Justin Yifu Lin:Observations on the Chinese Economy

January 18, 2024
Justin Yifu Lin
Lin Yifu is a Chinese economist, professor at Peking University, and former World Bank Chief Economist.
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The course Special Topics in the Chinese Economy takes a broad historical perspective to review China’s development. In history, China was once a prosperous civilization but missed the wave of the 18th-century Industrial Revolution, rapidly falling behind as a backward nation subjected to others’ whims.
After the Opium War, generations of intellectuals, who took it upon themselves to rejuvenate the Chinese nation, made extraordinary efforts. Under the leadership of the Communist Party of China, especially after the establishment of the People’s Republic of China in 1949 and the subsequent reform and opening-up in 1978, China experienced miraculous development. From 1978 to 2022, for 44 consecutive years, China achieved an average annual GDP growth rate of 9%, and its economy in 2022 was 44.8 times the size it was in 1978. In terms of purchasing power parity (PPP), China is now the world’s largest economy. In terms of market exchange rates, it is the second-largest economy. Moreover, China is the world’s largest trading nation and is expected to surpass the $13,207 threshold before the completion of the 14th Five-Year Plan in 2025, becoming a high-income country. This is a development miracle unprecedented in economic history. China is now closer than ever to realizing the dream of national rejuvenation.
Although the achievements China has made since the reform and opening-up are evident, the “China collapse” theory has been repeatedly raised. Recently, due to a continuous decline in economic growth since 2013 and the economic recovery falling below expectations after the COVID-19 pandemic in 2023, the “China collapse” theory has become prominent once again. There are many pessimistic arguments about China’s future development, not only prevalent abroad but also echoed by scholars and the media domestically. In this final class, I would like to analyze and clarify some prevailing viewpoints.

1. The Decline in Economic Growth is Caused by “Guo jin min tui”

One prevailing viewpoint attributes the continuous decline in China’s economic growth since 2013 to the phenomenon of “Guo jin min tui”(which means the state enterprises advance, the private sectors retreat- China Academy note).
This viewpoint is based on property rights theory. In the early stages of reform and opening-up, the state-owned economy accounted for nearly 100% of the overall economy, especially in the manufacturing sector. However, after the reform and opening-up, the private economy developed rapidly, and its share in China’s manufacturing sector increased from virtually zero to nearly 75% by 2008. According to the property rights theory, private enterprises are more efficient while state-owned enterprises are less efficient. Therefore, proponents of this argument attribute China’s rapid economic development after the reform and opening-up to the retreat of the state enterprises and the advancement of the private sector.
However, since 2008, especially after 2013, China’s economic growth has consistently slowed down. This has been accompanied by an increase in the proportion of state-owned enterprises and a decrease in the proportion of private enterprises. Hence, supporters of this argument believe that the decline in the share of the private economy is the main reason for China’s poor economic performance. They also attribute this decline to the policies of the central government. The proponents argue that since the government emphasizes the growth and strength of state-owned enterprises, the retreat of the private sector is a result of this policy. Moreover, the proportion of bank loans granted to private enterprises has been declining while the proportion granted to state-owned enterprises has been increasing. This further reinforces their belief that the continuous decline in China’s economy is a result of government policy.
This argument is quite popular as it sounds reasonable and is supported by data indicators. Therefore, many scholars argue that the only way to change the current situation and reverse the economic decline is to restore the advancement of the private sector and the retreat of the state. This argument is backed by prevailing economic theories, making it persuasive and gaining the belief of many people.

2. “The Disappearance of the Demographic Dividend is Causing China’s Economic Slowdown”

Another popular argument suggests that the main reason for China’s rapid development after the reform and opening-up was the demographic dividend created by the increasing proportion of the working-age population, which provided cheap labor for economic growth.
Now, the situation has reversed: the population is aging, and the proportion of the working-age population is declining. As the demographic dividend disappears, economic growth has decelerated. Japan experienced a similar situation. After World War II, Japan had rapid economic development, but from the 1990s onwards, it faced the same severe problem of an aging population as China does now, leading to a slowdown in economic growth. Therefore, proponents argue that China will follow in Japan’s footsteps.
This argument also sounds reasonable.

