While the rest of the world experiences the sting of stagflation, the Chinese economy seems to witness a whole different beast: deflation. The slowdown in the Chinese economy has been expected for some time now. The question is whether this is temporary or rather, a longstanding structural problem.
China has been a rare success story among ‘communist’ economies. The country began to grow on Stalinist lines – 100% public ownership of industry, village communes rather than family farms and the disastrous course of the Great Leap Forward – the nationwide campaign which claimed over 40 million lives in the 1960s.
Following Chairman Mao Zedong’s death, it was Deng Xiaoping who transformed the Chinese economy. By reversing previous policies, namely privatising agriculture, Deng rendered China a capitalist economy with a communist polity. He developed an export sector in Shenzhen by attracting overseas Chinese capital first and then capital from elsewhere. This led to the fastest growth for any developing economy over the next 25 years from the 1980s onwards.
Deng’s innovation was especially distinctive. My own conjecture is that it was the East Asian miracle of the 1970s, especially of Taiwan and South Korea, which changed Deng’s attitude towards a capitalist growth strategy.
Xi Jinping’s arrival as President of the People’s Republic of China in 2013 allowed Xi to restore physical controls and change the nature of the Chinese economy, particularly during the Covid-19 pandemic. The controls required during the pandemic were overextended. While the rest of the world was bouncing back, the Chinese economy was not, except in its property sector.
Bolstering the country’s economy in this one regard has been the investment in the real estate sector by public as well as private bodies using bank loans. This characteristic of the Chinese economy during the Deng period and beyond has facilitated a boom attracting foreign capital into the real estate sector.
With high ambitions for the country, Xi aims to place China as the other pole of a divided world replacing the position of the USSR in the Cold War era. He has had a lot of success in the Middle East and Africa and wants to take back Taiwan – a promise made in the Chinese constitution after the 1949 revolution. While Deng believed in the possibilities that capitalism presented to China, Xi is more of a Maoist or Stalinist in his attitude towards capitalism. Though he has not fully reverted to a Maoist model, he displays a lack of knowledge and concern about restoring economic prosperity.
There is increasing evidence that not only is the Chinese economy slowing down but the ‘property bubble’ itself may burst. This is what happened to Western economies in 2008. It was quantitative easing which proved the trick for reviving the economies from the 2008 financial crisis. China has tried to loosen its monetary policies, but still rather hesitantly.
It could be that there is an ‘inner party debate’ about this. Orthodox Marxists, like Austrian libertarians, do not approve of a loose credit policy. Karl Marx called debt creation ‘fictitious capital’. It may be Xi’s orthodox attitude that is slowing the economy down as monetary expansion is lacking.
The deflation tells us that the real economy is also in serious trouble. If Xi is unbending and does not reflate the economy quickly, China could face a serious recession. I conjecture that we could see political turmoil within the Chinese Communist Party if the slowdown persists.
Could Xi go the way Deng did?
Meghnad Desai is Emeritus Professor of Economics at the London School of Economics and Political Science, Chair of the OMFIF Advisory Council and Crossbench Peer in the House of Lords. He resigned from the Labour party in 2020 after 49 years of membership.