A China Optimist’s Lament

Dec 22, 2022

I have been a congenital China optimist for most of the past 25 years. I first came to that view in the depths of the Asian financial crisis in 1997-98. The so-called East Asian growth miracle was in tatters and China was widely portrayed as the final domino that would fall in what was then viewed as the first crisis of globalization. Having shuttled back and forth to the region during that period as Morgan Stanley’s chief economist, I had quickly come to appreciate the power of China’s market-based economic transition. So, in March 1998, I took a very different view on the pages of the Financial Times with my first published commentary on China, “The Land of the Rising Dragon.”

My argument, in a nutshell, was that China would supplant Japan as the new engine of post-crisis Asia. Japan was floundering in the aftermath of its post-bubble implosion, whereas a reform-oriented China had the wherewithal, determination, and strategy to withstand the currency contagion of a devastating external shock and sustain rapid economic growth. As China delivered, boosted by its accession to the World Trade Organization in late 2001, and Japan sunk into its second lost decade, the Chinese economy took off like a rocket.

Over the years that followed, my enthusiasm for China continued to grow. I was particularly struck by the rebalancing implications of former Premier Wen Jiabao’s famous 2007 critique that a seemingly strong Chinese economy was actually “unstable, unbalanced, uncoordinated, and unsustainable.” In subsequent years, China’s five-year plans aligned with a powerful rebalancing agenda. The case for a consumer-led transformation was increasingly on track. Optimists, like me, felt vindicated.

Then came Xi Jinping. At first, he seemed to be cut from the same cloth as the reform-oriented Deng Xiaoping. A sweeping set of reforms proposed at the Third Plenum of the 18th Party Congress in late 2013 was especially encouraging. But shortly thereafter, uncomfortable frictions started to creep into the rebalancing strategy.

In 2017, Xi kicked off the 19th Party Congress with a regression to Marxist ideology that immediately became known as “Xi Jinping Thought.” Consumer-led rebalancing was de-emphasized. An anti-corruption campaign was transformed into a power grab.  And Xi’s geostrategic muscularity broke from Deng’s low-key (“hide and bide”) posture and led to a major conflict with the United States.

But 2022 was the ultimate wake-up call for China optimists. Xi’s great-power gambit aligned China in an “unlimited partnership” with Russia on the brink of the Kremlin’s unprovoked invasion of Ukraine. Xi’s stubborn insistence on an untenable “zero-Covid” policy tapped an undercurrent of dissent not seen in a generation. And the 20th Party Congress in October was less about Xi’s claim to an unprecedented third term as general secretary and more about his fixation on security in what he dubbed to be a threatening world of “perilous, stormy seas.”

With a shrinking working-age population, China, until recently the world’s greatest growth story, needs an acceleration in productivity growth to reclaim that mantle. Yet Xi’s increased emphasis on security, power, and control undermines productivity at a time when China needs it the most. The growth miracle can only suffer as a result.

China had come close to the promised land. Its modern economy was on an extraordinary trajectory. The rebalancing agenda promised more to come. But Xi Jinping broke that sacred promise. The political economy of autocracy has thrown cold water on those of us who used to be congenital optimists on China.

Note: This blog dispatch is a shortened version of my December 22 article for Project Syndicate. This will be the last dispatch of the year for “US-China Watch.” The blog will resume on January 5, 2023. Happy holidays!

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