3. “China is Experiencing a Balance Sheet Recession”

Recently, Japanese economist Richard Koo proposed another explanation for China’s poor economic performance, which he calls a “balance sheet recession”.
What is a balance sheet recession? Koo believes that in the 1980s, Japan experienced a real estate bubble and a stock market bubble. At the peak of the real estate bubble, the land of the Tokyo Imperial Palace could be sold to buy the entire state of California on the US West Coast. If all of Japan’s real estate were sold, it could buy eight United States. The prices of real estate rose rapidly, making it the most profitable industry in Japan. Many companies that were originally engaged in real industries found it extremely difficult to make money and turned to real estate speculation. Similarly, many households also engaged in real estate speculation. The money for speculation by both companies and households generally came from bank loans.
In 1991, the Japanese bubble economy burst, and real estate prices in Japan plummeted by half, with prices in Tokyo dropping to 20% of their original value. This resulted in a large amount of bank debt for companies and households. Companies, after making money, prioritized debt repayment instead of investment, resulting in slow investment growth. The same applied to households, where after receiving wages, they prioritized mortgage repayment, resulting in stagnant consumption apart from basic living expenses. With stagnant investment and consumption, the overall economic growth stagnated, and the GDP growth rate remained between 0-1% for a continuous period of 30 years.
Koo refers to the process of companies and households repaying debt after the burst of the bubble as “balance sheet repair,” and he named this economic slump a “balance sheet recession.”
In recent years, real estate prices in China have also been very high, and currently, they are declining. Companies and households are also facing early repayment situations. Therefore, Koo believes that China’s sluggish investment is due to companies repaying bank debt. Slower-than-expected consumption growth in the household sector because they need to repay mortgages.
This explanation seems reasonable as it combines theoretical analysis with the experience in Japan.

4. “China Cannot Surpass the United States, Japan Serves as a Lesson”

The above-mentioned viewpoints all attribute China’s continuous economic decline to its system and structural issues. The combination of these factors creates the expectation that China will never catch up to the United States.
According to market exchange rates, China’s economy is projected to surpass that of the United States around 2030. This was proposed in my book The China Miracle, which was published in 1994, a time when the “China collapse” theory prevailed. I was confident in my judgment and even made a bet with someone. The winner would receive two million US dollars. Later, the person who made the bet with me thought the amount was too high and changed it to 200,000 US dollars.
In 1994, there was also a pessimistic sentiment about China overseas, with claims that China had various systemic and structural problems- its economy was on the verge of collapse. Initially, only a few believed that China’s development was a miracle. However, after 2000, with China’s sustained rapid growth, an increasing number of international institutions accepted my analysis and judgment. Therefore, for a considerable period, there was a consensus internationally that China’s economy would gradually surpass that of the United States.
However, now there are many authoritative scholars and institutions internationally who believe that China’s economy will never surpass that of the United States. For example, Professor Lawrence Summers, former US Treasury Secretary, former President of Harvard University, and former Chief Economist of the World Bank, recently stated in the media and various forums that he used to believe China would surpass the United States, but now he believes it will not.
His judgment seems to have historical experience. According to market exchange rates, China’s current GDP is 70% of the United States’. In the mid-1990s, Japan’s GDP approached 70% of the United States’, but now Japan’s GDP is only 16.6% of the United States’. Japan’s per capita GDP has also declined from surpassing the United States to only half of the United States’. With the lesson from Japan, he believes that China cannot surpass the United States.
These voices are prevailing internationally at the moment.
How should we view the Chinese economy? We are pursuing the great rejuvenation of the Chinese nation. We have set the goal of achieving basic socialist modernization by 2035, with per capita GDP reaching the level of moderately developed countries. The long-term goal is to build China into a socialist modernized strong country by 2049. I have mentioned many times that to achieve this long-term goal, China’s per capita GDP should reach half of the United States’ by 2049.
I have also done analysis. In 2019, there were 70 high-income countries in the world (according to World Bank standards, with per capita GDP exceeding $13,207 at current prices). Among them, 28 countries had per capita GDP that reached or exceeded half of the United States’, including the old capitalist countries in Europe after the Industrial Revolution, as well as later developed countries such as Japan, South Korea, Israel, and others.
In 2019, China’s per capita GDP, calculated by PPP, was only 22.6% of the United States’, and only 16% by market exchange rates.
Based on my calculations, from 2019 to 2049, during these thirty years, per capita GDP needs to increase from 22.6% to 50% of the United States’. China’s annual per capita GDP growth must be 2.7 percentage points higher than that of the United States. The United States has had an average annual per capita GDP growth of 1.8% in the past half-century, and it is likely to maintain this level in the future. Therefore, China’s average annual per capita GDP growth from 2019 to 2049 must reach 4.5% in order to achieve half per capita GDP of the United States by 2049.
However, the current international public opinion believes that China’s economic growth rate will decline all the way. For example, people are concerned that the economic growth rate in 2023 may be around 5% (on January 17, the National Bureau of Statistics announced that China’s GDP grew by 5.2% in 2023 – Guancha note), and it may be only 4.5% in 2024, and even lower in 2025.
In the past, the theory of China’s collapse prevailed many times, but China has consistently maintained stable and rapid growth. Therefore, we must not blindly believe those foreign opinions just because they sound well-founded. We must study these phenomena ourselves and understand the reasons behind them.

