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China Is Heading For A Long Growth Recession, Not Because Of The Trade War

China’s economy is heading into a long growth recession. A period of declining economic growth that is. But don’t blame the US-China trade war for it — blame the way China has been trying to get rich in the post-Great Recession era.

There was a time China was building the right wealth: factories that produced competitive products, and bridges and roads to connect cities and towns. These were investments that created job and income opportunities for the Chinese people, while they expanded the productive capacity of the economy.

China was also building homes and apartments where people could live in and raise a family.

000s, before the Great Recession. It was a period when the entrepreneurial spirit of the Chinese people rather than the bureaucratic spirit of the Chinese government guided economic activity. China’s economy was growing in double digits, helped by the “imitation effect,” the copying and replicating of foreign technology, and from a favorable demographic pyramid.

“In the 1990s and early 2000s, the country enjoyed expanding access to foreign markets and technology,” says Michael Beckley in a recent article in Foreign Affairs. “China was nearly self-sufficient in food, water, and energy resources, and it had the greatest demographic dividend in history, with eight working-age adults for every citizen aged 65 or older.”

Nowadays, China is still trying to build wealth, but it’s doing the wrong way… by pursuing investments that do not raise the country’s productive capacity and growth potential.

Like bridges and roads to nowhere; like factories that no longer produce competitive products. Like apartments where nobody lives.

“If a country spends billions of dollars on infrastructure projects, its GDP will rise,” says Beckley.“But if those projects consist of bridges to nowhere, the country’s stock of wealth will remain unchanged or even decline.”

Simply put, bridges to nowhere have a “multiplier effect.” They create several rounds of jobs and income while the building takes place. But these bridges have no “accelerator effect.” They don’t create any jobs and income once the building is over. They just waste the country’s precious resources, which could be used elsewhere.

That’s why bridges to nowhere undermine the country’s productivity and economic growth. “To accumulate wealth, a country needs to increase its productivity—a measure that has actually dropped in China over the last decade,” says Beckley. “Practically all of China’s GDP growth has resulted from the government’s pumping capital into the economy. Subtract government stimulus spending, some economists argue, and China’s economy may not be growing at all. “

Meanwhile, China has been building factories that practically duplicate each other, churning out similar products and engaged in a price war that eliminates profits—the fuel of capitalist production and capital accumulation.

Then there’s China’s building of “ghost cities,” owned by the country’s new landlord class. They deprive its young citizens of a place to live and raise a family, as was discussed in previous pieces here.

The bottom line: In the post Great Recession era, China is destroying rather than creating wealth, and that is expected to take its toll in the country’s economic growth for years to come.
Source: Forbes

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