The Foreign Affairs Interview
Bonus: Who Killed the Chinese Economy?
Released: December 7, 2023
Host: Justin Vogt (on behalf of Foreign Affairs editor Daniel Kurtz-Phelan)
Guests: Adam Posen, Zoe Liu, Michael Pettis
Length: ~30 minutes
Overview
This episode explores the lingering problems facing China's economy after its disappointing post–zero-COVID recovery. Three prominent economists—Adam Posen, Zoe Liu, and Michael Pettis—present distinct explanations for the economic stagnation and debate both its origins and the responsibility of Chinese leadership, particularly Xi Jinping. The conversation delves into structural versus political factors, historic turning points, the concept of “economic long COVID,” and the interplay between domestic policies and the broader global context.
Key Discussion Points & Insights
1. The Central Mystery: "Who Killed the Chinese Economy?"
- The host frames the discussion as a “game of Clue,” with three possible culprits:
- Excessive state interventions and zero-COVID policies (2020s)
- Xi Jinping’s policies (2010s)
- The CCP’s outdated growth model (2000s and earlier)
- Each expert offers a different narrative (01:00-03:04).
2. Adam Posen: "Economic Long COVID"
Argument: The core problem is a behavioral shift among Chinese households after zero COVID, marked by a fundamental loss of trust and propensity to spend.
Key Points:
- The anticipated economic rebound after reopening from zero COVID never materialized (03:04).
- Chinese households shifted away from durable goods and investment, increasing savings and liquidity due to distrust and fear of arbitrary state actions (03:20-04:00).
- The “no politics, no problem” compact, foundational to the Chinese economic miracle, was broken by Xi’s interventions and the zero COVID crackdown (04:16-04:55).
- "It's very hard for an autocrat...to re-establish credibility" once this trust is lost (05:07, Adam Posen).
- Argues these changes preceded the real estate crisis and are not simply a function of structural economic issues (05:35).
- The regime’s increasing hostility toward the private sector further undermines confidence and recovery (05:48).
- "We have economic long COVID in China. The ability to stimulate the economy is very limited, even though they keep trying." (06:01, Adam Posen)
Notable Quote:
"For decades, there was what I called a 'no politics, no problem' compact in China...Starting with Xi's consolidating power in 2015, but especially with their zero COVID crackdown, average Chinese suddenly were subjected to...arbitrary [decisions] by a given party member in a given city making up their mind. And...this breaks the compact." — Adam Posen (04:16)
3. Zoe Liu: The "Four Ds" and Xi Jinping's Overconfidence
Argument: Xi didn’t create China’s economic “time bomb,” but he shortened its fuse—exacerbating long-standing issues rather than originating them.
Key Points:
- Identifies China’s main problems as the "Four Ds": debt, demographics, demand, and decoupling (07:13).
- Xi's crucial error was accelerating the process of decoupling, amplifying international tensions and internal vulnerabilities (08:00).
- Problems such as debt and demographics predate Xi and were well known to policymakers (08:15).
- COVID-19 accentuated existing issues, but the critical juncture was actually several years prior—Xi’s consolidation of state and party control over the economy and his emphasis on the party’s leadership (08:55).
- Xi’s early pandemic “success” increased his confidence and willingness to pursue assertive, even isolationist policies (09:50).
- Offers memorable metaphors: pre-COVID China as a Monet painting ("beautiful from afar, but a jumbled mess up close"), post-COVID as a Jackson Pollock ("a jumbled mess from afar and up close") (10:45).
- Xi’s civil-military fusion strategy and emphasis on technological self-sufficiency triggered stronger US responses (22:42).
Notable Quotes:
"[Xi] did not assemble China's economic time bomb, but I do think he should be blamed for having shortened the fuse." — Zoe Liu (07:13)
"Before COVID...the Chinese economy, it looks like Monet—a beautiful impressionist painting from afar, but a jumbled mess up close. But after COVID...it's now like a Jackson Pollock: a jumbled mess from afar and a jumbled mess up close." — Zoe Liu (10:45)
4. Michael Pettis: The Structuralist View—China's Growth Model Became Its Trap
Argument: The root cause is an unsustainable, investment-driven growth model, a pattern seen in many countries that inevitably ends in tough adjustments.
Key Points:
- China’s high savings, high investment model followed predictable developmental phases like those seen in Japan, Brazil, the Soviet Union, etc. (12:52-13:40).