Refuting “China collapse” Theory

1.The phenomenon of ‘ Guo jin min tui’ is a result of economic growth decline, not the cause.

Let’s first analyze the first phenomenon: In the entire Chinese economy, the proportion of state-owned enterprises is increasing, while the proportion of private enterprises is decreasing. The proportion of loans to state-owned enterprises is increasing, while the proportion of loans to private enterprises is decreasing. This coexists and correlates with the continuous decline in China’s economic growth rate since 2013. But which is the cause and which is the effect?
Those who believe in property rights theory argue that the continuous decline in China’s economic growth rate since 2013 is due to a retreat in the reform of property rights, caused by prioritizing state-owned enterprises. It is true that the central government did propose the idea of expanding and strengthening state-owned enterprises at the 18th CPC National Congress. However, the central government also emphasized unwavering support for and guidance of the development of private sectors.
If the current poor economic performance is attributed to policy orientation, it does not square with the facts. In fact, the fastest-growing and most competitive industries in China, such as electric vehicle, solar cells, and lithium battery, known as the “new three,” are primarily driven by the development of private enterprises.
If we follow the popular belief that China’s economic downturn over the past decade is caused by the government’s promotion of state-owned enterprises and suppression of private enterprises, then why are the industries primarily composed of private enterprises the ones experiencing the fastest growth and best export performance?
Therefore, we cannot simply believe what others say. In my opinion, the phenomenon of Guo jin min tui is a result of the economic growth slowdown, not the cause of it.
Why? As we all know, the outbreak of the 2008 financial crisis originated from the collapse of Lehman Brothers, which triggered a collapse in the US financial market and subsequently evolved into a global crisis.
After the 2008 financial crisis, developed countries never truly recovered. Prior to 2008, the average annual growth rate of developed countries was around 3%, with the United States slightly higher at 3%-3.5%. However, even with the advantage of the US dollar as an international currency and the adoption of proactive fiscal policies and quantitative easing, the US could only restore its economic growth rate to around 2.5%. European countries were even slower, generally around 2%, and Japan was even weaker, with only 1% or even lower. The economic growth rate of the entire OECD countries also declined from an average of 3.4% between 1960 and 2008 to 1.5% between 2008 and 2022. As a result, the global economic growth rate declined from an average annual growth rate of 3.7% between 1960 and 2008 to 2.6% between 2008 and 2022.
For China, the more crucial issue is that the slow economic growth in developed countries and slow growth in consumer spending directly lead to a decline in imports from developed countries, thereby suppressing the growth of international trade. Prior to 2008, world trade grew at a rate more than twice that of the global economy, but after the 2008 financial crisis, the growth rate of international trade became even lower than that of the global economy. China is the world’s largest trading nation and largest exporter, so the slowdown in imports from developed countries has the greatest impact on China.
We can see that, in US dollars, from 1978 to 2008, China achieved an average annual export growth rate of 18.1% for 30 consecutive years. However, during the period of 2008-2012 after the crisis, the average annual export growth rate dropped to 9.4%. From 2013 to 2022, it further declined to an average annual growth rate of 5.7%. The sector most affected by the significant and sustained decline in export growth is China’s export sector, which is primarily composed of private enterprises that square with China’s comparative advantages.
