3 Additional Economic Challenges Facing China

Commentary

Apart from the Trump administration’s tariffs—existing and threatened—China faces several other serious domestic economic challenges. A previous column in this space itemized many of them. You can read it here. That list, however, was far from complete. Here are three more such challenges, none insignificant.

First on the list is an area where the Chinese Communist Party (CCP) has dedicated a great deal of propaganda: technology and innovation, especially in the area of artificial intelligence (AI). The line coming out of Beijing is that China is making great strides that will soon overtake the United States in these areas.

It appears that much of the Western media has accepted the CCP’s narrative. And although there can be little doubt that China has made impressive technological strides, available statistics suggest that China is falling short in this contest.

For all the difficulties inherent in trying to measure technological progress, a comparison of research and development (R&D) spending shows a powerful U.S. lead. According to the most recently available statistics from the Organization for Economic Cooperation and Development, the United States dedicates some 3.5 percent of its gross domestic product (GDP) to R&D, whereas China dedicates only some 2.6 percent, up significantly from the past but still well short of the United States. And since the U.S. economy is larger than China’s, the gap between actual money spent is much larger.

This is not the only point to consider regarding technological positioning. Washington is actively working to block technology transfers to China. The Trump administration implemented new restrictions on chip exports, blacklisting numerous Chinese entities from engaging in trade related to semiconductors and other advanced strategic technologies.

China has sources of semiconductors other than the United States, although Taiwan is not included in that list. And even though U.S. R&D spending exceeds China’s, the domestic Chinese effort nonetheless promises a Chinese-made substitute for the Western product. Nonetheless, the bans slow China’s pace of advance, and since the United States already has a widening lead, that is not an insignificant consideration.

A different sort of challenge comes under the heading of what some call “fiscal room.” It refers to the financial ability to stimulate economic activity and direct its focus. For years, China had significant “room.” It boasted such a small public debt overhang that it could have been described as the world’s envy.

In 2008, during the global financial crisis, Beijing used this financial or fiscal “room” to launch a huge stimulus effort that did much to mitigate the impact of that crisis on China’s economy. But that was then. Beijing’s efforts during that crisis and the COVID-19 pandemic, as well as subsequent efforts to help the economy recover its momentum from the country’s property crisis, have increased public debt levels so that they now equal China’s GDP.

To be sure, this relative debt load is lower than what the United States faces, but China’s lower-income, less capital-rich economy will have a harder time shouldering its debt load than will the United States in shouldering its debt. Besides, China also faces huge debt problems with its local governments that dwarf anything in the United States.

While fiscal constraints limit the ability of both Beijing and local governments to manage matters, China also finds itself burdened by a legacy of past policy mistakes. In the immediate aftermath of the pandemic and to soften the economic effects of the property crisis that began in 2021, Beijing poured money into investments in electric vehicles, technology, aerospace, materials, and other select industries.

Especially since, at the same time, foreign buyers in the West and Japan began to diversify their sourcing away from China, those investments created a huge overcapacity in certain areas of China’s economy. With fewer foreign buyers than before and a less-than-robust domestic economy, China has spent a lot to create a productive capacity that no one seems to want. The investments have effectively been wasted.

That nearly useless excess is shown in three statistics. Capacity utilization in the Chinese economy is now lower than at any time in the past three years, and the excess has created a multiyear deflation in producer prices. The excess has so reduced returns on investment that few managers have any interest in modernization, much less expansion.

According to the European think tank Bruegel, returns on assets for Chinese state-owned companies have fallen to a mere 3.4 percent. The figure for privately owned companies is higher at a bit more than 5 percent, but that is way down from the almost 10 percent return on assets averaged before the pandemic.

Even adding these three additional challenges to the list of China’s economic challenges does not complete the list. China, for instance, has yet to feel the longer-term impact of the country’s declining population and, more significantly for the economy, the even faster rate of decline in China’s workforce. It is not a pretty picture from any angle, especially since Washington is promising to add more economic pressure on China.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.