- Once underinvestment is resolved, failing to transition to a new model leads to unhealthy growth, rising debt, and a need for adjustment (13:25).
- Shifting to soft-budget economics (i.e., unprofitable but centrally-supported sectors, often local governments and property) became necessary to keep growth up (15:25).
- China’s problems predate Xi’s tenure; the trap was "baked into the pie" before COVID (16:00).
- COVID and zero COVID accelerated existing negative trends, particularly by reducing the household share of GDP and worsening inequality (16:55).
- Challenges the sequence of causality: "It's not that the recentralization of the economy caused the slowdown. I would say it was the slowdown that caused the recentralization of the economy." (00:06/17:12)
- Downplays the concept of the “middle income trap”—prefers "investment trap" to describe the recurrent global pattern (26:04).
Notable Quotes:
“A successful development model, by definition, makes itself obsolete because it resolves the problems it was designed to address. And then you need to shift the model. And if you don't shift the model, you end up developing a different set of imbalances...almost no one shifts the model.” — Michael Pettis (13:20)
“It's not that the recentralization of the economy caused the slowdown. I would say it was the slowdown that caused the recentralization of the economy.” — Michael Pettis (00:06/17:12, repeated for emphasis)
5. Points of Disagreement & Debate
Causality and Political Agency:
- Posen contends that agency — specifically leadership choices and the breakdown of trust — trumps structural determinism, challenging Pettis’s view (17:41–19:08).
- Posen: "The structural, the heavy duty structuralist version...is too dismissive of the agency of both the party and the average Chinese household." (17:41)
- Pettis maintains that entrenched interests and institutional inertia make successful reform nearly impossible, regardless of leader (13:45–14:55).
- Zoe Liu acknowledges both structure and policy, but stresses Xi’s particular contribution as one of acceleration and unpredictability (08:22–08:55, 24:29).
6. The Role of Foreign Policy and "Civil-Military Fusion"
- Zoe Liu elaborates how Xi’s elevation of the civil-military fusion strategy (merging civilian and military technological development) alarmed Western policymakers (22:30-24:40).
- This, plus Xi’s assertive foreign policy, triggered US export controls and investment screening, undermining China’s previous advantages of global confidence and low-cost access to technology.
Quote:
"If President Xi Jinping did not accelerate a lot of these policies to such a higher level, I do not think it would trigger such a response from the United States. And as a consequence, what used to benefit China’s economic rise...those things are no longer there." — Zoe Liu (24:17)
7. The Middle Income/Investment Trap and Prospects for Reform
- Pettis prefers “investment trap,” a global pattern not unique to middle income countries (26:04).
- Allude to the challenges democracies and autocracies face in rebalancing after the initial burst of high-investment growth (27:10).
- Reform can only succeed in either robustly democratic or highly centralized autocratic regimes, historically speaking (27:40).
- In China’s case, the rebalancing of the private sector depended mainly on the distribution of income to households, more so than exports (28:38).
Memorable Metaphors
- "Economic long COVID" (Adam Posen): Lingering loss of economic vitality after the acute crisis.
- Monet vs. Jackson Pollock (Zoe Liu): The shift from seemingly orderly disorder to overt chaos in the economic landscape.
- Wile E. Coyote over the cliff (Justin Vogt paraphrasing Adam Posen, 21:37): The economy suspended in midair after outrunning its underlying support.
Timestamps for Key Segments
- 00:06 — Pettis: "It's not that the recentralization of the economy caused the slowdown..."
- 03:04 — Posen presents "economic long COVID."
- 07:13 — Liu introduces the "Four Ds" and Xi's role.
- 12:52 — Pettis on the structuralist perspective and development model trap.
- 17:41 — Posen challenges the determinism of the structuralist view.
- 22:30 — Liu explains civil-military fusion and foreign policy impacts.
- 26:04 — Pettis disputes the "middle income trap" terminology.
- 29:18 — Closing remarks and thanks.
Conclusion
Each economist presents a compelling but distinct narrative:
- Posen sees a psychological and political rupture leading to chronic economic hesitancy.
- Liu stresses the compounding effect of Xi’s policies on existing vulnerabilities, emphasizing the international context.
- Pettis grounds the diagnosis in the inevitable cycle of overused growth models, structural incentives, and the failure to adapt after early successes.
Ultimately, all agree that China’s economic malaise is overdetermined: structural weaknesses, unfortunate leadership choices, and a changing global environment each contribute. The implications for American policy and global economics hinge on which diagnosis proves most accurate.