The weakness in external demand has led to difficulties in the operations of private enterprises, and their future prospects are uncertain, which results in a lack of investment willingness.
Due to poor growth expectations for private enterprises’ future, their investment willingness is low, and naturally, they will not seek bank loans. Even if they approach banks for loans, banks will evaluate the industry’s development conditions, and in industries with poor market expectations, banks will exercise caution. Therefore, in this situation, bank loans to private enterprises have also decreased.
In the same international and domestic environment, why do state-owned enterprises expand, and why does the loan volume increase?
Among the three drivers of short-term economic growth, exports have slowed down, and the other driver is investment. In the situation where private enterprises have low investment willingness, investment growth will also be low. Private enterprises are the main force for employment. If private enterprises do not perform well, household income growth and employment expectations will be affected, and household consumption growth will be restrained. Under such circumstances, the economy will naturally decline. During an economy decline, the government has a responsibility to implement countercyclical investment and proactive fiscal policies to stabilize the economy and employment.
In 2008, the government implemented a 4 trillion yuan ($617 billion) stimulus plan, investing heavily in infrastructure projects. The mileage of expressways increased from 60,300 kilometers in 2008 to 96,200 kilometers in 2012, and during the same period, high-speed railways increased from 1,035 kilometers to 9,643 kilometers. Due to further decline in export growth, the Chinese government continued to implement proactive fiscal policies. By 2022, the mileage of expressways had increased to 177,300 kilometers, and high-speed railways reached 42,000 kilometers, accounting for 70% of the world’s high-speed railways. Additionally, 4G and 5G communication base stations were invested. Many of these public infrastructure projects were invested in during an economic downturn. These infrastructure projects have strong externalities and low investment returns, making private enterprises unwilling or unable to undertake them. Therefore, state-owned enterprises invest in these projects, and their funding comes from bank loans.
Therefore, the increase in the proportion of state-owned enterprises in the economy and the increase in bank loans to state-owned enterprises are the results of insufficient external demand, poor economic development, and the government’s implementation of proactive fiscal policies. It is not as described by pessimistic critics, suggesting that the expansion of state-owned enterprises and the suppression of private enterprises have led to economic slowdown.
Moreover, in times of economic downturn, if there are no large-scale infrastructure projects invested in by state-owned enterprises, the development of private sector will be even more challenging. These large-scale infrastructure projects are undertaken by state-owned enterprises, and the construction of expressways, high-speed railways requires cement, steel bars, and the establishment of 5G communication networks requires base station equipment. These create significant market demand for private enterprises. With market demand, private enterprises will create employment opportunities. With increased employment, household income can maintain a certain level, which in turn provides consumption capacity and market opportunities for private enterprises in the production of Household Consumption goods. In this field, private enterprises are still the main players.
In summary, in times of insufficient external demand and economic decline, if the government does not use state-owned enterprises to carry out countercyclical infrastructure investments, the proportion of private sector in the economy may be slightly higher, but the situation for private enterprises would be even more difficult, and the economic growth rate would be lower than it is now.

