What might save China's economy

Summary

Episode Summary: "What Might Save China's Economy"

Podcast: The Indicator from Planet Money
Host: Darian Woods
Guest: John Ruich, NPR's China Correspondent
Release Date: March 18, 2025

In this insightful episode, Darian Woods delves into the pressing question of China's economic trajectory and the factors that might influence its ability to surpass the United States as the world's largest economy. Through an engaging conversation with NPR's China correspondent, John Ruich, the episode explores China's current economic state, the challenges it faces, and the strategies it employs to foster growth and stability.

Background and Context

The episode begins by referencing Goldman Sachs' evolving predictions regarding China's economic supremacy. Initially forecasting that China would overtake the U.S. by 2026, Goldman Sachs later adjusted this target to 2035. However, China's recent economic hurdles have sparked debates about whether it will ever achieve a larger economy than the United States. This shift holds significant implications globally, as "one sixth of all the world's economic activity happens in China," underscoring its pivotal role in international affairs.

Current Economic State and Growth Targets

China recently concluded its annual National People's Congress (NPC), a key event where the country's leadership outlines its economic priorities and targets. John Ruich highlights that China has set an ambitious GDP growth target of around 5% for the year, maintaining the same target as the previous year. While this growth rate is higher than that of the U.S., achieving it remains uncertain.

"It's around 5%. And it's the same as it was last year. Now achieving that rate of growth is possible, but not guaranteed."
— John Ruich [01:38]

Economic Challenges: Real Estate Slump and Trade Tensions

A central theme of the discussion revolves around China's ongoing struggles in the real estate sector. The "real estate hangover" has led to a prolonged slump, dampening the confidence of both the middle class and businesses. This sector's downturn restricts consumer spending, which is crucial for sustaining economic growth.

Additionally, the episode touches upon the repercussions of the U.S.-China trade war. New U.S. tariffs on Chinese-made goods present further challenges. However, proponents like Tian Xuan, a delegate and finance professor at Tsinghua University, remain optimistic.

"Tiansuan's fairly relaxed about it, though. He thinks the authorities have more ways to adapt this time around and are better prepared."
— John Ruich [04:28]

Government Strategies and Investments

To navigate these economic headwinds, China is focusing on strategic investments. Key areas include:

• Infrastructure: Enhancing ports to facilitate trade.
• Research and Development: Investing in cutting-edge technologies.
• Green Energy and Advanced Manufacturing: Aimed at positioning China as a global leader in future industries.

The government emphasizes the importance of boosting domestic consumption to reduce reliance on investment-driven growth. Recent policy announcements include initiatives to raise the minimum wage and invest in childcare, signaling a shift towards enhancing economic security for citizens.

"China just wrapped up its annual session of Parliament, the National People's Congress. And this is a once a year opportunity to take the pulse on what China's leaders are thinking about the economy."
— John Ruich [01:10]

Technological Innovation

Innovation is hailed as a cornerstone for China's economic resilience. The NPC highlighted significant advancements in technology sectors, with notable mentions of companies like Deepseek, an AI firm that achieved impressive breakthroughs with limited budgets.

"Innovation is blooming. And the key to reaching China's economic goals is creating an even better environment for innovation."
— John Ruich [06:23]

However, the narrative is nuanced with skepticism from industry experts like Arthur Kroeber, who questions the profitability and sustainability of these high-tech investments.

Criticisms and Limitations

Arthur Kroeber, a seasoned China economist, offers a critical perspective on China's heavy investments in technology. He argues that many high-tech industries, such as EVs and batteries, are currently unprofitable due to overcapacity and intense competition.

"I don't think that that is very likely because the problem with that is you look at all these high tech industries that everyone is so excited about, EVs and batteries and whatnot, but they're not very profitable."
— Arthur Kroeber [07:38]

This profitability issue hampers the ability of these companies to offer substantial wages or expand their workforce, thereby limiting the potential for broader economic growth through increased consumer spending.

"Everyone is struggling. So they're all barely making money, and so they don't have a lot of ability to hire lots of people and give them big wages."
— Arthur Kroeber [08:10]

Kroeber concludes that while China's industrial policies have yielded competitive manufacturing industries, overall growth may remain sluggish, contradicting the government's optimistic projections.

