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China faces a lot of uncertainty about its economic growth

STEVE INSKEEP, HOST:

President Biden recently made an obscure statement with big implications. It was a statement about the United States and its great rival, China. In a Wall Street Journal article, the president wrote, the U.S. economy may grow faster this year than China's economy for the first time since 1976. That would be news if it happened. The U.S. has the world's largest economy, but China, with its giant population, has drawn closer year by year. So could the U.S. reverse that trend and pull farther ahead?

ARTHUR KROEBER: It's possible. I wouldn't say that it's terribly likely.

INSKEEP: China specialist Arthur Kroeber gives that assessment. He nonetheless says China faces a lot of uncertainty about its growth, now and in the future. Since money can translate into global power, a lot is at stake. So we talked through China's economic problems. Problems this spring included massive COVID lockdowns in the economic center of Shanghai.

KROEBER: I think, base case, we're looking at another 12 months, at least, of China being pretty strict in its COVID control and, you know, accepting some economic damage as a result of that.

INSKEEP: As an authoritarian system, are there parts of the government that are kind of comfortable shutting down the country and keeping the borders fairly closed?

KROEBER: Oh, for sure. I mean, I think the Communist Party has a strong interest in control and surveillance. And then if you look at the border controls, I think for a lot of countries, reopening the borders has been very important because they want to promote travel and, you know, all kinds of economic activity that depends on face-to-face interaction. Chinese government has been, you know, pretty accepting of the idea that we closed the borders. We don't have too many people coming in. That's fine. We do our thing. We make our stuff in our factories and send it to the rest of the world. We don't actually need open borders to run the kind of economy that we want.

INSKEEP: What other factors might be dragging down the Chinese economy?

KROEBER: Well, so the government initiated a pretty big crackdown on the big internet platform companies - companies like Alibaba and Tencent - that, like the big internet companies in the U.S., reap enormous profits by scooping up lots of consumer data and, you know, doing things that are, you know, maybe questionable from a market power or a privacy standpoint. And some people have said, well, this - also, because these companies are privately owned, this is kind of a signal that the government is more hostile to private enterprise. I think that's somewhat debatable, but that's clearly a risk.

The other big thing that is a major problem long-term for them is the property sector. They've derived a lot of their growth over the last 20 years basically from the biggest property boom in history. And it's now clear that the sort of underlying rate of demand for housing in urban areas has peaked. So this major source of growth is evaporating.

INSKEEP: Does the war in Ukraine affect China's economy?

KROEBER: The main impact is that China derives a lot of its growth still from exports. The major markets for their exports are Europe and the U.S. Europe, in particular, is looking like it's going to have, you know, very weak growth, maybe even a recession this year. U.S. is maybe not looking so hot. That's going to hurt the Chinese export sector, and that's going to bring their growth down a bit.

INSKEEP: Does China get some benefit from allying itself with Russia, which has very few other allies in the world?

KROEBER: Yeah, well, that's a great question. And I think beneath the surface in China, there's a lot of debate about that. I think there are plenty of people within the Chinese system who are quite unhappy with the decision to place all the national chips in the Russia corner. But I think if you look at this from the standpoint of Xi Jinping, why did he do this? I think there's a judgment that, No. 1, the U.S. is now implacably hostile towards China, wants to contain China, wants to constrain its growth and so they need friends wherever they can get them.

INSKEEP: Let's test Xi's assumption that you mentioned there. Is the United States actively trying to constrain China's growth, and are they able to do anything that would actually accomplish that?

KROEBER: Well, Secretary Blinken said no, the U.S. is not trying to constrain Chinese growth. I think, though, if you look at actual U.S. policies, which are all about constraining flows of trade, technology and finance to China, it would be reasonable for people in China to look at this and say, well, you're saying one thing, but actually, your actions show that you're interested in slowing China's rate of growth and constraining our ability to rise in economic power.

INSKEEP: Can the U.S. do that?

KROEBER: I think the short answer is no. China is now the leading trade partner for a majority of the world's countries. They're trying to substitute stuff that they import with domestic products. So China can, I think, take itself out of the global economy, but I think it will be very difficult for the U.S. to do that.

INSKEEP: So let me circle back to the statement with which we began, the statement by President Biden about the U.S. outstripping China, maybe for a year. We have lived for many years with the idea that China's economy, at some point, maybe not too far in the future, will be larger than the United States, that the U.S. will no longer be the world's largest economy, which would have huge implications. Maybe there's another scenario where China turns out like Japan in the '80s, where it was thought they were going to surpass the United States, but they stagnated and their population started shrinking and just - things turned out differently. Is it possible that China does not overtake the United States as the world's largest economy any time soon?

KROEBER: Yeah, I think it's definitely possible. I would basically rate the odds as about a coin flip. They're pouring huge amounts of government resources to build up their semiconductor industries, other high-tech industries. And their theory is that if they build up these high-tech industries, this will generate a lot of productivity growth. You know, and if that succeeds and they're right, then China would overtake the U.S. as the world's biggest economy sometime early in the 2030s. And then there would be a question of how long they could sustain that lead, given that they're in long-term demographic decline, whereas the U.S. is probably going to keep adding population.

But then the other possibility is that they're wrong, that they can't generate enough productivity from this technology investment, that they need more sort of market-oriented reforms to deregulate and create more consumer-driven demand. And that if they don't do that, then they'll stagnate, which I think, in China's case, means that they'll start growing more like 2 to 3% - so maybe slightly more than the U.S., but not that much. And then you can easily construct a scenario under which they never catch up with U.S.

INSKEEP: Arthur Kroeber, author of "China's Economy: What Everyone Needs To Know," thanks so much.

KROEBER: My pleasure.

(SOUNDBITE OF COLLEEN'S "SEA OF TRANQUILITY") Transcript provided by NPR, Copyright NPR.