Speaking in Davos, Switzerland, this week, Vice Premier Liu He said that the Chinese economy would return to fast growth sooner than expected. Liu offered confidence 'that in 2023 China’s growth will most likely return to its normal trend. The Chinese economy will see a significant improvement.'
On average, state-owned enterprises are 30% less productive than private firms competing in the same economic sector. Capital efficiency is 50% lower for state-owned enterprises, and labor efficiency is 6% lower. And while Liu says that China will open up to the private sector and foreign investment, he's lying. China prefers social and economic stability to the dynamism of creative destruction.
China’s focus is on employment, especially the employment of young college graduates, whose unemployment rate now approaches 20%. China’s allocation of capital does not focus on research and development. Capitalin industrial equipment. Capital is instead allocated on the basis of increasing employment.
Compounding China’s policy mistakes, the country relies on the reckless use of debt to fuel the illusion of growth. Last year, China’s debt-to-GDP ratio reached 270%, up from 247% in 2021. At the margin, low-scale manufacturing will exit China and migrate to other countries in Asia as well as to Mexico. Increasingly, higher-skilled manufacturing will exit China and return to the United States or to other wealthy countries that are aligned with Western interests.
Even in the economic sectors of technology and biotechnology, China lags behind the U.S. and other advanced economies. Semiconductors are the oil of this century. China lacks the intellectual property necessary to develop the most advanced semiconductors, 5 nanometers or below. China isin manufacturing the most advanced semiconductor fabrication machines. As for biotechnology, China’s failure to develop an effective COVID-19 vaccine speaks for itself.
The central problem complicating Liu's olive branch to Davos? There is no rule of law in China and thus no foundation for long-term confidence. Investors know that where it matters, Chinese leader Xi Jinping pursues policies that support one paramount goal: the supremacy of the Communist Party.
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