The resulting bubble created a massive vested interest group that hijacked government policy and public opinion for two decades. Bubble-backed GDP growth is dangerous – its demise could reduce the size of the country’s GDP, but it would also make the economy healthier in the long run. This is where China finds itself today.
These bubbles float on a bigger bubble anchored on the US dollar-yuan peg, and this big bubble is now threatened by inflation.
That is why, despite resuscitating the bubble multiple times in recent years, Beijing won’t throw money at it this time. Soothing words will be offered from time to time, including at the NPC meeting, but hard cash won’t come in any significant amount.
These short-cut approaches left behind vulnerabilities that the US is using to slow or even reverse China’s economic progress.
The foreign direct investment (FDI) model didn’t work well for technology development. In many ways, it stunted it. Germany, Japan and South Korea did not rely on joint ventures for technological development. They used their indigenous businesses and institutions to develop their capabilities. The foreign partner in a joint venture naturally wants to protect its technology while holding onto the profit opportunity in the Chinese market.
How monumental is China’s challenge to build its own jet engine for the C919?
How monumental is China’s challenge to build its own jet engine for the C919?
Even though China is the world’s largest market for semiconductors, its weak supply chain has become a vulnerability for the economy. It didn’t take advantage of this market to develop its supply chain, instead erroneously believing in the reliability of the global supply chain.
No big country rises without a big struggle. China was extraordinarily lucky in the 1990s and 2000s. It made expedient choices because it could. Now it has to make hard choices, and one wrong move could spell calamity. It is overallocating capital for technological development, but that is the right decision, as some waste is justifiable.
Printing money to start or sustain a party is no longer on the cards. A bad stock or property market doesn’t move the policy needle like before. Anyone expecting Beijing to turn on the monetary spigot is likely to be disappointed again.
Andy Xie is an independent economist