The Tumultuous Trajectory of China’s Economic Powers

China is rightly considered an economic wonder. Since the late 1970s, when it was one of the most backward nations in the world, it has become an economic powerhouse and a formidable rival to the United States and the West generally. Given this record, observers and journalists can be excused for anticipating that China will soon surpass America’s economic might and assume the premier position among the world’s economies with everything that status implies. But the future seldom emerges as a straight line from the past. Chinese prospects today must take account of the country’s changing economic trajectory, especially the array of serious economic problems it faces, all of which in one way or another reflect Beijing’s policy missteps and mismanagement.

Exhibit one among these considerations is China’s ongoing property crisis, which began in 2021 when the giant residential developer Evergrande admitted that it could no longer meet its business and financial obligations. Evergrande was only the first of many such failures. Property development once constituted some thirty percent of China’s GDP, so these failures almost immediately became a huge impediment to the country’s growth prospects. Housing starts stalled and then began a long decline. And while some developers this year have at last begun to reschedule their finances, the situation has yet to turn around, and according to analysts at S&P Global, declines will likely continue into 2027 or longer. 

The ills imposed by this situation go far beyond the immediate effects on this once-powerful growth engine. The spread of failures has restricted China’s financial resources generally, limiting investment and expansion throughout the economy for private firms as well as state-owned enterprises. The failures have also prevented the completion of millions of apartments for which Chinese households had prepaid. Many of these frustrated homeowners have refused to pay on the mortgages associated with these non-existent units, putting yet more strain on Chinese finance. And because this collapse of home-building and home-buying has depressed real estate prices almost twenty percent since the start of the crisis, just about all Chinese homeowners have suffered declines in their net worth, crimping consumer spending and impairing the economy’s growth prospects in yet another quarter.

Unsurprisingly, Beijing has blamed property developers and lenders for the crisis. Certainly, the managements of these firms deserve some blame for lending and borrowing aggressively and spending recklessly. But behind such reprehensible behaviour, much of the blame belongs with Beijing’s economic planners. Three huge policy mistakes stand out.

First, Beijing’s central planners actively promoted residential development for far too long with easy credit and active cooperation from local governments. At first, this plan was a justifiable attempt to address China’s severe housing shortage, but Beijing kept the encouragement up long after that problem had disappeared. Property development accordingly reached an outlandish relative size in the economy. The above-mentioned thirty percent of GDP compares with maximums of five percent elsewhere in the developed world. 

Beijing made its second mistake in 2020, when it abruptly decided it was time to rein in this development. The authorities suddenly promulgated what they called the “three red lines” policy, which was intended to bring housing development into better balance with the rest of China’s economy and to encourage greater prudence among lenders and developers alike. Unfortunately, Beijing implemented this huge change with little or no warning, which left those involved with no time to adjust. Developers—who were already overextended by past encouragement—suddenly lost all that support. Unsurprisingly, they failed.

Then, in the face of the unfolding crisis, the authorities made their third mistake. They waited almost a year before doing anything to protect Chinese finance from the ill effects of the failures. Unlike the measures Western governments and central banks took to mitigate financial strains during the crisis of 2008–09, neither the government in Beijing nor the Peoples Bank of China (PBOC) provided emergency liquidity to financial arrangements, lower interest rates, or indemnification of debts. By the time the Chinese authorities acted, financial strains had metastasised throughout China’s financial system.

If precipitating the property crisis and then delaying any remedial action were not enough, in 2023, Beijing decided to help China’s by-then troubled economy by pouring investment funds into advanced technologies: electric vehicles, batteries, semiconductors, biotech, and quantum computing. These, officials announced, would be the industries of the future. While such an investment emphasis may sound like a reasonable reflection of the nation’s development aspirations and international standing, it was wrong for the economy’s immediate needs. 

These industries could only do so much to generate the broad-based growth Beijing wants and China needs. They constitute less than ten percent of China’s economy, which is hardly enough to offset the loss of home-buying and construction. Worse, the additional productive capacity generated by this investment quickly outstripped China’s domestic needs. As producers competed to sell more than domestic Chinese buyers wanted, wholesale prices have been falling ever since. While outright deflation might seem enviable to economies suffering unwanted rates of inflation, falling prices convince retail and wholesale buyers to postpone purchases in the expectation of lower future prices, thereby impeding efforts to stimulate growth. This excess productive capacity has also made China more export-dependent than ever. Not only does such a trend run counter to Beijing’s stated desire to prioritise the consumer, but it also puts China’s economy in need of foreign buyers at a time when other countries—including the US, the EU, the UK, and even Mexico—have become increasingly hostile to Chinese trade.

Even this foreign hostility has links to Beijing’s poor policy choices. In the early years of this century, the developed West and Japan had welcomed Chinese development and tolerated that nation’s unfair trade practices, high tariffs, laws that prescribed domestic sourcing, patent theft, and Beijing’s insistence that foreign firms operating in China have a Chinese partner to which they must divulge all proprietary technologies and trade secrets. These practices chafed increasingly as China’s economy grew to a more formidable size. Indeed, Trump justified his initial tariffs in 2018 and 2019 as a response to these unwanted practices. But Beijing refused all compromise and remained intransigent despite persistent complaints from the Americans, the Europeans, and the Japanese. In its steadfast refusal to compromise at all, Beijing effectively invited the harsh responses on display today, and not just from Trump.

The growing list of Beijing’s policy missteps even extends to its relations with its domestic business community. In 2020 and 2021, before the property crisis broke and China still looked unbeatable, President Xi Jinping felt free to castigate private business owners for being too focused on profits and capital and not sensitive enough to the Chinese Communist Party (CCP)’s agenda. His government prevented offending firms from raising capital in either Chinese or foreign markets, imposed an array of regulations, and otherwise threatened their businesses’ freedom of action and even existence. Unsurprisingly, levels of private investment fell immediately. Xi’s rhetoric has softened as China’s economy slowed and came to need an aggressive business sector. He has begun to promise “equal protections” and referred to private owners as “our own people.” But businesspeople have memories and many remain reluctant to commit the investment funds they might otherwise have dedicated to expansion, hiring, and overall economic growth.

Even China’s troubling demographics can be traced back to Beijing’s policy mistakes. Beijing’s strict one-child policies, first introduced in the 1970s, left China starved of young workers to take the place of the large generation now retiring. Though Beijing has belatedly relaxed policies on the size of families, almost fifty years under the old policies have changed the culture. Fertility rates have not responded to recent policy reversals, and even if they had, it would take at least twenty years for the change to make a difference to the country’s available workforce. Not even robotics will completely alleviate the problem.

This tremendous array of problems, severe as they are, will neither sink China’s economy nor remove all the challenges China poses to the West, economically, financially, diplomatically, even militarily. But this picture should offer something like an antidote to the fears and promises about China offered in many media discussions. Chinese dominance is by no means a foregone conclusion, and the Chinese experience may yet serve as an object lesson on the limitations of central planning.