2.Experience of Countries that age before growing rich: Economic growth does not decline but increases

Now let’s talk about population aging. In the past, some scholars believed that the reason for China’s rapid economic growth was due to the demographic dividend. Now our population is entering negative growth, and the proportion of the labor force in the total population is also decreasing. Without the demographic dividend, economic growth is expected to decline.
In addition, they take the example of Japan to argue that one of the reasons for Japan’s economic slowdown after 1990 was population aging. China is now experiencing population aging, and in the future, it is very likely to experience a similar decline in growth as Japan. This is also a major reason why many people abroad believe that China cannot catch up with the United States.
I recently conducted an analysis on this issue. So far, 53 countries in the world have entered the stage of severe aging (where the population aged 65 and above accounts for 14% of the total population), and half of them (26 countries) can be described as aging before becoming wealthy.
We can divide these 53 countries into two groups. One group consists of 27 countries whose per capita GDP has already reached half or more of that of the United States when they entered severe population aging. The other group consists of 26 countries that entered severe aging before their per capita GDP reached half of that of the United States, known as “aging before becoming wealthy.” South Korea, Japan, Germany, and France belong to the first group, while China belongs to the second group.
It is generally believed that after population aging, economic growth will slow down. However, in reality, the first group, which consists of developed countries, experienced only a slight decline in economic growth when comparing the 10 years before and after entering aging. The growth rate of per capita GDP in these developed countries remained largely unchanged, and GDP growth only slightly decreased due to stagnant population growth.
Interestingly, the second group of countries, which are still catching up, experienced an increase in economic growth both in terms of per capita and the overall economy during the 10 years before and after entering population aging. This is contrary to our common perception.
At first, I was also surprised when I looked at this data because everyone says that economic growth will decline after population aging, and after hearing about Japan’s experience, it’s hard not to believe it. However, the reality is different.
I think the main reason is that population aging is not a black swan event. It can be predicted when population aging will occur 10 or 20 years in advance. Since it is an expected event, the government will not sit idly by and will take measures to avoid negative impacts on the economy. For economic development, labor input is important, but what is even more crucial is the input of effective labor, which is equal to the quantity of labor multiplied by the level of education. Before population aging arrives, the government generally increases investment in education to improve the quality of the labor force. Therefore, after entering population aging, effective labor may not necessarily decline.
For example, in China, the age range of labor entering the job market is from 16 to 25 years old, and their average years of education reach 13.8 years. The average years of education for the entire labor force is 10.8 years, while the retired population at 60 years old has an estimated average of only 6 years of education. During population aging, our annual effective labor force is increasing. Premier Li Qiang said in a press conference after the 2023 Two Sessions meeting that our demographic dividend has not disappeared, and the talent dividend is forming, referring to the increase in effective labor. The same situation applies to other developing countries experiencing aging before becoming wealthy.
Furthermore, for the second group of countries that are catching up, there is more room for technological innovation and industrial upgrading. The improvement in the education level of the labor force entering the job market not only leads to an increase in effective labor but also enhances the ability of workers to master new technologies. This, in turn, leads to faster industrial upgrading and productivity growth. Therefore, after entering the stage of severe population aging, these countries can achieve higher growth rates.
Why do high-income countries in the first group experience a slight decline in economic growth after population aging? The main reason is that when their per capita GDP reaches 50% of that of the United States, they are already highly developed countries with high education levels. The education levels of the retired labor force and the labor force entering the job market are comparable, making it difficult to increase effective labor when the quantity of labor decreases. As a result, per capita GDP growth remains unchanged, leading to a slight overall economic decline.

3. Japan’s experience is not applicable to China: Faced with technological blockade from the United States, China will not give up.

