The article examines China’s economic ascent and its current real estate crisis within the context of the East Asian development model. It highlights China’s impressive growth and the challenges it faces due to high investment and low private consumption. The author argues that while financial measures may temporarily alleviate symptoms, they won’t resolve underlying issues. A shift towards increased domestic consumption is necessary for sustainable growth, but politically challenging wage increases may hinder this transition, risking further trade tensions.
The recent developments in the global economy are closely tied to China’s extraordinary growth. Since the 1970s, the average income per capita has surged to more than ten times its previous level. China is now regarded as the manufacturing hub of the world, and in several industries, Chinese firms lead the way in technological advancements. Moreover, the government has consistently demonstrated its ability to navigate crises effectively. A noteworthy example is the massive stimulus package initiated in 2008, which totaled 4 trillion yuan—over 10 percent of China’s GDP—designed to mitigate the impact of the global financial crisis.
While this impressive performance has earned considerable respect, it can also lead Western analysts to overrate the capabilities of Chinese leadership. This is particularly true in light of the ongoing real estate crisis, which is often presented as a manageable hurdle that can be easily remedied through financial interventions. However, the situation is far more severe, indicating that China is at a critical juncture, and the leadership cannot address every challenge effortlessly.
The Cost of Austerity
An effective evaluation of the crisis requires an understanding of the East Asian development model, which has not only been employed in China but has also been successfully implemented in Japan, South Korea, and Taiwan. A defining feature of this model is its high domestic savings rate. Unlike many Latin American countries, East Asian nations have financed their industrialization primarily through local savings, allowing them to avoid dependency on foreign capital—a strategic move.
However, a high savings rate necessitates that private consumption be prioritized less for an extended period. For the populace to save significantly and funnel these savings into industry under favorable conditions, a robust state apparatus is essential to oversee the financial sector.
Consequently, restraining private consumption leads to a weakened domestic demand. To offset this shortfall, the East Asian model typically aims for an export surplus, facilitated by lower wages and a deliberately undervalued currency. In essence, the approach is straightforward: prioritize saving, limit consumption, and focus on high levels of investment and exports.
High Consumption is Key to Wealth
Here lies the pivotal issue: while this development model is effective for lifting a nation out of poverty, it fails to make a country genuinely affluent. To achieve true wealth, a timely restructuring is necessary, where the high investment ratio should gradually decline to allow for increased private consumption.
In Japan, South Korea, and Taiwan, this transition commenced approximately 25 years after their economic ascents, helping these nations join the ranks of the wealthiest industrialized countries. Meanwhile, China has not initiated this crucial shift, despite the fact that its significant growth phase began nearly 50 years ago. Currently, investment and private consumption each constitute around 40 percent of China’s GDP, while wealthier nations like Japan and Switzerland showcase investment rates of about 25 percent and private consumption ratios exceeding 60 percent of GDP.
Injecting Funds Won’t Solve Core Issues
In this context, the ongoing real estate crisis clearly signals that China has encountered a deadlock. The investment ratio, particularly in the construction sector, has escalated excessively, yielding diminishing returns that fail to spur growth. Although a substantial financial injection and liberal monetary policies might somewhat alleviate immediate repercussions, they do not address the underlying problem. China’s strategy should involve saving less, investing less, exporting less, and consuming more.
How can this transition be achieved? The only viable solution is to gradually increase wages over an extended timeline. However, implementing wage hikes poses significant political challenges, as higher wages may jeopardize the competitive edge of Chinese businesses linked to the ruling communist factions.
Thus, a more likely outcome is that China will inject funds into its economy, complicate access for foreign companies, and initiate an export drive to stimulate growth. This scenario raises the likelihood of continued tariff escalations from the US, regardless of future leadership, taking the trade conflict to a more intense level. The prospect of a second Cold War is increasingly materializing.
Tobias Straumann is a Professor of Economic History at the University of Zurich.
An article from the “NZZ am Sonntag”