Dealing with China’s polycrisis

Author: Editorial Board, ANU

Those paying attention to the World Economic Forum in Davos will doubtless have heard the latest buzzword of the global elite: ‘polycrisis’, a word that designates a cluster of interrelated systemic risks. Applied to the myriad problems facing Beijing, the word might be a touch melodramatic, but there’s no doubt that Chinese policymakers are confronted by some of the most challenging circumstances in decades: economic, demographic and geopolitical.

The most pressing is the massive COVID-19 wave that has hit the country since it abandoned the policy of complete containment in early December 2022. Precisely how many cases and how many deaths there have been is difficult to say, but even going by official figures, the human toll has been enormous. Given the lack of natural immunity in the population and the waning effect of China’s vaccination program, it’s unlikely that this winter wave will be China’s last, either. The central government will have its work cut out finding a way to contain the spread of the virus without a return to the stop-go lockdowns it has now definitively abandoned.

The COVID surge has also slammed the brakes on China’s economic recovery, which had already been throttled back by the downturn in property and construction. Deleveraging in that sector was unavoidable, given the unsustainable borrowing of large developers. Beijing has backed away from its harsh regulatory crackdown, but a return to the debt-fuelled bubbles of the past few decades would be undesirable. China’s economic rebound needs to be built on a foundation of broad-based structural change and growth, rather than unhealthy real estate speculation.

Help is unlikely to come from abroad. The global economy is in a muddle: growth is slowing and relying on demand for exports is unlikely to give the Chinese economy the boost it needs. The marginal economic returns to public investment, after more than a decade of massive government spending, are declining. If fiscal stimulus is called for to stoke growth, then infrastructure investment could play a role, but, as Yu Yongding has argued, Beijing should take the opportunity to fix both the financing and implementation problems that have plagued this policy lever in the past.

Direct policies to support household spending are also likely to play a role, but as Yang Yao argues in this week’s lead article, the kinds of measures put in place to date have not been significant enough to shift the needle much. ‘If China is to reach its potential for GDP growth, it is important that the Chinese government continue to advance these pro-growth policies, and make further efforts to promote domestic consumption’. Ad-hoc stimulus cannot continue to shoulder the burden indefinitely. In the medium-to-long term, what is needed is a proper Chinese welfare state, one that can redistribute income in a predictable and reliable way to encourage household spending and bring down its still high (by world standards) household savings rate.

A more robust welfare state (embraced in the ‘common prosperity’ initiative) will also be needed to provide for China’s other major long-term challenge: its rapidly ageing population. The era in which demographics accelerated economic growth is well and truly over: the dependency ratio is rising rapidly, and spending on healthcare and aged care will have to rise rapidly over the coming decades.

Labour shortages — previously undreamed of — are beginning to make life difficult for some manufacturers. These are not insuperable problems, at least for now: the gradual elimination of the remains of the hukou system of household registration that militates against internal labour mobility and the raising of the retirement age to 65 would buy some breathing space. But the demographic reckoning can only be delayed, not avoided. The burden will have to be borne by a comparatively small working-age population, which will in turn need to become steadily more productive. China’s transition to a high-productivity, innovation-intensive economy is not just a question of a natural structural transformation: it is an imperative of the demographic challenge the country is now facing.

This is a transition, though, that will be made more difficult by the deteriorating geopolitical environment: one that is unambiguously more difficult than at any time since the end of the Cold War. Hopes that a Biden administration may have taken a more conciliatory attitude towards Beijing have largely been disappointed. On the contrary, as Jia Qingguo argued here earlier this week, the ‘guard rails’ that Washington had declared were necessary in the bilateral relationship have not been put in place: ‘the US–China relationship is now closer to a historic breakdown than it has been before.’

The rise of Atlantic industrial policy in the European Union and the United States, driven by fear of Chinese competition and the politics of protectionism, is an aggressive attempt to permanently restrain China from ever reaching the global technological frontier. Bans on semiconductor exports to China as well as chip-making devices represent a serious obstacle — at least in the short term — to Chinese industrial upgrading, particularly if, as demanded, Japan and the Netherlands fully join the United States in the technological blockade. In the long-run, of course, American pigheadedness is just as likely to backfire, encouraging China and others to develop their own autonomous semiconductor industry outside Washington’s reach. In the meantime, though, the chip famine is another dilemma for Beijing to manage.

Beijing’s multiple policy headaches are precisely that: they do not, as some more excitable commentators have suggested, presage a China collapse or downfall. But there is no doubt that the days of demographic dividends and easy growth are over, and — even once its COVID-19 outbreak is brought back under control — there is a huge task ahead for Xi Jinping to steer the ship through choppy international economic waters.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.

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