So, how can we explain Japan’s economic downturn since the 1990s?
Economic growth requires an increase in the average level of labor productivity. Improving labor productivity requires continuous technological innovation and industrial upgrading. By the 1990s, Japan had already become one of the most developed countries, and in order to continue growing, it also needed continuous technological innovation and industrial upgrading.
By the end of the 1980s, Japan’s GDP was close to 60% of the United States’, but because Japan’s population was only half of that of the United States, its per capita GDP exceeded that of the United States, reaching nearly 110% of the US level.
Per capita GDP represents the average level of labor productivity and the average level of industrial technology. So at that time, Japan was actually one of the countries with the highest level of industrial technology in the world, at least higher than the United States. That’s why the United States adopted strategies to suppress Japan in 1985, similar to the current situation where the United States is initiating a trade war on technology with China.
In the 1980s, in order to contain Japan’s development, the U.S. Congress passed the Section 301 Act, which aimed to suppress Japan’s trade with the United States on the grounds of unfair competition. This also targeted Japan’s technology industry. At that time, and even until now, the most advanced industry in the world is the semiconductor chip industry. In the 1980s, Japan’s semiconductor industry was ahead of the United States, with Japanese companies like NEC, Toshiba, and Hitachi ranking among the top three in the global semiconductor industry. The United States felt that the semiconductor industry was too important to let Japan take the lead, so they implemented measures similar to those currently used to restrict Huawei’s development to limit the development of Japanese semiconductor companies.
The U.S. goal of suppressing Huawei is very clear. For example, in September 2023, the U.S. Secretary of Commerce, Raimondo, stated that as long as Huawei gives up 5G and chip development, the U.S. will lift sanctions against it. At that time, the United States also applied the same policy to Japan, requiring Japanese companies to share technology with American companies.
Japan accepted, so Japan basically gave up its semiconductor industry. Now Japan’s semiconductor industry is not as competitive in terms of production as TSMC and Samsung, and it lacks innovation compared to Intel, Qualcomm, and others. Furthermore, Japan also accepted the neoliberal viewpoint and gave up the practice of supporting new industries through industrial policies. Since the 1980s, Japan has not had any new industries that have led the world. Some say that the automotive industry is still in a leading position, but Japan’s automotive industry was already ahead before the 1980s.
For any developed country, without the emergence of new technologies and industries that lead the world, productivity levels and economic growth will stagnate. Meanwhile, the United States continues to develop, which is why Japan’s per capita GDP, which was once 50% higher than that of the United States, is now only around 50% of the US level.
The slowdown in Japan’s economic growth is indeed happening concurrently with population aging. However, a simultaneous occurrence does not necessarily imply a causal relationship. When a developed country experiences population aging, if it can improve its education level, continuously innovate technologically, and upgrade industries, the growth of per capita GDP can still be maintained at around 2%.
But Japan’s growth is only 1%, and the key reason is that Japan’s technological innovation and industrial upgrading have stagnated, which is the cause of the slowdown in Japan’s economic growth.
Will Japan’s situation occur in China? No, there are two reasons:
First, in most areas of the new economy, China and developed countries are starting from the same line. China can utilize its abundant talent, large domestic market, and complete industrial supporting facilities to take the lead in the world. New energy vehicles, solar cells, lithium batteries, and other new economy fields are examples of this.
Certainly, in some cutting-edge technology and industry fields, China still lags behind developed countries and indeed faces restrictions and suppression from the United States. However, most high-tech technologies are not exclusively owned by the United States. If the United States does not sell to us, we can import them from other developed countries. If other developed countries are also suppressed by the United States and do not sell to us, we can rely on our large domestic market and utilize a new national system for mobilizing the resources nationwide to support the research and breakthroughs of suppressed technologies. For example, Huawei, despite the United States’ efforts to suppress the company, has not been defeated.
Second, 85% of China’s industries belong to traditional industries, and most of them are still in the catch-up stage. These traditional industries do not fundamentally affect US hegemony, and the United States has already largely abandoned these traditional industries. We can continue to leverage the advantage of being a latecomer to introduce, assimilate, and absorb them. The improvement of education levels and the increase in effective labor will be beneficial to our catching up in the field of traditional industries.
Therefore, Japan’s experience is not applicable to China. When Japan entered the stage of population aging, its per capita GDP had already surpassed that of the United States, indicating that Japan’s industries were already at the forefront of the world. Technological innovation and industrial upgrading no longer had the advantage of being a latecomer, and they could only rely on their own research and development of new technologies and industries. However, when Japan faced suppression from the United States, it basically surrendered and gave up its innovative and leading position in the semiconductor chip industry.
At the same time, Japan also embraced the neoliberal ideology promoted by the United States. Before the 1980s, Japan was well-known for supporting new industries through industrial policies. The term “industrial policy” was coined by Japan. In the 1980s, the neoliberal ideology emerged, advocating that the government should not interfere with industrial policies and leave resource allocation to the market. Japan followed suit, and technological innovation, industrial upgrading, and economic growth stagnated.
In reality, the United States has always supported the development of its new industries, which is also the reason why its technology has maintained a leading position in the world. As a developed country, for new industries to develop and new technologies to emerge, they must be developed through research and development. Enterprises have a high motivation for developing new products because these new products and technologies can be patented. However, enterprises are not interested in basic research because the outcomes of basic research become public knowledge through publications and cannot generate profits. Yet, without breakthroughs in basic research, the development of new products and technologies will be like water without a source.
In this situation, the government of a developed country must invest in basic research. The government’s support for basic research is limited by funding, so it must make choices and support basic research in those fields that are most helpful to the country’s technological innovation and industrial upgrading – this is industrial policy.
In 2011, Mariana Mazzucato, a renowned Italian economist working at University College London, published a book called “The Entrepreneurial State,” which researched pioneering companies in advanced industries internationally, such as Microsoft, Google, Intel, and others. Her research found that the early research and basic research of these American companies were mostly supported by the US government. As a result, she refers to the U.S. government as an entrepreneurial state – one that is adept at identifying new opportunities and mobilizing and allocating resources to help entrepreneurs seize those opportunities. The U.S. government plays precisely this role.

