China’s Economic Rut: Beyond the Reach of Any Leader || Digging into China

Hi, I'm Dong Xiong. Welcome to Digging into China, where we explore China in depth to reveal unique perspectives. It's been more than six months since Xi Jinping's last economic rescue measures, and their ineffectiveness is now evident to all. The latest data confirms this. The primary goal of these measures was to combat deflation. Yet, May's consumer price index stood at negative marking four consecutive months of decline. Only January this year showed positive growth. Meanwhile, the producer price index fell to negative 3.3%, a 22-month low, signaling that China is slipping deeper into a deflationary crisis. Ultimately, Xi Jinping's latest economic intervention has proven unsuccessful. Since China's economy began to falter in 2020, Xi has implemented several rounds of policies, none of which have reversed the downward trajectory. Why has Xi failed? Is it a lack of competence, or is he simply unable to succeed? I believe it's a combination of both, incompetence and systemic constraints. On the competence front, Xi's most significant misstep was not recognizing the deflation issue until October. Had he acknowledged this severity earlier, China's economic situation might be somewhat better today. If it were merely a matter of incompetence, there would still be hope. A sudden spark of wisdom or reliance on the capable advisors around him, Xi has, after all, surrounded him with some of China's brightest economic minds, could potentially turn things around. Xi himself may not be exceptionally astute, but he has access to talented experts. However, the deeper reason Xi cannot rescue China's economy lies in systemic issues, particularly those tied to extraction and distribution. The term extraction may carry a negative connotation, but it's not always inherently bad. Let me first clarify the distinction between democracy and authoritarianism. There is an ongoing debate online about which system better fosters economic growth. For many Chinese, abstract concepts like free speech or one person, one vote feel remote. What matters most is tangible improvements in living standards. So, which system is better for economic development, democracy or authoritarianism? The answer is complex. The strongest case for democracy is that nearly all developed nations today are democratic, with exceptions like city-states such as Singapore or oil-rich countries like Saudi Arabia. However, whether Singapore is a true authoritarian state is open to debate. Conversely, there is substantial evidence that authoritarian regimes can drive economic growth. We've seen authoritarian states achieve economic miracles, particularly in their early development stages. Examples include South Korea under Park Chung-ki, China during the China especially is often cited as evidence of authoritarian superiority when compared to India's slow progress. Authoritarian regimes can provide a strong impetus in a nation's early development, but often struggle to elevate a country to developed status. The prevailing explanation is that such regimes stifle technological innovation, trapping nations in the middle-income trap. As China, the world's largest authoritarian state, began its push towards developed status, I gained a deeper perspective on this issue. Can authoritarian states achieve development? Yes, particularly in the early stages of industrialization. However, the notion that authoritarian regimes always develop faster than democracies is a misconception. Statistically, they are roughly comparable. In a country's developing phase, the political system, democratic or authoritarian, has little impact on growth speed. So why do some believe authoritarian regimes develop faster? It's because they can achieve remarkable highs but also devastating lows. The highs come from creating economic miracles, like South Korea under Park, or China's rapid growth under Jiang and Hu Jintao. The lows, however, can be catastrophic, as seen in North Korea under the Kim dynasty or China under Mao Zedong. Focusing only on the highs creates the illusion that authoritarianism consistently outperforms democracy. This raises a key question. Why do authoritarian regimes sometimes develop faster under certain conditions? This is where the concept of extraction advantage comes into play. Authoritarian systems are inherently designed to extract resources from their people. They possess the ability to extract, whereas democracies constrained by voters struggle to do so on a large scale and excel at distribution. While extraction may sound negative, it's not always a disadvantage in a nation's early development. If a leader extracts resources solely for personal gain or to suppress others, the country descends into chaos, as seen in Mao's China or Kim's North Korea. But if a leader recognizes that to extract more in the long term, they must first grow the economic pie. Using extracted resources to build infrastructure, invest, and expand production, the economy can grow rapidly, sometimes surpassing democracies. For instance, building a highway is far simpler in an authoritarian state than in a democracy. Democratic process requires votes and approvals, which slow progress. In an authoritarian system, it's often a matter of the leader's decree. This creates a dynamic where a wise, authoritarian leader can outperform a democracy, and a democracy outperforms a foolish authoritarian. This is evident when comparing China and India. Two metrics effectively measure a government's extraction and distribution capabilities, GDP growth and disposable income growth. GDP is widely discussed, but disposable income, the money people can freely spend, is less so. In China, disposable income is rarely emphasized, leading many to assume GDP growth equates to income growth. This is not the case. A gap exists between the two. Comparing China and India illustrates this. Historically, China's GDP growth was robust, but disposable income growth lagged, typically by about a 5% point, reflecting high government extraction. In contrast, India, particularly from 2005 to 2011, saw disposable income growth far outpace GDP growth, averaging 13.6% and peaking at 18% in one year, surpassing China. Yet India's GDP growth averaged only 6.9%, much lower than China's, highlighting China's higher extraction. In the early stages, this wasn't entirely negative. While India extracted less, it struggled to concentrate resources for major projects, slowing its GDP growth. Even with lower extraction, India's quality of life improvements trailed China's. Since 