Prosperity of the Chinese economy does not come by decree – 07/21/2023 – Rodrigo Zeidan

The Chinese economy continues to move sideways, something that ends up affecting all Brazilians. The last time we grew above 7% was in 2010, when Chinese dynamics pulled the world out of recession due to the financial crisis of 2007/9. Not coincidentally, 2010 was also the last time China grew above 10%.

China is skating because of anti-economic reforms in the country. Instead of removing constraints, such as corruption and inefficiency present in various sectors, the government decided to prune the private sector. The result is there: a weak economy that jeopardizes the immense gains of the last 40 years; it is possible that China will get stuck in the middle-income trap, where Brazil has been for decades.

In 2021, President Xi Jinping launched the “common prosperity” program to tackle inequality and bring wealth to the entire country, not just the urban elite. Until then, so good. We know that the theory of the cake, so debated in the 1970s and 80s in Brazil, which says that a country must first grow and then distribute income, is a flaw.

It is a perversion of the Kuznets curve, which shows that inequality tends to rise as the country industrializes, decreasing afterwards. The “geniuses” of military governments felt that this was something to be desired rather than something to be fought against or at least softened.

The problem is that common prosperity, like many other Chinese government actions in recent years, has little to do with inequality. Regulations against tech companies have wiped out more than $1 trillion from the market value of just four companies: Alibaba, Baidu, Didi and Tencent. The result? Strong cut of investments. In addition, measures to limit executive compensation and demonize Chinese billionaires ended up having a perverse effect: it limited hypercompetitiveness, the main characteristic of Chinese capitalism, perhaps the most aggressive in the world.

Several billionaires have announced huge donations to “common prosperity” campaigns, but the Chinese problem is not a lack of money. In addition to the strange regulations, it is also necessary to consider the restrictions imposed by the Americans and the weakness of the real estate sector. These facts help explain why the economy remains weak even after the economic reopening following the Covid outbreaks.

“Common prosperity” seemed like an excellent idea: to cast the Xi government as concerned about economic inequality; who knows, maybe an Asian version of the “father of the poor”. But the actions ended up holding back private sector investments and everyone pays the duck.

This week, several billionaires have come forward to announce that they support the Xi Jinping administration’s latest plan to rebuild the economy. This is a sign that the government understands that incentives for the public sector instead of the private sector have gone too far. The concern now is to make the country grow. However, the damage is done. When competition is stopped, the process is not renewed quickly.

Today, private investors are much more cautious. China lived largely on the “animal spirit” (a term coined by Keynes) of Chinese capitalists. Without that spirit, the economy will not pick up again. And this is the big question: will the Chinese government ever encourage hypercompetition again? For the sake of the world economy, it better be.

PRESENT LINK: Did you like this text? Subscriber can release five free hits of any link per day. Just click the blue F below.