Developed countries all do this, but at that time, Japan was too naive. They accepted the ideology of American neoliberalism and believed that the government should implement inclusive policies rather than specific industry-oriented policies.
In debates with domestic scholars about industrial policies, I have mentioned that just like corporate innovation, indeed, most policies supporting the development of new industries have failed. However, there is no developing country that can catch up with developed countries without industrial policies, and there is no developed country that can maintain technological leadership without industrial policies. China’s breakthroughs in new technology fields in recent years, reaching a global leading position, cannot be achieved without the Chinese government’s industrial policies.
Throughout, the United States has been urging other countries not to use industrial policies, but it has consistently supported and implemented technology policies that possess industrial policy characteristics itself. At the same time, they use the pretext of national security to suppress companies from other countries that compete with American companies. After the 1980s, under pressure from the United States, Japan abandoned its leading semiconductor chip industry and also gave up its efforts to support new technologies and industries through industrial policies. This led to Japan’s failure to produce new technologies and industries that lead the world after the 1990s, and its productivity level could not continue to improve, resulting in long-term economic decline.
Indeed, China has entered the stage of population aging. However, as long as we continue to invest in education, improve effective labor, utilize the technological gap and latecomer advantage compared to developed countries, as well as our advantage of overtaking in the field of the new economy, even if some technologies are restricted by the United States, the number of such areas is limited. We can rely on the large domestic market, adopt a new national system to tackle challenges, and continue to promote technological innovation and industrial upgrading, thereby continuously improving productivity levels and income levels, and maintaining sustained economic development. Population aging should not and will not lead us to an economic slowdown like Japan or even a decline in our economic growth rate.

4. The balance sheet theory cannot explain China

Next, let’s discuss the issue of balance sheet recession. After the burst of the Japanese bubble economy, there were indeed situations where businesses and households had to “repair their balance sheets”. When businesses need to repay debts, their investment growth slows down; when households need to repay debts, their consumption growth slows down. As a result, the overall economic growth slowed down. This explanation is suitable for Japan but does not apply to China.
In China, our real estate prices have only stopped rising, and the decline is not significant or has only declined slightly. Unlike Japan, where real estate prices plummeted in a short period, with Tokyo housing prices dropping by 80%, China has not reached that level. Moreover, in terms of proportion, there are relatively fewer companies engaged in real estate speculation despite the large population and the number of enterprises in our country.
More importantly, whether companies invest or not depends on the level of debt or growth opportunities. Is it due to high debt that they don’t invest, or is it because there are few development opportunities that they don’t invest? Obviously, it is due to the lack of investment opportunities rather than high debt. An implicit assumption of the balance sheet recession theory is that companies lack good investment opportunities.
Why didn’t Japan have investment opportunities? As mentioned earlier, since signing the Plaza Accord in 1985, Japan not only accepted the conditions imposed by the United States but also abandoned the development of advanced semiconductor chip industries. Additionally, Japan adopted the neoliberalism advocated by the United States and no longer used industrial policies to support the emergence of new industries and technologies. With the absence of highly profitable new technologies and industries in the market, the willingness of companies to invest naturally decreased. Therefore, after the burst of the bubble economy, it was due to the lack of investment opportunities brought about by new technological innovation and industrial upgrading that Japanese companies refrained from investing. At the same time, without the improvement in productivity levels brought about by new technologies and industries, workers’ wages did not increase, resulting in weak consumption growth and ultimately leading to economic decline.
The situation in China is different; we still have many investment opportunities. As I mentioned before, on the one hand, we still have opportunities to catch up in some traditional fields. On the other hand, in the new economic race characterized by artificial intelligence and big data, we are on the same starting line as developed countries. Moreover, compared to developed countries, China has three major advantages that are conducive to breakthroughs and rapid development in new technologies.
First, we have the advantage of human capital. Investments in the new economy primarily rely on human capital, and China has a huge advantage in terms of human capital. As a populous country, we have a large pool of talent, and our education level is not far behind that of developed countries. This allows us to drive technological innovation and breakthroughs more quickly.
Second, we have the advantage of a massive domestic market. Calculated by PPP China is the world’s largest market. Therefore, after the development of new technologies and products, they can be immediately introduced to the domestic market, making it easy to achieve economies of scale. Among the top five most downloaded applications in the U.S. app store, four of them are Chinese companies, including Pinduoduo, Jianying, Douyin, and Shine. Their success in overseas markets stems from years of polishing and experience accumulation in the Chinese domestic market.

