Nobel laureate in Economics, Paul Krugman, stated that the Chinese Communist leaders are unwilling to use more government spending to support consumer demand but instead focus on supporting production, which he finds peculiar and believes that the Chinese economic model is not sustainable.
According to a report by Bloomberg on June 2, Krugman expressed in an interview with Bloomberg Television’s Shery Ahn and Haidi Stroud-Watts, “The Chinese (Communist Party) seem to be completely lacking in realism, which is a threat to all of us.”
Krugman agreed with criticisms of Chinese policies by US economic officials, stating that China should not rely on exports to escape its economic challenges. “We cannot absorb (cheap Chinese goods), the world will not accept everything China (Communist Party) wants to export,” he told Bloomberg Television.
The Chinese Communist Party has been investing heavily in the manufacturing sector, focusing on new industries such as electric vehicles, batteries, and renewable energy in an attempt to find new sources of economic growth. However, China’s economic growth is driven by domestic demand, and many of these new industries are highly automated, unable to provide sufficient employment opportunities. An analysis by Goldman Sachs in 2023 found that the three main industries prioritized by the Chinese Communist Party – electric vehicles, lithium-ion batteries, and renewable energy – only account for about 3.5% of China’s GDP and cannot create enough job opportunities for millions of struggling college graduates and migrant workers.
As Krugman made his comments, concerns are rising in the US and Europe about China’s overcapacity in production and the export of subsidized cheap goods to overseas markets, leading to potential retaliatory actions.
On April 15, US Treasury Secretary Janet Yellen stated in an interview with CNN, “We are concerned that China’s overcapacity in goods could lead to a surge in exports to our market.”
“I have made it very clear in my discussions with them (the Chinese side) that this is not only our concern, but also the concern of other countries, Europe, Japan, and even emerging markets such as India, Mexico, Brazil,” she said.
Krugman added that due to “severely insufficient” domestic spending and lack of investment opportunities, China’s entire economic model is unsustainable.
He suggested that Beijing should support demand rather than increase production.
During her visit to China in April, Yellen also urged Beijing to address the issue of overcapacity, saying, “There is supply and there is demand.” “One possible way is to stimulate demand so that households’ (consumption) share in the domestic production is increased.”
Mary Gallagher, a China expert at the University of Michigan, said in a recent study that overcapacity has been part of the broader governance approach of the Chinese Communist Party from the Great Leap Forward to the prosperity of the real estate market, with its governance model tending towards “overcapacity” and exceeding goals.
An article by Bloomberg previously suggested that the Chinese government’s shift towards supporting the manufacturing sector could potentially spark a new trade war.
A report by Business Insider quoted Neil Shearing, Chief Economist at Capital Economics, stating that regardless of whether former President Trump or current President Biden wins the US presidential election in November, China’s current economic policies could trigger a trade war.