China’s ambitious reform plan, first initiated by President Xi Jinping a decade ago, has hit a significant roadblock. The 60-point agenda, which aimed to transition China to a Western-style free market economy driven by services and consumption by 2020, has largely fallen flat. The old growth model, better suited to less developed nations, still dominates the Chinese economy, leading to a massive debt pile and industrial overcapacity. The failure to restructure the world’s second-largest economy poses critical questions about China’s future economic trajectory.
The economic stagnation, coupled with the failure of the reform plans, has drawn comparisons to Japan’s economic stagnation, leading to speculation about a potential economic crisis. "Things always fail slowly until they suddenly break," warns William Hurst, Chong Hua Professor of Chinese Development at the University of Cambridge. He notes the risk of a financial crisis that could carry substantial social and political costs for the Chinese government. A reckoning, it seems, is inevitable.
China’s Economic Future: Crisis, Stagnation, or Reform?
Chinese President Xi Jinping’s ambitious economic reform plans from a decade ago aimed at transitioning China to a Western-style free market economy by 2020. However, most of these reforms have not been implemented, leaving the economy largely dependent on older policies, industrial overcapacity, and a growing debt pile. These circumstances have raised serious questions about what’s next for the world’s second-largest economy.
Riding on Outdated Economic Policies
China emerged from its Maoist planned economy in the 1980s as a largely rural society in dire need of factories and infrastructure. By the time the global financial crisis hit in 2008-09, economists argue that the country had already met most of its investment needs for its level of development. However, instead of transitioning towards a consumption and services-led model, China doubled down on infrastructure and property investment in the 2010s, neglecting household consumption.
This policy focus inflated China’s property sector to a quarter of economic activity, while local governments became so reliant on debt that many are now struggling to refinance. The pandemic, a demographic downturn, and geopolitical tensions have further complicated the scenario, making economic recovery even more challenging.
Crisis vs Stagnation: What Lies Ahead?
Economists see three potential paths forward for China: a swift, painful crisis that curbs excess industrial capacity and deflates the property bubble; a slow, decades-long process of winding down excesses at the expense of growth; or a transition to a consumer-led model with structural reforms that cause near-term pain but facilitate a stronger re-emergence.
A crisis scenario could unfold if the massive property market collapses uncontrollably, or if local government debt, estimated at $9 trillion by the International Monetary Fund, spirals out of control. However, given the state control of many developers and banks and tight capital account restrictions, many economists see this as a low risk scenario.
A Potential Shift to a New Model
The third path, actively transitioning to a new model, seems very unlikely based on the fate of Xi’s 60-point program. Those plans have largely been sidelined since 2015 due to fears of capital outflows and potentially disruptive reforms.
"Right now is a time in which there’s a potential for the train to change direction to a new model, and I think there’s appetite to do that," said William Hurst, Chong Hua Professor of Chinese Development at University of Cambridge, "But at the same time there’s a great fear of the short-term political and social risk, especially of provoking an economic crisis."
Takeaway: China’s economic future seems to be at a crossroads, with each path carrying its unique risks and challenges. The decisions made by the Chinese government in the coming years will have profound implications not only for China, but for the global economy as a whole.