Third, China has the most comprehensive industrial supporting facilities in the world. The best example is Tesla. Tesla, an electric car company, developed in the United States for over a decade and had a peak annual production of only 30,000 vehicles. However, after the completion of Tesla’s Shanghai factory in 2019, it delivered 480,000 vehicles in the following year. Tesla was on the verge of bankruptcy, but thanks to the excellent hardware support in China, it experienced rapid development, and Elon Musk became the world’s richest person.
The above example shows that there are still many investment opportunities in traditional industries. At the same time, new technologies and industries continue to emerge. In such a market situation, even if companies have relatively high debts, they dare to borrow money for investment. Unlike Japanese companies in the past, they didn’t have investment opportunities and could only repay debts without daring to borrow more. The same goes for households. With the continuous improvement of productivity and increasing employment, households have better income expectations or at least not too poor. As wages continue to rise, people dare to consume, and they won’t hesitate to increase consumption due to debt repayment.
In the case of a balance sheet recession after the burst of the real estate bubble, on the one hand, companies and households have high debts, and on the other hand, companies lack new investment opportunities. This is the fundamental reason for the “balance sheet recession” in Japan, a situation that China will not encounter.

China still has the most opportunities in the world

In this course, I have previously discussed expectations for the future. From now until 2035, China should still have 8% growth potential. Even in the face of significant changes that occur once in a century, such as competition with the United States and global warming, I believe that before 2035, we still have 8% growth potential and can achieve an annual growth rate of 5-6%. From 2036 to 2050, we should still have 6% growth potential, ultimately achieving 3-4% growth. By 2049, our per capita GDP can reach half of that of the United States. We can build a socialist modernized strong country and achieve the great rejuvenation of the Chinese nation.

In this process, China remains the fastest-growing market in the world because our economy now accounts for 18.5% of the global economy. If we can achieve the growth expectations I mentioned earlier, our annual contribution to global economic growth can reach around 30%, which means that approximately 30% of the world’s annual economic growth will still come from China.
Even though we see the economic difficulties this year, we should consider that other countries are facing even greater challenges. According to IMF predictions, the United States is projected to have a growth rate of only 2.1% in 2023, and Europe and Japan are facing even greater difficulties. While our growth may be slower compared to the past, we are still the country with the largest contribution to global growth and the fastest-growing market in the world.
Therefore, if you are in business, China offers the most opportunities in the world. If you are in a traditional industry facing overcapacity, you should undergo industrial upgrading. On one hand, engage in digital transformation to enhance competitiveness. At the same time, invest in upgrading industries that can replace imported products through introduction, assimilation, absorption, and innovation, and focus on exporting. Additionally, leverage domestic human capital, market size, and industrial supporting advantages to explore and seize the opportunities brought by the new economy and achieve corner overtaking
In conclusion, in recent years, as the economic growth rate has declined, we have repeatedly seen the resurgence of pessimistic “China collapse” arguments that have been present since the beginning of the reform and opening up. The main reason why many people believe in such arguments, in my opinion, is that China has adopted a gradual dual-track reform in its transition process instead of the shock therapy advocated by developed countries. Therefore, from the perspective of mainstream theories, there are many institutional and mechanistic issues in our country. So, whenever they see a slowdown in China’s economic growth, they analyze it using theories from developed countries and believe that China’s economic development is unsustainable. However, these collapse theories fail to truly understand the reasons for China’s economic slowdown and fail to see the opportunities and conditions for China’s economic development. It happened in the past, it happens now, and it will happen in the future.
I believe that on our path forward, China will still face many problems, and there will be many years where economic growth falls below expectations, leading to a resurgence of “China collapse” theories. However, we must maintain our ability to think independently, identify the root causes of challenges and the opportunities they present, seize development opportunities, create conditions, and overcome challenges. Of course, as the economy develops, new challenges will arise, but new opportunities will inevitably emerge as well.
Throughout this course, I have consistently emphasized these principles, and I hope that all of you will maintain confidence in China’s prospects. Because I believe that China still offers the most opportunities, and by seizing these opportunities, many of you will become influential figures leading various fields worldwide. When you reach the age of prosperity and strength in your forties or fifties, you will witness the realization of the great rejuvenation of the Chinese nation!

(We would like to express our sincere appreciation to editor Gao from Guancha for her invaluable contributions in organizing and proofreading the Chinese manuscript.)


Justin Yifu Lin
Lin Yifu is a Chinese economist, professor at Peking University, and former World Bank Chief Economist.
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