The Indicator from Planet Money - What might save China's economy

Starting point is 00:00:00 NPR. This is the indicator from Planet Money, I'm Derrym Woods. In 2011, Goldman Sachs predicted China would seize America's crown for the world's biggest economy by 2026. A couple of years ago, Goldman Sachs pushed that date back. 2035 was when China would become dominant. But since then, China's faced economic hurdles. Some people are now questioning whether China will ever have an economy, larger than the US. And this matters. One sixth of all the world's economic activity happens in

Starting point is 00:00:46 China. Whoever has the largest economy can afford the largest military. They can sweeten more alliances and have a larger say in how the world is run. As the world's number two economy, China's growth directly challenges US dominance. And to help us figure out how fast China might grow or not, we have NPR's China correspondent John Rewitch. Welcome, John. Hey, great to be here, Darien. So China just wrapped up its annual session of Parliament, the National People's Congress. And this is a once-a-year opportunity to take the pulse on what China's leaders are thinking about the economy. One big announcement at the start of the event that everybody's looking for is the target for economic growth. This year, it's around

Starting point is 00:01:29 5%. Around 5%. Okay. Sounds solid. And it's higher than U.S. growth in GDP, gross domestic product. Yeah, and it's the same as it was last year. Now, achieving that rate of growth is possible, but not guaranteed. This question of Chinese growth is critical for the global economy. So today's show, we cross the Pacific to see the headwinds and tailwinds facing this industrial giant. John, you went to the National People's Congress at an incredible moment for China. Yeah, it's a moment that's got almost equal.

Starting point is 00:02:08 amounts of opportunities and risk for China. The chief problem being that China's been in this kind of real estate hangover for years. Its property sector has been in a grinding slump, which has really been hitting confidence of the middle class and of businesses. Officially, though, there is a lot of confidence and optimism in China's future, too. Just before the opening session of the National People's Congress, the representatives were streaming into the Great Hall, the people, this giant facility on the side of Tiananmen Square. and I button-hold a delegate named Tian Xuan.

Starting point is 00:02:38 He's a professor of finance at Qinghua University. He's also a representative of the Shanghai delegation at the National People's Congress. Tiansuan said hitting the around 5% growth target is going to take a lot of work. First, China needs its own consumers buying more. China has been trying to do this for a while, but it hasn't really figured out how to do it. And it's also been hit particularly hard in the last years with that property slump. Yeah, it has. But Tian Quan says that there are other ways to boost the economy,

Starting point is 00:03:09 like making wise investments in things like ports and research and development. Overall, I got the sense that he thinks the government is choosing the right policies to hit that around 5% growth target this year. The trade war must be a storm cloud, though. Got new U.S. tariffs on Chinese-made goods. Yeah, it is. Tian Xuan's fairly relaxed about it, though. He thinks the authorities have more ways to adapt this time around and are better prepared.

Starting point is 00:03:34 Plus, Chinese businesses, you know, they're doing their thing, right, and continuing to figure out ways to reduce risk. You told me this fascinating story about a guy in southern China making light fixtures. Yeah, last fall, I visited his factory. The owner is a guy named James Chung. When I was there, he was churning out thousands of mirror lights for a Las Vegas hotel. He told me that during Trump's first term in office, he moved some of his production to Thailand to help his customers avoid the tariffs. And when I called him the other day, James Chung told me that he had just gotten back from a trip to Thailand for work. In the past couple months since Trump took office again, he says he's been moving a lot of production there.

Starting point is 00:04:16 It's now 70% of his total up from about 30. James Chung says his customers will pay about 15% more for the products if they're made in Thailand. But that's actually a bargain compared with getting products from China. From China, he says they pay 45% in tariffs. So moving production and assembly outside of China, that's one way around some of these tariffs. Now, it's worth noting that, all told, China's exports to the U.S. aren't a huge share of China's economy. It's just roughly 3% now.

Starting point is 00:04:53 Yes, China is an exporting powerhouse, but most economic activity is still internal to the country. So what's really going to help China's economy is broader trends that make it more productive, like inventing and adopting cutting-edge technology. Technology and tech-based manufacturing was talked about a lot at the National People's Congress. That member from the Shanghai delegation, Tian Xuan, he says there have been some big innovation breakthroughs in recent months in China, like, of course, the AI company Deep Seek. Yeah, it is a very impressive chatbot, and it used a much smaller budget to make than we thought was possible. Tian Shuan says innovation is blooming

Starting point is 00:05:34 and the key to reaching China's economic goals is creating an even better environment for innovation. And the government feels this way too. Beijing is in the midst of a multi-year effort to build up its industries in green energy, aerospace, robotics, AI, and advanced machinery. It wants China to dominate these industries of the future. We often talk about it on the show that it's doing incredibly well in some of these areas. Right. China's a leader in green energy, for instance, EVs, batteries.

Starting point is 00:06:08 And it's made some pretty surprising strides recently in AI, as Deepseek showed. But the strategy may have its limitations, according to Arthur Krober. Arthur is one of these longtime China heads. He's written a book. He's started a China macroeconomics firm. He divides his time between New York and Beijing. He says that the government's theory seems to be that heavy investments in tech will lead to productivity breakthroughs. Those productivity breakthroughs will then lead to higher wages and good jobs.

Starting point is 00:06:37 I don't think that that is very likely. The problem with that is you look at all these high-tech industries that everyone is so excited about EVs and batteries and whatnot, but they're not very profitable. Arthur says there's a capacity glut. A lot of stuff being produced, but not enough buyers to keep businesses standing on their own to feed. Companies in the solar sector are struggling in batteries. Profits are falling. Profitability and EVs is dropping. And a lot of this is due to competition with other companies in China. Everyone is struggling. So they're all barely making money. And so they don't have a lot of ability to hire lots of people and give them big wages.

Starting point is 00:07:19 Without those big wage increases, Arthur says it's hard to see how growth and high tech industries will spill over to the rest of the economy. He says China's industrial policy has been successful at a certain level. They've got a lot of very competitive manufacturing industries, but growth is probably going to be pretty sluggish for a few more years yet. And they're not going to get this magical nirvana that they hope for. So that is the glass half empty take. A government that has intervened a lot in high-tech industries,

Starting point is 00:07:52 has had some results like green tech. exports, but it's unclear whether that's really lifting the whole country up. Yeah, in some ways China's challenge is a lot more basic. It wants to move away from an economy dependent on high levels of investment encouraged by the government. Instead, to one where everyday Chinese people feel enough economic security to spend more. And that's going to take some adjustment. Yeah, just over the weekend, the Chinese government announced plans to vigorously boost consumption, in their words. They want to raise minimum wage, and invest in child care, among other things.

Starting point is 00:08:26 In the meantime, the Chinese people may have to, as Xi Jinping put it, eat-kou or eat bitterness. Eat bitterness. Now, that is a lot more direct than we hear from leaders here. Recently, we heard President Trump calling the possible economic tumult coming in the U.S. A period of transition. There will be plenty of transitions from both countries, I'm sure. That I think we can say for sure. This episode was produced by Cooper Katz McKim and Alwyn-Zaw.

Starting point is 00:08:55 It was engineered by Kwa-Ca-Lee-Lee. It was fact-tracked by Sarah Quares. Cake and Canon edits the show and The Indicator is a production of NPR.

The Indicator from Planet Money - What might save China's economy

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