"Growth is probably going to be pretty sluggish for a few more years yet, and they're not going to get this magical nirvana that they hope for."
— Arthur Kroeber [08:32]

Future Outlook and Conclusion

The episode underscores the delicate balance China must maintain as it transitions from an investment-heavy economy to one driven by consumer spending. Achieving this shift requires enhancing economic security for its citizens, a goal reflected in the government's recent policy measures.

As Darian Woods aptly summarizes, the episode presents a "glass half empty" view on China's economic strategy. While there are successes in sectors like green technology, significant challenges remain in ensuring these advancements translate into widespread economic benefits.

"China's a leader in green energy. For instance, EVs, batteries. And it's made some pretty surprising strides recently in AI, as Deepseek showed."
— Darian Woods [07:13]

In closing, both China and the United States face periods of economic transition, each with its unique set of challenges and opportunities. The episode encapsulates the complexities of China's economic landscape, offering a comprehensive analysis of what might save its economy in the face of internal and external pressures.

"There will be plenty of transitions for both countries, I'm sure that I think."
— John Ruich [09:44]

---

Produced by: Cooper Katz, McKim, and Alwyn Tsar
Engineered by: Khwesi Lee
Fact-Checked by: Sarah Juarez
Edited by: Cake and Cannon

Transcript

[NPR]

Npr.

[Darian Woods]

This is the indicator from Planet Money. I'm Darian Woods. In 2011, Goldman Sachs predicted China would seize America's crown for the world's biggest economy by 2026. A couple of years ago, Goldman Sachs pushed that date back. 2035 was when China would become Dominan. But since then, China's faced economic hurdles. Some people are now questioning whether China will ever have an economy larger than the U.S. and this matters. One sixth of all the world's economic activity happens in China. Whoever has the largest economy can afford the largest military. They can sweeten more alliances and have a larger say in how the world is run. As the world's number two economy, China's growth directly challenges US Dominance and help us figure out how fast China might grow or not. We have NPR's China correspondent John Ruich. Welcome, John.

[John Ruich]

Hey, great to be here, Darian. So China just wrapped up its annual session of Parliament, the National People's Congress. And this is a once a year opportunity to take the pulse on what China's leaders are thinking about the economy. One big announcement at the start of the event that everybody's looking for is the target for economic growth this year. It's around 5%.

[Darian Woods]

Around 5%. OK, sounds solid. And it's higher than U.S. growth in GDP, gross domestic product.

[John Ruich]

Yeah. And it's the same as it was last year. Now achieving that rate of growth is possible, but not guaranteed.

[Darian Woods]

This question of Chinese growth is critical for the global economy. So today's show we cross the Pacific to see the headwinds and tailwinds facing this industrial giant Foreign.

[NPR]

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[Darian Woods]

John, you went to the National People's Congress at an incredible moment for China.

[John Ruich]

Yeah, it's a moment that's got almost equal amounts of opportunities and risk for China. The chief problem being that China's been in this kind of real estate hangover for years. Its property sector's been in a grinding slump, which has really been hitting confidence of the middle class and of businesses. Officially, though, there is a lot of confidence and optimism in China's future, too. Just before the opening session of the National People's Congress, the representatives were streaming into the Great hall of the People, this giant facility on the side of Tiananmen Square, and I buttonholed a delegate named Tian Xuan. He's a professor of finance at Tsinghua University. He's also a representative of the Shanghai delegation at the National People's Congress. Tianxuan said hitting the around 5% growth target is going to take a lot of work. First, China needs its own consumers buying more.

[Darian Woods]

China has been trying to do this for a while, but it hasn't really figured out how to do it. And it's also been hit particularly hard in the last few years with that property slump.

[John Ruich]

Yeah, it has. But Tianjuan says that there are other ways to boost the economy, like making wise investments in things like ports and research and development. Overall. I got the sense that he thinks the government is choosing the right policies to hit that around 5% growth target this year.

[Darian Woods]

The trade war must be a storm cloud, though. Got new US Tariffs on Chinese made goods.

[John Ruich]

Yeah, it is. Tiansuan's fairly relaxed about it, though. He thinks the authorities have more ways to adapt this time around and are better prepared. Plus, Chinese businesses, you know, they're doing their thing right and continuing to figure out ways to reduce risk.

[Arthur Kroeber]

Yeah.

[Darian Woods]

You told me this fascinating story about a guy in southern China making light fixtures.

