china is back

“China is back.” This is the sentence that summarizes the presentation of the Vice-Premier of the People’s Republic of China, Liu He, before the World Economic Forum in Davos 2023.

Among the principles that Liu He outlined in his speech, he expressly mentioned the idea of ​​”letting the market play a decisive role in the distribution of resources (…), we will deepen support for the private sector, promote free competition and entrepreneurship”. In the same vein, he recognized the weaknesses of the current Chinese economy, and addressed the measures being taken to address problems in the real estate sector, in terms of intellectual property, and in domestic consumption.

Now, is China back? And if so, back to what?

Since the “reform and opening up” process started in the late 1970s, China has experienced an impressive boom in its economic growth. They were decades in which the GDP reached rates of around 10% per year, driven primarily by policies to attract foreign investment (FDI), by the development of public infrastructure and by encouraging exports. This, in a context of opening up and international reintegration led by Deng Xiaoping.

This model helped lift millions of people out of poverty and generated historically unparalleled social welfare. However, over the years, it became clear that this development model would not be sustainable over time. To make the situation more complex, in 2018 the “trade war” with the United States began and, almost instantly, the Covid-19 pandemic broke out.

Since then, China has plunged into a process of constant search for a “new” economic-social model that allows it to report similar benefits to those delivered by the one developed by Deng and his team. There have been attempts at greater self-sufficiency; the classic formula of increasing public spending has been “handed back”; foreign investment has been encouraged.

But where does China really want to go or return to? This is very difficult to predict.

What we do perceive is that pragmatism is reigning once again. Thus, we see that efforts to attract and retain foreign investment have returned; the path of regulatory liberalization has continued in some strategic sectors; and the private sector has once again been given a greater role.

Even McKinsey is optimistic when pointing out that “The next China is China”. If the country grew at an annual rate of 2% in the next 10 years, the consultant points out, the accumulated growth in this period would be equal to India’s GDP today; and, at a rate of 5%, it would be equivalent to the current GDP of India, Indonesia and Japan combined.

In summary: we see a certain return to the old approach of “crossing the river groping the stones.”

Source: Financial Journal