In the late 1970s Deng Xiaoping was forced to tackle the gigantic mess that central planning had made of the Chinese economy during Mao’s rule. The problem: highly inefficient, loss-making, corruption-infested, Soviet-style (feel free to add more negative, hyphenated adjectives) state-owned enterprises dominated the industrial base. The products were poor; the books more fiction than not. Deng’s solution was to adopt Western-style capitalism under the banner of “Socialism with Chinese Characteristics.” This meant pulling the plug on bank credit and political favor for state-owned enterprises and redirecting support toward the private sector.
The result has been 30+ years of economic growth so strong that it has vaulted China from nowhere into first place among world economies. In fact, the PRC is now 10%+ larger than #2, the US, using Purchasing Power Parity as the yardstick.
According to an astute observer of China, Nicholas Lardy, writing in the Financial Times, however, current Chinese leader Xi Jinping has not simply been cracking down on the cumulative excesses of the private sector over the past couple of years. He has also reversed Deng’s policy in favor of building up the state-owned sector again. Lardy thinks this decision is reducing China’s annual GDP growth rate by a whopping two percentage points.
I’m not sure why this is happening. But for China, the highest economic principle has never been about achieving maximum sustainable GDP growth. Rather, it’s whatever is necessary to maintain the Communist Party in power. Reduction in GDP growth is a secondary concern.
I don’t know how this affects China’s stance in tariff negotiations with the US, especially since White House economists seem to be suggesting that the US economy is already beginning to contract under the weigh of current tariffs plus the government shutdown (increased tariffs slated for March will only deepen any decline). From a longer-term point of view, though–and assuming Chinese policy doesn’t change–for a company to simply have exposure to China will no longer be any guarantee of success.