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Three Factors Confounding China's Trajectory: Corruption, Speculative Investment, and the Climate Crisis

S ince President Xi Jinping came to power in 2012, the sharp shift in political winds not only has startled global observers but also has forced some analysts to dramatically revise their prior conclusions about China’s trajectory. In Nicholas Lardy’s previous book Markets Over Mao: The Rise of Private Business in China (2014), he expressed optimism about the triumph since 1978 of market forces and the private sector over state planning. Five years later, however, his latest book—The State Strikes Back: The End of Economic Reform in China?—acknowledges both the resurgence of state dominance in China’s economy and the deceleration of market-oriented reforms under Xi’s leadership. The book argues that these are the largest stumbling blocks to China’s growth. In explaining China’s growth slowdown after the 2008 financial crisis, Lardy rejects the “natural slowing” thesis—meaning that as China matures into an upper-middle-income country, growth will naturally slow and stay permanently low. This argument, he contends, masks the fact that China remains at a level of GDP per capita that is only 25% that of the United States, and far lower than that of Japan in the 1990s. There is still plenty of room for China to catch up, Lardy maintains, by liberalizing market forces and correcting inefficiencies in resource allocation. According to Lardy, two principal factors account for China’s slowdown. First, prior to 2008, the country performed far above its potential due its unprecedentedly large trade surplus, so the slowdown constitutes an adjustment. Second, and more importantly, under Xi growth is dragged down by “the slowing pace of economic reform and the steadily deteriorating performance of state-owned enterprises” (p. 41). Worsening these problems, he adds, are the predominant allocation of bank credit to state companies and the weakening protection of private property rights, as seen in recent instances of illegal state seizures of private assets. Hence, in 2016, China saw its first-ever decline in the share of private investment relative to state investment.