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As Beege pointed out earlier today, there are ongoing signs that the Chinese economy is in deep trouble. And as with any significant downturn, especially one involving one of the world’s largest economies, the question eventually turns to why. Why is this happening to China now?
Today the New Yorker published an interview with economist Eswar Prasad, an expert on China’s economy who teaches at Cornell University. Prasad makes the case that China’s struggles are structural but also ideological.
The structural problems come from the fact that “China has an aging population and a labor force that is already beginning to shrink.” In fact, China is no longer the most populous country in the world, having been surpassed by India. On top of that there is a crisis of confidence that is impacting both Chinese consumers and foreign investors.
China took away its “zero covid” policy, but consumers and businesses seem quite nervous about the country’s economic prospects. Businesses—private businesses in particular—aren’t investing and consumers are not spending that much. All of this is now leading to another problem, which is deflation, or falling prices…
The difficulty that China faces right now is somewhat larger in scope, because even if you give people money to spend, if you make it cheaper to borrow, if you give them government handouts, people need to be confident about their future economic prospects so that they go out and spend rather than save. Right now, China could use its traditional policy tools, but I think the fundamental problem that the Chinese economy is beset by is really a lack of confidence, and we’ve seen this in a variety of measures.
Prasad doesn’t say this but it seems to me the lack of confidence is at least partly created by the experience people had of zero-COVID. Remember, Chinese people got a close up look at government disruptions to the economy and their personal lives for about two solid years. People were literally locked into their offices and apartment buildings, forced to take COVID tests, struggling to get food. Their were people throwing themselves out of windows because they were despondent.