2012, however, India has shifted toward higher investment and slower income growth, underscoring the advantage of strong extraction capabilities. When paired with a capable leader, strong extraction can drive faster development than in a democracy. But it's a gamble. A poor leader can spell disaster as seen in Mao's era, which lagged behind India. In China, this extraction ability is often termed concentration resources for major achievements. However, this advantage is stage-specific. As a country nears developed status, extraction becomes less critical and can even hinder progress, primarily due to shifts in growth rates. Developed nations grow significantly slower than developing ones. Since the 21st century, developed countries have averaged 2.2% GDP growth compared to 5.5% for developing nations. This is because developing countries focus on technological imitation. But as economies mature, investment returns diminish. To put it simply, in the past, the Chinese Communist Party invested heavily in factories, highways, and infrastructure. Did it work? Yes. Investing $100 billion could yield $300 or $400 billion in output within three years. Even if officials siphoned off some funds, the returns were worthwhile, far better than India's slower or non-existent projects. At that stage, the Party's advantage was clear. Its strong extraction ability provided more funds for investment. But as the economy matured, investing in factories or infrastructure no longer surfaced. Now investments must target high-tech sectors like electric vehicles or chips. These can yield returns, but they are less efficient. $200 billion invested might take a decade to produce $500 billion, and any corruption or misstep can lead to losses. Efficiency becomes paramount. As growth slows, the concentrated resources-for-big-projects approach loses effectiveness. In the past, high extraction drove 9% GDP growth, while a distribution-focused model might yield 5%, making unequal distribution tolerable. But in the developed stage, the gap narrows to 3% versus 5%. This is China's current reality. The drawbacks of high extraction become magnified as growth slows. Consider civil service jobs. From the 1979 reforms to today, China's rapid population and economic growth led to an expansion of administrative districts. Municipal districts grew from 211 to 333, and county-level districts from 2,137 to 2,844. Civil service jobs surged from 3.7 million to over 8 million, creating opportunities for ordinary citizens. If 50 new jobs opened, elite families might claim 20, leaving 30 for others. The rapidly growing pie masks distribution inequalities. Now, however, if only 20 new jobs open, and elite families have 30 or more candidates, they dominate, leaving little for others. As growth slows, inequality becomes stark. People shift from seeking growth to demanding fair distribution of the existing pie. The civil service issue is just one example. Many of China's current challenges stem from slower growth, which is inevitable. Transitioning to developed status means shifting from imitation to innovation, which is inherently slower. At the threshold of developed status, the only solution is reform, a shift from growth-centric to distribution-centric policies. Some Chinese hope Xi Jinping will be a wise leader using extracted resources effectively to boost GDP. This reflects high extraction thinking. Even if Xi were the wisest leader deploying resources perfectly, he couldn't restore China's rapid growth era. Developed nations face a growth ceiling. China's future growth lies not in economic expansion but in how much of the existing pie reaches the people. The current pie dwarfs new growth, but abandoning high extraction is beyond Xi's ability, as he is bound by the system's inherent drive to extract. Ask anyone why consumption birth rates and ambitions are declining, and even loyal patriots will say people lack money and time, and the system feels unfair. Effort doesn't yield proportional rewards, so people are giving up. The solution is straightforward. Raise wages, increase rest time, reduce cronyism, and lower social security contribution. If ordinary people understand this, doesn't Xi? Lowering contribution is simple, but it's unfeasible. Where would funds for retired officials' health care or civil servant salaries come from? Xi's position as General Secretary relies on their support. Redistributing their benefits to the masses could jeopardize his leadership. Xi's policies reveal he is trapped in this extraction model. His current strategy? Spending freely. Stock market struggling? Create a fund to buy stocks. Low consumption? Issue subsidies. Bluntly, it's inefficient. Why not tax less instead of collecting and redistributing? Because the party can't help itself. The party's authoritarian system naturally concentrates power and wealth. Xi has amassed vast funds but struggles to spend them effectively. In the developing stage, it was simple. Invest in infrastructure. But as China nears developed status, this no longer works. Xi may not have realized this initially, believing investments in manufacturing chips, electric vehicles would suffice. Last October's rescue policy showed he is beginning to see the low returns and overcapacity issue. Yet he cannot distribute funds effectively. Authoritarian regimes excel at extraction but falter at fair distribution. China aims to become a consumption-driven economy. But what can the central government do beyond subsidies? Little. Its redistribution ability is so weak it can't even allocate funds to local governments effectively. While the central government is flush with cash, local governments are broke, unable to pay salaries and resorting to predatory fines. Why not distribute the funds? It's difficult to do fairly. The central fears local governments will squander bailouts on vanity projects for political gain, leaving useless infrastructure. Yet, without the funds, some locals can't function. Ideally, China would abandon concentrating resources for big projects and stop hoarding money. But this extraction tendency is uncontrollable. Anyone in Xi's position would face the same dilemma. Some argue this leads back to democracy will save China. As I've consistently said, democracy's strength lies not in growth but in redistribution, ensuring fairness through voting. China once needed growth. Now it needs fairness. Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit the subscribe button right here. It really helps YouTube suggest my video to others. I'll be back with more content soon. Until then, be well.