline.

Xi carried all this baggage to his meeting with Biden. Both men tried to dial back the hostility, and Xi gave a pleasant-sounding speech to American businesspeople. In their talks, Xi doubtless asked Biden for relief from Washington’s export and investment restrictions. He might have encouraged Biden to boost America’s economy and hence the prospects for Chinese exports. Biden in return might have sought a resumption of Chinese sales of rare earth elements, which Beijing banned in response to the American export and investment bans. He might have asked for a less demanding approach to American companies doing business in China. It is far from clear that Biden took as much advantage of China’s position as he could. It is not even clear whether the American team understood China’s predicament. What is evident, however, is that Xi has no idea how many of his economy’s problems spring from the central planning to which he seems wedded, and which is implicit in Communist economics.

Photo by Li Xueren/Xinhua via Getty Images


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