‘Xinomics’ Leads China Into a Middle-Income Trap: Experts

Shipping containers stack at Zhoushan port in Ningbo, in China's eastern Zhejiang Province, on April 19, 2023. STR/AFP via Getty Images

As China faces economic challenges, it is falling into the “middle-income” trap due to Chinese leader Xi Jinping’s repressive policies, according to Japanese finance experts.

According to the World Bank, China is now an upper-income-middle country. The middle-income trap refers to a situation where a developing country’s economic growth slows down after reaching a certain size at around a per capita GDP of $10,000 to $12,000, which stays at that level. Countries that fall into this trap lose the competitiveness of their exports due to rising wages and cannot create high-value-added markets and developed economies.

Sputtering Economy

China’s GDP in April-June grew by 0.8 percent compared to 2.2 percent in January-March, and it’s not due to a slow post-COVID pandemic recovery, but rather it is an accelerated collapse of a real estate bubble that was formed over the past two decades, wrote Tsuchiya Hideo, a Japanese feature writer and economist at Nikkei, a Japanese financial newspaper, on Aug. 3.

Real estate accounts for about 30 percent of China’s GDP. Latest official data reveal that new home sales by China’s 100 biggest developers dropped by 33 percent in July from a year ago, despite Beijing’s various real estate incentives. However, while this decline is significant, it is important to note that China was under lockdown due to the Chinese Communist Party’s (CCP) zero-COVID policy.

China’s real estate giant Evergrande lost $81 billion in the past two years during the country’s real estate crisis.

Country Garden, the largest privately owned developer in China—once hailed as a role model for property developers—is now in danger of default after missing $22.5 million interest payments on dollar-denominated bonds due on Aug. 7.

According to IMF economic data of countries around the world, the ratio of “total investment” to China’s GDP, which includes both the public and private sectors, has exceeded 40 percent since 2004—except for 2006 when it was 39.8 percent, Mr. Hideo wrote, adding that no other country in that dataset has that number.

China’s current economic situation is quite challenging, Mr. Hideo wrote, with falling property prices, sluggish consumption, and declining exports. Global companies are relocating their manufacturing plants out of China.

In addition, China’s local governments, which rely on land sales to generate revenue, are in a financial crisis due to a sharp drop in sales. A recent report found that 2,892 local government financing vehicles—entities established by local governments to raise funds for infrastructure projects and other development initiatives—hold over 59 trillion yuan (about $8.15 trillion) in interest-paying debt and payables, an amount equivalent to about 50 percent of China’s GDP.

Moreover, unemployment is at an all-time high in China, and the problem is compounded by new graduates—over 11 million—this year.

The statistics bureau reported that unemployment among workers aged 16 to 24 hit a record 21.3 percent in June. But Zhang Dandan, a researcher at Peking University, said that if the 16 million-plus people who choose not to work and live with their parents are all counted as unemployed, the real youth unemployment rate in March was as high as 46.5 percent.

These factors indicate that China’s economy is in a downward spiral. There have been claims that China is experiencing a “Japanification,” referring to a period of economic stagnation in Japan in the 1990s, Mr. Hideo wrote. However, Japan’s economic bubble only burst after it became a developed country, he continued. As a middle-income country, he said that if China’s economic growth stagnates for an extended period, its path to becoming a developed country will be cut off.

The Middle-Income Trap

Long Ke, a senior fellow at the Tokyo Foundation for Policy Research in Japan, wrote that if China seeks to become a developed economy, it needs to overcome many structural challenges.

Cheap labor is becoming “a thing of the past” for China, which means that the old mass production model of cheap goods for export is no longer viable, he stated.

In other words, China needs to enter the higher end of industrial production, he continued, otherwise, it will not be able to become a developed country. Furthermore, with the shrinking labor force, China would need to shift from its reliance on a labor-intensive manufacturing model to a capital-intensive industry.

However, this would mean that the CCP would have to prioritize technological innovation to engage in research and development, and China would have to protect intellectual property rights, which it does so poorly, Mr. Ke said.

If Beijing “is unable to boost the technical abilities of its local industries, China will never successfully industrialize. ... A closer look reveals that China is in fact falling into what is known as the ’middle income trap,' making it unable to change its development model or strategy to move on to the next phase of more advanced economic growth,” he wrote.

China’s exports have been experiencing a persistent downturn in recent months. Official customs data showed that, following a significant 12.4 percent drop in June, exports in July fell by 14.5 percent year-on-year.

Mr. Ke said that a market economy must be at the center of the solution. However, the CCP seeks to expand and empower state-owned enterprises, which contradicts a market economy.

CCP Ignored World Bank’s Advice

In February 2012, the World Bank and China’s Development Research Center of the State Council published “China 2030” to explore how China could avoid falling into the middle-income trap.

The World Bank report stressed that China should prioritize completing its transition to a market economy and allow private companies to participate freely in sectors monopolized by state-owned enterprises. In addition, it advised Beijing to work on eliminating corruption and maintaining a transparent system with the rule of law.

Cai Xia, a former professor of political ideology at the CCP’s Central Party School, wrote in Foreign Affairs, “When Xi came to power, he came to see the private sector as a threat to his rule and revived the planned economy of the Maoist era.” As a vocal critic of the CCP, Ms. Cai was expelled from the school, and her Party membership was revoked by Beijing after criticizing Mr. Xi. She has lived in the United States since 2020.

Mr. Hideo called “Xinomics” the policy of strengthening government control over the economy, reversing the trend toward reform and opening up.

Unfortunately, Beijing did not heed the advice of the World Bank, he wrote.