Economic Growth is No Longer China’s Top Priority

A panel of economists from the U.S. and China agreed that China's economy is at a structural turning point where economic growth is no longer the primary objective of the government. Instead, the new focus appears to be on building a modern industrial system that prioritizes state-owned enterprises (SOEs) and state entities over the private sector whose dynamism has fueled past decades of growth.

Panelists agreed that in this new context, policymaking will be more important than ever. But the evidence suggests China’s government is abandoning its former tolerance for policy experimentation at the local level and embracing centrally formulated “moonshot” objectives driven by the state. Meanwhile, policies seeking to drive domestic consumption appear to be taking a back seat, as cautious households protect their savings and wrestle with losses in the troubled property sector.

Further complicating the picture are cash-strapped local governments. Provinces and municipalities that once financed themselves with land sales face severe fiscal strain in the wake of China’s property bust, with debts near 100% of GDP. One panelist shared analysis showing some cities face debts exceeding 800% of their annual budgets, underfunded pension systems, and reductions in civil servant benefits of up to 30%.

Genuine GDP growth on the order of 5% per year could help China grow out of its problems but no panelist was able to say with confidence what sectors could replace the property sector in driving that level of growth. While the panelists agreed we may not be at “peak China,” the country’s leadership is taking a major gamble by empowering the state sector and doubling down on manufacturing, while doing little to reassure private business and households. 

The Evolving View from Europe

China’s apparent aim to export its way out of trouble has caused a fundamental shift in Europe’s approach to the country, according to panelists from Germany and France. In response to a flood of commodity and green tech imports, the panelists point out that Europe has steadily developed and deployed policy tools like tariffs to combat the challenges posed by China’s industrial policy.

At the same time, they were careful to emphasize that Europe must also learn from China in sectors where it has surged ahead of European counterparts. One panelist deemed China “a fitness center” for foreign firms that not only draws on high levels of state support but also on a world-class pool of high-end engineers and businesses honed by the demanding Chinese consumer. Foreign firms can learn from Chinese competitors to be faster in production and take more risks. German car companies, for example, are in China not for the market, but instead to unlearn how to build traditional cars and learn how to build “mobile phones on wheels” – the electric vehicles that China’s firms lead the world in producing. 

Tech Competition with the U.S. Heats Up, Fueling Unintended Consequences

Panelists from Silicon Valley and U.S. business groups highlighted the U.S. government’s multiplying efforts to hem in China’s tech ambitions through use of export controls on advanced semiconductors, onshoring with the CHIPS act, and impending controls on outbound investments, artificial intelligence, cloud services, data flows, and biotech.

They asserted that though these measures have hurt China’s tech ecosystem and exacerbated a flow of entrepreneurial talent out of China, they have also spurred a series of unintended consequences. For example, many Chinese venture capitalists have decamped to Japan and Singapore, where they comprise a new generation adept at reading China’s policies and identifying niches to found startups where American funds are barred from playing. U.S. tech controls have also induced consolidation around China’s “national champion” firms like Huawei, which has seen profits jump, while market share for American tech firms active in China like Apple have only declined.

As for generative AI, panelists asserted that China will remain persistently behind the U.S. by two to four years, partly due to lack of access to best-in-class chips and other hardware, but also because the unpredictable nature of generative AI is unpalatable to China’s leaders seeking control over politics, society, and culture. Nevertheless, China may still jump ahead in other applications of AI, like self-driving tech, advanced manufacturing, and robotics. A case in point: China’s tremendous manufacturing capacity offers abundant use cases to train AI in advanced manufacturing.

