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China's economy according to Paul Krugman

Paul Krugman, Nobel-prizewinning economist, has written an opinion piece in the New York Times arguing that the Chinese economy is in deep trouble. He reasons that although some analysts had expected the Chinese economy to boom after it lifted its zero-Covid measures for containing the pandemic, in fact it has since underperformed by about every economic indicator other than official GDP, which supposedly grew by 5.2%, according to questionable official figures. China is also experiencing Japan-style deflation and stubborn high youth unemployment, and is likely entering an era of stagnation. Krugman argues that it is only partly poor economic management which has stifled private initiative. There is also a problem with China’s economic model, which is becoming unsustainable.

The country’s low consumer spending means that the country is struggling to generate enough demand to absorb its high production capacity. Historically, the solution has been to ramp up investment, which may work well with a fast-growing workforce and increased productivity, but China’s working-age population peaked around 2010 and has been declining ever since. The country’s overall productivity also appears to be stagnating. Although these problems have been noted for at least a decade, a key reason that it is becoming acute now is that the Chinese government managed to mask the problem of inadequate consumer spending by promoting a gigantic real estate bubble, which has now burst.


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