After years of hearing that China was going to be taking over as the world’s next economic superpower, anyone paying attention to the current state of China’s economy is likely left with the same question: what is going on? 

In July, China’s National Bureau of Statistics reported second quarter GDP growth of only 4.7 percent compared to analysts’ expectation of 5.1 percent.  While this figure might seem high to those of us in the United States, 4.7 percent represents the lowest GDP growth in the past decade if we set aside fluctuation due to COVID and is a continuation of declining GDP growth over the same period. That even China, a country famous for manipulating its own economic data to show success, is admitting this relatively-sluggish growth is alarming. 

In fact, the economic condition in China has gotten so dire that they are now in their twenty-third consecutive month of a declining producer price index, causing fears of deflation, where prices across their entire economy start to fall. While lower prices are typically heralded as a good thing for consumers, falling prices across the board can impel consumers to withhold their purchases for a later date.  Combine this with tumbling wages, and consumer spending could easily plummet. Manufacturing grinds to a halt as everyone waits for the already-falling prices to fall even further. China’s famously high levels of government subsidies paid to Chinese exporters and other forms of economic stimulus would not stabilize the slide. 

Amid these well-founded concerns about a recession, Chinese leadership announced three major stimulus measures, all to be done through The People’s Bank of China. Briefly, these are:  

1. Cutting the reserve requirement ratio by half a percentage point and lowering the main policy interest rate by 0.2 percentage points. These are designed to infused more cash into the economy and lower the cost of borrowing. 

2. Infusing investment in the housing market. 

3. Boosting the stock market through the creation of two new monetary policy tools. 

A more detailed discussion of these monetary policy measures can be found in this Peterson Institute report. After a brief frenzy of buying in their stock market followed by very quick and very large sell-offs, the market rallies are all but over, now awaiting a potential fiscal stimulus package to try once again to prop up their ailing economy. The unfortunate reality is that, as the Wall Street Journal reports, “China [has fallen] into their own trap.” The economic model China has followed has largely been a failure. To understand why, consider China’s recent history. 

China has enjoyed tremendous economic growth over the last several decades. With the collapse of Maoist socialism and, especially, the joining of the World Trade Organization in 2001, the Chinese private sector grew by leaps and bounds. Unfortunately, the underlying ideology of China’s aging population is difficult to change. We saw this same phenomenon with the collapse of the Soviet Union in 1991. Soviet Nostalgia, as it has come to be called, is real, particularly among older generations. For many, life under the Soviet Union was poorer, but it was also simpler. There were fewer choices, sure, but for people who never had such choices their whole lives, this was a comfort compared to the tremendous amount of choice found in, say, the grocery store. The same can likely be said about Chinese citizens who lived under Mao. 

With a burgeoning economy, the older generation of Chinese citizens start to pine for those simpler days. In 2021, when President Xi began promoting the term, “common prosperity,” which became the guiding principle of the Chinese economy. Rather than allow the private sector to grow and expand at its own discretion, Chinese leaders cracked down on the excesses of certain sectors (at least, relative to other Chinese sectors), primarily in technology, property, and private tuition. All this in the name of achieving a “common prosperity,” where the difference between the rich and the poor is reduced. Had this been accomplished by raising the living standards of the poor, there might be a justification, albeit a weak one.  

Unfortunately, this is not what happened. Instead, the poor of China remained poor while the rich became less rich as the economic returns of their efforts were suppressed and diverted. As a result, the Chinese economy’s growth slowed tremendously. The causal observer might be forgiven for thinking “so what?” at this. But economic growth, not redistributive policy, is the sine qua non for reducing poverty worldwide. With reduced economic growth in China, millions of Chinese people are being prevented from escaping poverty. 

So what can Americans learn from the Chinese experience since 2001? To my mind, there are three lessons. 

First, we can plainly see that privatization works. In fact, it works so well that the productive gains from slightly freer markets afforded the Chinese government sufficient prosperity to flirt once again with socialism. The aggressive use of industrial policy in China over the last several decades, for example, has resulted in the Chinese economy becoming de facto directed by the Chinese Communist Party. While this has led to some successes, these should be taken with a grain of salt: if you throw enough money at a problem, you will get a solution. Take China’s incredible manufacturing prowess, which today dominates the rest of the world in terms of sheer output. This is an impressive feat accomplished through vigorous subsidization of their industrial capacity by the Chinese Communist Party.  Despite this, providing adequate housing in China remains a difficult challenge, with the Chinese Communist Party having constructed mega projects in areas people do not want to live, cannot get to, or cannot afford. As a result, half-finished skyscrapers dot the skylines, with little to no hope of them being completed any time soon. 

Second, we can see that focusing on “common prosperity” through policy is a fool’s errand. Privatization and free markets succeed in promoting common prosperity by growing the economic pie, particularly for low-income households. For example, in 1979, Chinese officials instituted the infamous one-child policy to curb rapid population growth. This idea was borne out of the desire to increase GDP per capita; to provide more economic pie per person. Rather than focus on growing the numerator, as is done in virtually every other country, China chose to increase this number by slashing the denominator. In doing so, they inadvertently set off a cascading effect where the Chinese population is aging, meaning increased demands on public coffers for retirees and a diminished working age population from which to provide the funding. This is bad. 

One way out of this mess would be to allow higher-productivity enterprises to flourish. Unfortunately, President Xi and the Chinese government have stifled these with onerous regulations and taxes time and again. Thankfully, the US still enjoys a relatively free-market economy, where people choose to pursue high-productivity enterprises in technology, medicine, and the skilled-trades, and provide goods and services demanded by people, not the State. 

Finally, we can learn that the successes of the past are no guarantee of successes in the future. We must be vigilant of the scourge of collectivism and the dangers that it poses and resist the temptation to allow government officials to steer the economy in the name of “the national interest.” 

Ronald Reagan once said, “Freedom is never more than one generation away from extinction.” Too few Americans understand that the laws of economics are as immutable and universal as the law of gravity. Nations have, time and again, attempted to subvert these laws in the name of progress and common prosperity. We have been told that “we’re all in this together” and that we must put the country’s needs ahead of our own. President John F. Kennedy expressed this eloquently in his inaugural address when he said, “ask not what your country can do for you – ask what you can do for your country.” 

While the sentiment here is certainly a noble one, it belies a fundamentally flawed understanding of how the world works. The country is best served by people zealously pursuing their own interests. In a free market system, the best way to serve oneself is by serving others. In doing so, everyone progresses and the economic pie grows such that more people can enjoy better and easier access to the cornucopia of goods and services provided in a modern economy.