REUTERS/Jason Lee
- China's economy is headed for an era of stagnation and disappointment, Nobel laureate Paul Krugman wrote.
- The country's economic model has been unsustainable for years, given ultra-low consumer spending.
- "Let's not gloat about China's economic stumble, which may become everyone's problem."
The world's second-biggest economy is underperforming on nearly every barometer, Paul Krugman wrote in an op-ed piece for The New York Times.
In fact, the problems faced by China today mirror those Japan experienced after its asset-price bubble burst in the 1980s. But where Tokyo managed to avoid issues such as widespread unemployment, GDP decline, and political strife, Beijing may not come out so positively.
"It's not a full-blown crisis, at least not yet, but there's reason to believe that China is entering an era of stagnation and disappointment," the Nobel laureate said.
To Krugman, part of the problem stems from China's leadership, with President Xi Jinping's arbitrary interventions — such as his crackdown on the country's tech industry — getting in the way of efficient economic management.
But even under better stewardship, China's economic approach has been unsustainable for years and was set to break down eventually.
That's as the nation's massive growth streak of the past decade has barely relied on consumer spending, which has made up a meager percentage of GDP.
Among reasons for this is financial repression and weak social safety nets, which created incentives for households to save more than spend. To generate demand, China instead focused on heavy investing, which accounts for over 40% of GDP.
"The trouble is that it's hard to invest that much money without running into severely diminishing returns," Krugman explained.
While this strategy can work when the workforce is quickly expanding and productivity is high, these factors have already peaked and are stagnating.
China has been able to hide its lacking consumer spending by pushing colossal real estate outlays, fueling a sector that makes up a quarter of the country's GDP and almost 70% of household wealth.
But bubbles burst, Krugman emphasized, as has been seen with Chinese developers recently crashing, headlined by defaults and bankruptcies.
The concern now is how China reacts to its economic woes.
"Will it try to prop up its economy with an export surge that will run headlong into Western efforts to promote green technologies? Scariest of all, will it try to distract from domestic difficulties by engaging in military adventurism?," he added.
"Let's not gloat about China's economic stumble, which may become everyone's problem."