- Nobel Prize winner Paul Krugman has written that China’s economy is headed for an era of stagnation and disappointment.
- Given ultra-low consumer spending, the country’s economic model has been unsustainable for many years.
- “Let’s stop gloating about China’s economic stumbling. That could become everyone’s problem.”
The world’s second-largest economy is underperforming on nearly every barometer, Paul Krugman wrote in an op-ed for the New York Times.
In fact, the problems facing China today mirror those experienced by Japan after the bursting of the asset price bubble in the 1980s. However, while Tokyo has managed to avoid problems such as widespread unemployment, declining GDP and political strife, China may not be as positive.
“There is reason to believe that China is entering a period of stagnation and disappointment, although it is not a full-blown crisis, at least not yet,” the Nobel laureate said.
According to Krugman, part of the problem stems from China’s leadership, with President Xi Jinping’s arbitrary interventions (including a crackdown on the country’s high-tech industry) impeding efficient economic management. It is said that there is.
But even under better management, China’s economic approach had been unsustainable for many years and was destined to eventually fail.
That’s because the country’s tremendous growth over the past decade has relied largely on consumer spending, which accounts for a small portion of GDP.
Among the reasons were fiscal repression and weak social safety nets, which created incentives for households to save rather than spend. To generate demand, China instead focused on heavy investment, accounting for more than 40% of GDP.
“The problem is that it’s difficult to invest this much money without experiencing a significant drop in returns,” Krugman explained.
This strategy works if the workforce expands rapidly and productivity is high, but these factors have already peaked and are stagnant.
China has been able to mask shortfalls in consumer spending by promoting huge real estate spending, enriching a sector that accounts for a quarter of gross domestic product and almost 70% of household wealth.
But Krugman stressed that the bubble has burst, as seen in the recent defaults and bankruptcies of Chinese developers.
The current concern is how China will react to the economic crisis.
“Will we try to prop up the economy with a surge in exports that directly conflicts with Western efforts to promote green technology? Worst of all, will we seek to distract from domestic difficulties by engaging in military adventurism?” “Will we try to distract from this?” he added.
“Let’s stop gloating about China’s economic stumbling. That could become everyone’s problem.”