The resulting bubble created a massive interest group that hijacked government policy and public opinion for two decades. Bubble-fueled GDP growth is dangerous – stopping it can reduce the size of a country’s GDP, but it will also make the economy healthier in the long run. This is where China is today.
Those who remember the good old days cast envious eyes at the booming stock markets in USA, Japan and elsewhere, but these are bubbles. Great Britain and Japan are in recession. The US is holding back the economy with huge and growing fiscal deficits.
These bubbles float on top of a larger bubble anchored to the fixed US dollar-yuan ratio, and this large bubble is now at risk of inflation.
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A vanishing dream from fairyland: how China Evergrande rose, then crashed
A vanishing dream from fairyland: how China Evergrande rose, then crashed
Regardless of how Beijing feels about the situation, US pressure limits its options. He couldn’t do what he did in 2008 and printing huge amounts of money to re-inflate the bubble. Cheating money now has dire consequences.
Therefore, although it has revived the bubble many times in recent years, this time Beijing will not throw money at it. Reassuring words will be offered from time to time, including at the NPC meeting, but hard money will not come in any significant amount.
China took the easy path in its development. There are four parts to China’s growth story. The government uses the socialist part – State-owned enterprises and planning agencies – for infrastructure development. The Taiwanese outsourcing model was used to develop exports, earn foreign exchange and create jobs. Foreign joint ventures were used to develop technology and the local economy, and Land model of Hong Kong was enacted to enrich the government and elites.
These short-sighted approaches have left behind vulnerabilities that the US is exploiting to slow or even reverse China’s economic progress.
The Foreign Direct Investment (FDI) model does not work well for technology development. In many ways it was holding him back. Germany, Japan and South Korea did not rely on joint ventures for technological development. They used their local businesses and institutions to develop their capabilities. The foreign joint venture partner naturally wants to protect its technology while retaining the possibility of profit in the Chinese market.
People walk past the SAIC Volkswagen showroom in Chengdu, Sichuan province, in 2021. Volkswagen was one of the first Western companies to do business in China in the 1970s and now depends on the country for at least half of its annual your profits. Photo: Reuters
The automotive sector is the best example. While Volkswagen and Toyota made China an important profit center, they protected their technology and kept their Chinese partners at arm’s length. Meanwhile, South Korean companies managed to catch up on their own.
Reduction in FDI is a blessing in disguise for China. This forces the government to rely on domestic companies, as a normal large economy should. Local governments in China are competing with each other to attract FDI by offering more and better incentives for attract foreign companiesputting local firms at a disadvantage.
The FDI model also hinders the development of local supply chains. Foreign joint partners are responsible by supplying key components from their existing supply chains, in part for protect their technology. This is one of the reasons why China’s economy is large, but not necessarily strong, as some might argue.
The internal combustion engine is the best example. China’s auto market is the largest in the world, but the weak state of the engine supply chain is a result of the joint venture model. of China experience in the field of electric vehicles allows it to leapfrog its competitors, but the same cannot be said commercial jet engines.
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Although China is the world’s largest semiconductor market, its weak supply chain has become a vulnerability for the economy. It did not take advantage of this market to develop its supply chain, instead it mistakenly believed in the reliability of the global supply chain.
Precision components and equipment, high-performance materials and even high-end bearings are weaknesses for China. They are the result of joint ventures buying from their existing suppliers, denying local suppliers the ability to scale.
No great country rises without a great struggle. China was exceptionally lucky in the 1990s and 2000s. He made expedient choices because he could. Now he has to make tough choices, and one wrong move could spell disaster. This is a reallocation of capital for technological development, but it is the right decision, because some loss is justified.
The key is for local companies to scale. Companies with scale can innovate and push the envelope. The Chinese government seems to rely on the domestic market and care private enterprises as much as possible, similar to what Japan and South Korea did.
Printing money to start or maintain a party is no longer available. A bad stock or property market doesn’t move the policy needle like it used to. Anyone expecting Beijing to turn on the cash spigot is likely to be disappointed again.
