China’s mixed—and resilient—economy

China’s leader, Xi Jinping, is remaking the economy for the 2020s, blending enhanced Communist Party control with market mechanisms. Evidence of this peculiar mix can be found in the growing number of companies that praise Mr Xi in their annual reports. Many foreign observers give short shrift to the idea that real market reform is under way. But Mr Xi has overseen a partial professionalisation of the judicial system and given courts more authority on non-political matters. Last year there were nearly five times as many intellectual-property cases as in 2012. Bankruptcy filings have increased tenfold. Despite its success, China’s economy has always had its sceptics, expecting boom imminently to turn to bust. And many argue that it is still weaker than it looks, because growth has relied on an unsustainable formula of debt, subsidies, cronyism and intellectual-property theft. In fact, the strength of China’s $14trn state-capitalist economy, sophisticated and integrated with the rest of the world, cannot be wished away.

Disagreements between America and China, on issues ranging from the origins of covid-19 to political freedom in Hong Kong, proliferate. American pressure on China includes bans on dealing with notionally private companies seen as beholden to the Communist Party, including Huawei, a telecoms giant, Bytedance, which owns TikTok, a video-sharing app, and WeChat, a messaging and payments super-app (a ban that has alarmed millions of its users in America). Some American threats can be dismissed as pre-election bluster. But some risk doing lasting damage to both Chinese and American firms, above all in the tech industry. More dangerous still would be a resort to the “nuclear option”—cutting China off from the global dollar-payments system. That would produce a huge shockwave, not just in bilateral relations, but in global financial markets.

While Donald Trump pursues American diplomacy by tweet and tariff, its traditional source, the State Department, is in disarray. Last year China overtook America as the country with the most embassies and consulates around the world. Mr Trump has sought to slash America’s spending on diplomacy; Xi Jinping doubled China’s between 2011 and 2018. Morale at State is low and often its diplomats find themselves undermined by other parts of the administration. Meanwhile, Britain’s Foreign Office suffers some of the same problems. But in one respect, gender balance, it is being transformed. In 2014 there were as many men called Sir Simon in the top two grades of its officials as women. But in the past few months women have seized a clutch of the top jobs.

This awful year could, paradoxically, be good for what economists call convergence, ie, a narrowing of the income gap between rich and poor countries. This year few emerging markets will grow at all. But because advanced economies will probably shrink even faster, the gap between them will narrow. That is little consolation to some countries enduring economic turmoil, such as Turkey, in the grip of a currency crisis. And in poorer countries the pandemic is undoing years of progress. In Cambodia, for example, the garment industry, which has helped hundreds of thousands escape poverty, has been ravaged. The difficulties are compounded by the troubles of microfinance lenders, depriving the poor in many countries of a source of credit when they need it most.

The extent of the economic damage wrought in rich countries by the pandemic is becoming apparent. Britain has been particularly hard-hit. In the first half of the year it endured its deepest recession since the post-first-world-war crash of 1919 and 1920, as GDP shrank by 22.1%. In reviving the economy, Boris Johnson, the prime minister, faces a long-term political problem. Many of those who voted for his Conservative Party in December’s election are older people. Many are insulated against the vagaries of the economy by inflated property prices and generous pensions. They have less of a stake in the future than young people and are more averse to the changes—spoiled views, building work, more immigrants—that go with growth.

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