No Easy Solutions for Demographic, Labor Market Trends

A panel of economists and sociologists highlighted troubling, longer-term trends in China’s labor force. A panelist from China presented new research showing that the rapid advancement of AI is threatening China’s white-collar jobs and causing dramatic changes in the manufacturing sector, including declining skill requirements for blue-collar workers and a steady rise in unstable, short-term employment for unskilled workers. She pointed out that the proportion of China’s college graduates taking jobs in the formal sector (i.e., salaried positions with benefits) has been declining since 2013, with more women entering these roles and consequently delaying childbearing. This trend contributes to China’s precipitously declining birth rate (from 18 million children born in 2017 to just 11 million in 2021), saddling the country with an aging society for the foreseeable future. Other panelists emphasized the hundreds of millions of underemployed rural Chinese and uneven progress in China’s universal education as posing significant obstacles to sustainable growth with few easy solutions.

Grim Outlook for U.S.-China Relations

Two panels of political scientists and historians pointed out that China’s apparent shift away from the market is a feature, not a bug, of current leader Xi Jinping’s administration. They asserted that China’s economic liberalization of the 1980s, 1990s, and 2000s was never a goal in itself, but rather a means to generate the material basis required to keep the ruling regime in power. Now, decades of growth have made it possible for China’s leaders to reembrace central planning to harness “new productive forces” in the industries of the future, harden supply chains, and extend social controls. In doing so, the leadership is purposefully choosing not to empower China’s consumers and households, and instead preparing for prolonged confrontation with the U.S., no matter the long-term cost to the economy. In this era of competition, cooperation, even when desirable by either the U.S. or China, remains difficult because both sides fear openness to cooperation will be exploited as a vulnerability by the other.

Letting Data Take the Lead

The throughline of the conference was that empirical research is essential for understanding the complex dynamics of China’s economy and politics. Data-driven research helps decode the nuanced impacts of policy changes, technological advancements, demographic trends, and more. By providing a platform for interdisciplinary exchange, SCCEI aims to put empirical research at center stage to enhance understanding of China’s current trajectory and inform more robust and adaptive policy to navigate future challenges.

 
Stanford Affiliated Panelists

Paul Gregory is a Research Fellow at the Hoover Institution. He is the Cullen Professor Emeritus in the Department of Economics at the University of Houston, a Research Fellow at the German Institute for Economic Research in Berlin, and Emeritus Chair of the International Advisory Board of the Kiev School of Economics.

Zhiguo He is the James Irvin Miller Professor of Finance at the Graduate School of Business at Stanford University.

Hongbin Li is the Co-director of Stanford Center on China's Economy and Institutions, and a Senior Fellow of Stanford Institute for Economic Policy Research and the Freeman Spogli Institute for International Studies at Stanford Unviersity.

Jennifer Pan is the Sir Robert Ho Tung Professor of Chinese Studies, Professor of Communication and (by courtesy) Political Science, and a Senior Fellow at the Freeman Spogli Institute at Stanford University.

Scott Rozelle is the Co-director of Stanford Center on China's Economy and Institutions and the Helen F. Farnsworth Senior Fellow at the Freeman Spogli Institute for International Studies and Stanford Institute for Economic Policy Research at Stanford University.

Joseph Torigian is a Research Fellow at the Hoover Institution. He is an Assistant Professor at American University in Washington, a Global Fellow at the Wilson Center, and a Center Associate of the Lieberthal-Rogel Center for Chinese Studies at the University of Michigan.

Guoguang Wu is a Senior Research Scholar at the Stanford Center on China’s Economy and Institutions at Stanford University.

Chenggang Xu is a Senior Research Scholar at the Stanford Center on China's Economic and Institutions and a Visiting Fellow at the Hoover Institution at Stanford University. He is also a Visiting Professor in the Department of Finance at Imperial College London.

Yiqing Xu is an Assistant Professor of Political Science at Stanford University.

Xueguang Zhou is the Kwoh-Ting Li Professor in Economic Development, a Professor of Sociology, and a Senior Fellow at the Freeman Spogli Institute for International Studies at Stanford University.

Discover more from the inaugural SCCEI China Conference which brought together over 20 expert panelists from around the world and from across Stanford’s schools and disciplines, as well as experts and business leaders from Silicon Valley and the Bay Area to share insights on China's economic prospects.