China's government is starting to screw up

A few cracks in the facade of omnipotence.

No government is all-powerful. But over the past two decades, as China’s government has gone from strength to strength, many have begun to think of it, at least tacitly, as nigh-omnipotent. First there was the incredible spurt of economic growth that left other developing countries — and indeed, the entire world — in the dust:

In a single generation, China went from indigence to the world’s largest manufacturer and exporter. This was accompanied by massive feats of engineering and construction — the titanic Three Gorges Dam, the ultra-fast Shanghai Maglev — as well as surprising military advances like anti-satellite weapons and anti-ship ballistic missiles.

Even more incredible was China’s ability to completely avoid recessions. Where the U.S. suffered the Great Depression and other Asian countries endured the Asian Financial Crisis during their own periods of rapid development, China’s growth occasionally slowed but never sputtered. It seemed as if China had discovered a better way to stabilize an economy, controlling bank lending directly instead of employing the indirect levers of fiscal spending and interest rates.

Time and again, skeptical observers predicted imminent doom — from a housing bubble, from excessive debt, from an unbalanced growth model. Time and again, doom kept refusing to materialize. When property prices threatened to spiral out of control, the government cooled them; when a stock price collapse or global recession threatened to slow the Chinese economy, the government let prices rise again. It seemed as if direct management of the financial system had let China tame the business cycle in a way that no other government had yet figured out how to do.

Then there was COVID. Although the epidemic began in China, it never got nearly as bad there as it did in Western countries that had much more time to prepare. With a system of harsh, well-enforced lockdowns, border closures, and universal rapid testing, the country managed to control the disease so well that its economy has outpaced most others in recovery.

Given this seemingly unbroken record of success, perhaps it’s no surprise that the ever-present chorus of skepticism has quieted lately. Many thinkers outside China now seem to tacitly accept that the country’s leaders can simply attain whatever growth rate they want, develop whatever technology they want, and meet and conquer any threat. Writers who normally support free markets, property rights, and so on now wonder if China has invented a wholly new and more successful way of running an economy.

But although the fact hasn’t received much media attention, China’s government has stumbled badly on a couple of things in the past few years. These state failures aren’t big enough to threaten the country’s development, but they’re small narrative violations that may indicate that the omnipotence of China’s rulers has been oversold.

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Belt and Road

The first failure was the Belt and Road project — a series of infrastructure projects outside China, mostly supported by loans from Chinese state banks. The idea was to strengthen China’s ties with surrounding countries, secure resource availability, and hopefully provide a market for Chinese companies as well.

But the project has been a debacle from the very start. In a Bloomberg post last December, I detailed its many missteps:

From its inception, the program began to run into difficulties. An ambitious Chinese port project at Hambantota in Sri Lanka is in trouble, as a new government is demanding to renegotiate the lease. A $62 billion transportation corridor through Pakistan became mired in delays and setbacks. Projects were canceled and terms renegotiated in Malaysia and Kenya. Asian countries soured on the lending program, and Chinese outbound investment fell…

[M]any of the [infrastructure] projects that China financed [in Africa] were not well-thought-out, leading to a predictable wave of defaults. Many countries in Africa and elsewhere are now asking for debt relief, and it looks like China is going to take significant losses.

I have a theory for why this happened. Chinese officials are used to China, but the rest of the world works differently. In China, farmers can be kicked off their land to make way for construction projects without too much fuss (other than some angry but ultimately inconsequential protests). But if China comes in and pushes governments in Pakistan or Malaysia to boot poor people off their land, either those governments will balk or they’ll face blowback. The governments of other countries are probably going to be far less willing than local Chinese officials to sacrifice the livelihoods of their vulnerable populations on the altar of Chinese greatness — both because their social control is less total, and because they themselves don’t have nearly as much of a stake in the Chinese system.

Meanwhile, Chinese planners seemed to do a poor job of selecting and carrying out projects for Belt and Road. This might be simply because supply chains and regulation and labor systems work differently outside of China than in it. Or it might point to some underlying weakness in China’s planning capacity. Or it might be a simple isolated case of incompetence.

But the general failure of Belt and Road suggests that China’s government is not so great at working miracles abroad. This is in contrast to, say, Japan, which has been quietly successful at helping other countries build infrastructure.