[John Ruich]

Yeah. Last fall, I visited his factory. The owner is a guy named James Chung. When I was there, he was churning out thousands of mirror lights for a Las Vegas hotel. He told me that during Trump's first term in office, he moved some of his production to Thailand to help his customers avoid the tariffs. And when I called him the other day, James Chung told me that he had just gotten back from a trip to Thailand for work. In the past couple months, since Trump took office again, he says he's been moving a lot of production there. It's now 70% of his total, up from about 30. James Chung says his customers will pay about 15% more for the products if they're made in Thailand. But that's actually a bargain compared with getting products from China from China. He says they paid 45% in tariffs.

[Darian Woods]

So moving production and assembly outside of China, that's one way around some of these tariffs. Now, it's worth noting that all told, China's exports to the US aren't a huge share of China's economy. It's just roughly 3% now. Yes, China is an exporting powerhouse, but most economic activity is still internal to the country. So what's really going to help China's economy is broader trends that make it more productive, like inventing and adopting cutting edge technology.

[John Ruich]

Technology and tech based manufacturing was talked about a lot at the National People's Congress. That member from the Shanghai delegation, Tian Xuan, he says there have been some big innovation breakthroughs in recent months in China. Like of course, the AI company Deepseek.

[Darian Woods]

Yeah, it is a very impressive chatbot and it used a much smaller budget to make than we thought was possible.

[John Ruich]

Tianxuan says innovation is blooming. And the key to reaching China's economic goals is creating an even better environment for innovation.

[Darian Woods]

And the government feels this way too. Beijing is in the midst of a multi year effort to build up its industries in green energy, aerospace, robotics, AI and advanced machinery. It wants China to dominate these industries of the future. We often talk about it on the show that it's doing incredibly well in some of these areas.

[John Ruich]

Right. China's a leader in green energy. For instance, EVs, batteries. And it's made some pretty surprising strides recently in AI, as Deepseek showed.

[Darian Woods]

But the strategy may have its limitations, according to Arthur Kroeber. Arthur is one of these longtime China heads. He's written a book. He started a China macroeconomics firm. He divides his time between New York and Beijing. He says that the government's theory seems to be that heavy investments in tech will lead to productivity breakthroughs. Those productivity breakthroughs will then lead to higher wages and good jobs.

[Arthur Kroeber]

I don't think that that is very likely because the problem with that is you look at all these high tech industries that everyone is so excited about, EVs and batteries and whatnot, but they're not very profitable.

[John Ruich]

Arthur says there's a capacity glut, a lot of stuff being produced, but not enough buyers to keep businesses standing on their own. Companies in the solar sector are struggling in batteries. Profits are falling, profitability in EVs is dropping. And a lot of this is due to competition with other companies in China.

[Arthur Kroeber]

Everyone is struggling. So they're all barely making money, and so they don't have a lot of ability to hire lots of people and give them big wages.

[Darian Woods]

Without those big wage increases, Arthur says it's hard to see how growth in high tech industries will spill over to the rest of the economy.

[John Ruich]

He says China's industrial policy has been successful at a certain level.

[Arthur Kroeber]

They've got a lot of very competitive manufacturing industries, but growth is probably going to be pretty sluggish for a few more years yet, and they're not going to get this magical nirvana that they hope for.

[Darian Woods]

So that is the glass half empty. Take a government that has intervened a lot in high tech industries has had some results like green tech exports, but it's unclear whether that's really lifting the whole country.

[John Ruich]

Yeah, in some ways China's challenge is a lot more basic. It wants to move away from an economy dependent on high levels of investment encouraged by the government, instead to one where everyday Chinese people feel enough economic security to spend more. And that's going to take some adjustment.

[Darian Woods]

Yeah. Just over the weekend, the Chinese government announced plans to vigorously boost consumption. In their words, they want to raise minimum wage and invest in childcare, among other things.

[John Ruich]

In the meantime, the Chinese people may have to, as Xi Jinping put it, or eat bitterness.

[Darian Woods]

Eat bitterness. Now that is a lot more direct than we hear from leaders here. Recently we heard President Trump calling the possible economic tumult coming in the US A period of transition.

[John Ruich]

There will be plenty of transitions for both countries, I'm sure that I think.

[Darian Woods]

We can say for sure. This episode was produced by Cooper Katz McKim and Alwyn Tsar. It was engineered by Khwesi Lee. It was fact checked by Sarah Juarez. Cake and Cannon edits the show and the indicator is a production of NPR.

[NPR]

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