What the West Gets Wrong About China's Economy

Debt, Trade, and Corruption

A hot air balloon over Tianjin, China, July 2017.  STRINGER / REUTERS

Few countries command as much attention as China. That is not surprising. Its remarkable economic rise is shaking the world’s geopolitical balance even as it raises questions about the universality of market-led capitalism and democratic norms. In turn, China has become a lightning rod for all manner of anxiety. The White House has blamed China for the United States’ huge trade deficits, for example, even though there is no direct causal relationship between such deficits and China’s surpluses. In fact, there are several things about China that U.S. analysts get wrong.

It isn’t hard to understand why. For the general public, there are difficulties in drawing appropriate conclusions about a country that is so big and regionally diverse in the distribution of its natural resources and commercial activities. And sentiments are almost always clouded by differences in ideology, values, and culture.

For scholars, meanwhile, conflicting views stem from the lack of an agreed framework for analyzing China’s economy. Decades ago, in the heyday of the Soviet Union, universities taught courses on centrally planned or “transitional” economies as an academic discipline. With the demise of the former Soviet Union, this body of analysis faded away. Today, China is studied as a developing economy, yet it is not one. The close links between its financial, fiscal, trade, and social welfare systems make it a different animal entirely.

Given the lack of an appropriate framework for analyzing China, predictions of its future have varied wildly. Among the many popular beliefs are that China’s high debt levels will inevitably lead to financial crisis (yet its debt as a share of GDP places it around the middle of major economies); that corruption has negative consequences for China’s growth (yet deepening corruption has facilitated rather than impeded growth); that it is impossible for U.S. firms to compete with China because its wages are so low (yet China’s wages have increased fivefold since the mid-1990s); and that American

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