Vaccines

China’s other big government stumble has been the vaccination effort. Earlier this year, China’s government, including top health officials, state media, and state-sponsored spam networks, was spreading rumors about the safety and efficacy of U.S. vaccines. Now those rumors look ridiculous, and the efficacy and safety of mRNA vaccines have proven to be second to none. Already countries like Israel have crushed the pandemic using Pfizer’s vaccine.

In fact, it was China’s vaccines that ended up not working very well:

China is exploring the option of mixing different Covid-19 vaccines as a solution to the relatively low efficacy of its existing jabs, the head of the country’s Centre for Disease Control and Prevention has said.

Gao Fu told a conference in Chengdu on Saturday that the country was examining two routes “to solve the problem that the efficacy of its existing vaccines is not high”.

That’s a startling admission — and of course China’s government immediately forced Gao Fu to walk it back and scrubbed it from the internet — but it’s true. The CoronaVac vaccine showed only a 50.4% efficacy in a trial in Brazil — barely over the threshold for usability. The CanSino vaccine did a bit better in its own trials, at 65.7%, but that’s still not great. One of Sinopharm’s vaccines is supposedly more effective, at almost 80%, but that data has suspiciously not been published.

Not only did China’s vaccine technology stumble, but its rollout has been underwhelming as well. Despite having four times as many people as the U.S., China has put fewer total shots into arms; in percentage terms the gulf is enormous.

Maybe this is a case of China being so good at suppressing the virus that it has seen fit to take it easy on vaccinations, but I doubt it. The sooner China vaccinates the bulk of its population, the sooner it can open its borders again and stop issuing hair-trigger lockdowns every time there’s a minor COVID outbreak. Part of the issue may be that China is reluctant to mass-vaccinated its people with vaccines that don’t work that well (instead choosing to export these, which raises its own issues). Part of it is that China uses a lot of inactivated virus vaccines, which are harder to manufacture at scale. But it might also be an issue with supply chains, which America has handled with surprising efficiency.

China’s challenges ahead

So in the areas of economic diplomacy and biotechnology, China’s government has faltered. That’s not catastrophic by any means — China’s economy doesn’t really need the Belt and Road projects, and its public health measures have been stringent enough where the lack of vaccination won’t hurt its growth much either.

But these small failures might be an early warning that the Chinese government will stumble in the herculean tasks that it has set for itself in the coming decade. The “Made in China 2025” plan and the push to become self-sufficient in semiconductors represent unprecedented forays into national-level industrial policy — something China didn’t even have much experience with before around 2010. Displacing the U.S. as the supreme military power in East Asia will also take some doing; especially challenging would be an invasion of Taiwan in the face of U.S. and allied resistance.

Meanwhile, some of China’s earlier government successes may have come at a steep price. The bank-based stimulus that China used to ride out the Great Recession pushed huge amounts of capital into real estate, construction, and infrastructure — sectors with low productivity growth. That could be behind China’s slowing productivity growth, and its slowing GDP growth overall.

Given the failures of Belt and Road and vaccines, and the end of China’s rapid growth, it’s worth asking whether there are unappreciated weaknesses in the country’s state capacity.

Of course, that question isn’t very clearly defined — “state capacity” is a pretty vague and amorphous term. States have different capacities in different areas — Japan’s government, for example, is great at building trains but has proven terrible at administering vaccines.

But yet it makes sense to ask if key elements of China’s system are showing some cracks. Diplomatic ineptness could harden alliances against China in Asia, making its military domination of the region that much more difficult. Technological weaknesses could frustrate the Made in China 2025 effort. The end of fast growth — which will soon be exacerbated by rapid population aging — could make the Chinese populace, as well as lower-level officials and party cadres, less enthusiastic about Xi Jinping’s increasingly oppressive rule.

It’s not clear yet whether China is suffering some kind of long-term institutional issues — ossification of vested interests, complacency, internal struggles, etc. — or whether it’s simply the case that no government can win them all. But observers outside China should quietly take note of the government’s modest stumbles, and question any tacit assumptions of Chinese state omnipotence they may hold.

Update: Many people are pointing out a potential addition to this list of government stumbles: A shrinking population.

In fact, to the extent that this is a government failure (rather than an inevitable fertility transition), it’s a failure of the one-child policy, which the current government has wisely ended. Shrinking population is absolutely a big challenge for China, which I wrote about in an earlier post. That doesn’t really represent a Chinese government failure, but it DOES raise the stakes for future Chinese policy — with a shrinking population, it’ll be harder for the country to grow its way out of any setbacks.


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