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China must stop its return to socialism if it wishes to continue its rate of economic growth

By Crofton Lee
web posted November 1, 2021

China has been well known as one of the fastest growing economies in the past 30 years, in fact, since 1991, China’s GDP per capita has risen from $333 to $10,500 in 2020, an increase of $10,167 or %3155. This is as drastic an increase as anyone has ever seen. Many attributes this astounding rate of economic growth to two factors, rapid productivity growth and “large scale capital investment (financed by large domestic savings and foreign investment)” (CRS Report). Economic reforms since the Mao and Deng Xiaoping era have boosted China into the upper level of economic productivity. In the past year, however, China’s economic growth has started to slow down, and if China wants to continue on its economic boom from the 90’s, it must once again change its economic policies.

In 2021, the Chinese government in Beijing has put pressure on businesses to reduce their carbon emissions, which has led to a coal shortage in northern China. These coal shortages have resulted in frequent power deficiencies. Many provinces have implemented electricity rationing programs, and recurrent blackouts have severely impacted businesses’ productivity.

In order to combat this shortage, the government must diverge capital away from technological research subsidies and instead use this capital to buffer the steal and cement industries, which have taken a particularly hard hit from a lack of power. Because of this re-allocation of capital, future technological advancements will start to grow farther away, and labor productivity will continue to decrease, further exaggerating diminishing marginal returns.

Beijing has also ramped up pressure on China’s property sector, demanding that the sector finds some sort of solution to reign in its debt. This pressure will decrease potential for economic growth, as capital that could be spent on investment or technological advancements will now have to be spent paying off debts. According to BBC, "The slowdown in the property sector will affect the activities of firms in areas such as construction contracting, building materials, and home furnishing." It would seem that simply removing some government subsidies from technological companies is not enough. The Chinese government has recently enacted a slew of new regulations and a new, more stringent enforcement of existing rules. China’s chairman, Xi Jinping, has decided that the current party policies relating to daily live and technology are no longer compatible with Chinese beliefs, claiming that he is “putting the Communist back in the Communist Party, at least to some extent” (BBC). Xi’s goal is to bring China back to the “traditional” way of Mao, and has tried to achieve this by setting limits of daily lives of Chinese citizens, as well as a crackdown on China’s tech giants.

What Chairman Xi fails to realize is that these new regulations will only serve to slow down China’s economic progress. After the ride hailing tech giant Didi listed its stock on in New York, China responded by removing it from the Chinese app store, and even making it unavailable for use in some major Chinese cities. This decision has resulted in Didi price shares falling by more than 20%, and strongly discourages foreign investors to invest in Chinese companies, for fear of similar backlash plunging the value of the stock of local companies. In order to help improve the economic progress of 2021, and continue the economies upward trend, China needs to lean on more capitalist practices.

By lessening regulations of product markets (like regulations that reduce competition) and relaxing strict employment regulation, China can allow for more economic growth that stems from competition and employment benefits. Secondly, by relaxing regulations on businesses, whether related to environmental or monetary impacts, the government can allow businesses to fend for themselves, instead of being careless and waiting for the government to bail them out. With a lessening of funds required for subsidies, the Chinese government can then focus more on technological advancements that will help expand their production possibilities frontier, paving the way for an increase in economic growth. Most economists agree that more capitalistic practices tend to promote economic growth more than others, but whether China will be willing to follow ideas fundamentally different that its own communistic ideals still remains to be seen. ESR

(c) 2021 Crofton Lee.




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