Year XXXVII, Number 3, November 2024

Adriana Castagnoli
Historian and economist. Columnist for “Il Sole 24 Ore”

Tao Wang
Making Sense of China’s Economy
Routledge, London, 2023

Beijing's economic power has grown steadily since China overtook Japan as the world's second-largest economy in 2010. Yet the enormous size and luxury consumption of its affluent classes do not detract from the fact that China is still an emerging country. In 2020, its GDP per capita was ranked 83rd in the world, lower than the level of the United States in the 1940s on a comparable basis.

In highlighting the changing dynamics of China's economy, the influence of key stakeholders, the history of reforms, and the evolution of the country's development strategy, Tao Wang, Chief China Economist at UBS Investment Bank in Hong Kong, explains its complex trajectories from the 1970s to the present, of which dualism is the hallmark. China is a developed but still emerging economy, in transition from centralized planning and state ownership to greater market orientation, one of the most populous nations on Earth but with limited natural resources, led by the Chinese Communist Party but with a decentralized governance structure.

Data on the ownership structure of the Chinese economy suggest that private ownership is the majority (60-70%). However, one must analyze the role of the state from multiple angles, including how resources are allocated, the use of industrial policy, government intervention in the market, and the role of the state in providing public goods. While government stimulus and proactive development strategy have helped China respond to shocks and challenges, there are many problems related to the excessive presence of the state in some areas and its absence in others.

State-owned enterprises in resource, finance and infrastructure-related sectors have grown rapidly. Policymakers regard them as indispensable when it comes to economic security, job provision and social services.

The government still plays an active role in guiding development strategy and uses five-year plans to set medium-term goals in crucial areas such as major infrastructure.

In recent decades, the market has played an increasingly important role in the allocation of productive resources, including labour, capital (and capital goods), land, energy, and natural resources. But progress has been uneven, and reforms have been resisted and constrained by the government's desire to maintain control, especially in sectors such as energy, banking and telecommunications, which are considered strategic to China's economic and national security.

The market has played an increasing part in capital allocation, but the state has maintained a strong influence through ownership of the banking system, persistent control of interest rates, and involvement of local government agencies. The importance of the market in capital allocation increased when China established commercial banks to lend rather than subsidize enterprises as interest rates gradually liberalized and the money market, stock market and credit market grew.

Unlike the early years of reform, much of China's capital allocation is now driven by market forces. However, the banking system remains predominantly state-owned, and the government interferes in banks' business decision-making, especially during periods of economic shocks or challenges (as in 2008-2009), putting pressure on banks to support growth.

No other industry, perhaps, can demonstrate the successes and challenges of China's industrial policy like the solar photovoltaic industry. The policy has been instrumental in dramatically increasing its production, lowering prices, and driving out international competition with low-cost products. But also by establishing domestic industrial funds with investment from the central government to act as a catalyst to attract private investment and open the sector to foreign investment.

Digitalisation, automation and green technology are development trajectories already mapped out for the coming years. Nevertheless, the dualism between rural and urban lands – such as the hukou system of household registration – still underlies China's social and economic structure. China, says the author, should gradually shift to a more equitable society, with less "savage" capitalism, better social protection and a narrower social gap. But even a moderate redistribution effort is likely to meet strong resistance from powerful and noisy interest groups. Outside of potential collaboration on major global issues such as climate change, Beijing's relations with the West and, primarily, the United States are likely to remain strained, with a rising China becoming increasingly assertive.

However, the greatest damage caused by geopolitical tension may come from the way it can affect the course of China's domestic politics and development strategy with a more self-focused government and a more nationalistic public turning away from certain policies and strategies because they embrace "Western" norms or ideals.

* Article published by Il Sole 24 Ore