What Beijing’s Planners Thought Would Help Has in Fact Hurt China’s Economy

Commentary

China’s economic challenges are by now well known, especially to the readers of this column. Read a partial review of them here and here. The unfolding trade war with the United States has compounded them greatly.

What is less well known is how one of Beijing’s answers to these problems—heavy investment in technological production capabilities—has only made matters worse. Some, whether they recognize this particular failing or not, have forecast a collapse in China. That conclusion is no doubt a step too far for what, after all, is a huge economy backed by a disciplined and well-educated population. But as should be clear by now, it will take years for China to recapture even a small part of its once-envied economic momentum.

The country’s economic failures are clearly evident in every major economic measure. According to an extensive review published not too long ago by the prestigious Rand Corporation, the property crisis that began in 2021 and the attendant declines in consumer spending, as well as capital investment by private businesses, have contributed to a massive growth shortfall.

China’s real gross domestic product at the close of last year was, for instance, more than 5 percent lower than it would have been had pre-2019 trends prevailed. Every major sector—consumer spending, capital investment, exports—trailed its former trend. On a value-added basis—a measure that roughly accounts for the complexity of each product—Chinese manufacturing has even lost ground to the United States during the past five years. Chinese consumer confidence stands some 30 percent below pre-pandemic levels. Even high-technology output, where Beijing has focused considerable emphasis and resources, is growing at a slower pace than previously, about 11 percent in 2024 compared with 25 percent on average in 2018–2019.

As part of Beijing’s response to these developing shortfalls, its planners directed huge public investments—largely through state-owned enterprises—into technological production capabilities. These efforts have focused especially on the production of what the planners described as the future, such as electric vehicles (EVs), semiconductors, artificial intelligence, and biomedical products. Spending in these areas soared. The effort has been so overwhelming that the Rand study quoted above has described this advance as a hidden strength that might overcome all the other failings in the economy. As it has turned out, however, this push has done more to compound the economy’s problems than remedy them.

This huge spending and production push has done less to revive China’s economy than simply to unbalance it. Because Beijing has failed to revive both consumer and business spending, China’s domestic economy can hardly absorb this additional technology production capacity. The flood of products from Beijing’s efforts has put downward pressure on prices, which has called into question the viability of the additional technology production capacity. Moreover, it has contributed to a generalized deflation in consumer prices, and at the producer level, that has stymied other efforts at economic revival by convincing Chinese households and businesses to delay spending in the hopes of getting lower prices at a later date.

Worse for China, the capacity surplus has forced the country to seek export growth at a remarkably inauspicious time. At base, this export need is thwarting Beijing’s other aims to make China’s economy more domestically focused and hence less vulnerable to other economies. The surplus also creates a need for exports when both Washington and the European Union are taking steps to keep out Chinese products, with high tariffs in general in the United States and aimed at EVs in Europe, as well as quantitative barriers, especially in the EU.

Instead of an answer to China’s general economic troubles, much less the hidden strength that Rand identifies, Beijing’s “solution” of a buildup in technological production capacities—whatever other values it might bring—has failed to get the economy moving and actually made a general economic solution more difficult.

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