The China traps

India must learn from China's botched recovery

There is some disconnect between how China’s position as an economic power is portrayed in the news headlines, and how its economy is actually doing. The recent visit of United States Treasury Secretary Janet Yellen to Beijing was seen almost as a supplicatory effort, an impression  enhanced by the visuals of Ms Yellen’s overly respectful greeting of President Xi Jinping. Yet, in the real world of investment and unemployment, the real China story is of an economy that has underperformed in terms of recovery from the effects of the Covid-19 pandemic. Two recent data releases made it quite clear what the stakes are for China. It was revealed that retail inflation in June on the mainland was flat compared to the same month the previous year, and that it had fallen on a monthly basis — as had wholesale inflation, which had fallen quicker than at any point since 2016. In other words, the mainland’s economy stands on the edge of a deflationary precipice, driven by low demand and shrinking manufacturing output. It was further revealed that, in May, over 20 per cent of the mainland’s workers under the age of 24 were unemployed. This is a higher rate than in most comparable economies, and even some European nations  known for high levels of youth unemployment.

China is faced with at least three simultaneous and interlinked economic traps. There is the deflationary trap, which has slowed Japan’s growth since the 1980s  — and which that former growth superpower is yet to escape. Then there is the investment trap. China’s policymakers have few levers with which to push growth and employment other than increasing public investment. However, the marginal returns on additional investment are diminishing, and public debt is already high. Reworking the debt/savings relationship as well as increasing private consumption at the expense of fixed investment would require a significant structural shift in the economy — the political implications of which the Communist Party clearly finds unpalatable. Finally, there is the traditional “middle-income trap” faced by all countries that have reached a certain level of income and development: How do they move up the value chain and increase worker wages and productivity? The mainland’s youth unemployment problem is in many ways driven precisely by this trap: The tech and start-up sector, which should have been soaking up many of these young people, is failing to grow as fast as is needed to push China into high-income status.

This situation is the product of conscious choices by Beijing, and thus has clear policy implications for New Delhi. The death of China’s tech sector due to a crackdown by Party apparatchiks, and the country’s consequent floundering in the middle-income trap, is a reminder of the dangers inherent in politically motivated and arbitrary regulation. To attract the investment that would otherwise have gone to China, India must work harder to ensure its regulation is seen as independent, its economy is not  subservient to public investment choices, and fiscal responsibility and debt reduction remain important.