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Andrew Peaple interviews “Barry Naughton on the State of the Xi Jinping Economy” at The Wire China website (January 5, 2025). The interview is subtitled: “The economist discusses Beijing’s recent stimulus efforts, and the long-term problems building up as China’s leader implements his model for the country.” The interview is packed with insights. Here are a few that caught my eye:
 

Chinese echoes of Japan’s stagnation

[N]one of the things that we’ve seen to prop up demand and keep institutional structures intact have yet involved a substantial resolution of large amounts of debt. He [Xi Jinping] keeps refinancing, kicking the can down the road, injecting some funds into the system to keep anybody from failing, but without resolving any of the problems. That’s really a problem, because at a certain point you have to clean up the mess. You mentioned earlier whether China was becoming Japan-like: this is one respect in which it certainly is. Japan spent almost a decade trying to painlessly restructure a financial system that had suffered a huge reduction in the value of its assets. It was the fundamental problem that lay behind the so-called ‘Lost Decade’ in Japan; and now China seems to be repeating some parts of that.

China’s high levels of inefficient investment

When we look at total factor productivity growth, which is the economists’ attempt to figure out what you’re getting from pure efficiency gains, China’s not really experiencing significant productivity growth. That is astonishing, because if we look at this economy that’s implementing all these new technologies, we think, wow, that’s gotta produce some kind of explosive growth in productivity. But we don’t see it.  And it’s fundamentally because, for example, China is investing in lots of semiconductor equipment plants that are losing immense amounts of money; it’s investing in thousands of miles of high speed rail that go where nobody wants to go. There are just these huge, long run implicit costs from not improving the efficiency of your society. Now, of course, on some level, Xi Jinping is making a gamble that all these technologies will at some point come together and produce a sudden surge of productivity. And he might be right. We can’t say for sure that he’s not. But thus far, he’s very much not.  …

Outsiders are much too prone to hear Chinese policy makers say we want to increase domestic demand, and interpret that as being them wanting to rebalance the structure of the economy towards consumption. As far as I can determine, China has never, since 2008, said we’re going to rebalance the economy away from investment, towards consumption.  … Do they really want to do that rebalancing, or do they enjoy sitting atop an economy that can invest trillions of dollars? I think they rather like it. 

Can the US and China reach “reasonably efficient protectionism”?

We need to get beyond the sort of ‘protectionism good, protectionism bad’ argument, and try to craft a set of policies that amounts to reasonably efficient protectionism, that works in the American interest. 

There’s two parts of that which we can lay out pretty simply. One is, let’s decide what are the sectors that we want to protect, and what are the sectors where we can benefit from opening up in the way that you suggest. EVs is a sector that we’re going to want to protect, because we have a big automobile industry that employs a lot of people. It’s behind the Chinese industry in terms of electric vehicles, but it clearly is capable of catching up. By contrast, solar panels or batteries are areas where we don’t really have a significant industry. Chinese producers have meanwhile become very good, and very low cost. We should encourage Chinese investment in the United States to produce these products, both to create jobs and so that we can learn how to produce at that kind of scale and efficiency. We’re going to need a more explicit industrial policy.

The second thing is, we don’t want to trigger a chaotic scramble for protectionism among all the different countries in the world. We want to signal that we have certain interests, but they’re reasonably limited, and we are also interested in reaching a mutually beneficial equilibrium, especially with our allies, but also with China. 

That’s difficult to do, but not impossible. We should keep our minds open to the idea that the U.S. will move towards more protectionist policy, but that it will be articulated in a way that is less disruptive, and benefits the United States’s interests. … This might, with a little bit of luck and wisdom on both sides, lead us to a new equilibrium that’s not terrible. 

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