China was the only major economy to experience growth last year, as its industrial sector continued to expand. After contracting 6.8% year-on-year in the first three months of 2020 – the first drop in output in more than 40 years – the Chinese economy avoided a recession and grew 2.3% at the end of 2020.
Much of China’s apparent success can be attributed to its response to the coronavirus. Its number of reported infections stagnated in early March, although there has been a recent spike in cases centered in Hebei province. Instead of suffering the punitive economic consequences of national lockdowns, China has been able to keep its factories open and its people working.
However, GDP growth is not synonymous with economic health. According to Global Energy Monitor, China has invested heavily in the development of coal-fired power plants in order to support its GDP. In the first half of 2020, the production capacity of the new coal-fired power plants offered in China was almost equal to the entire coal fleet in South Africa (41.4 GW). This despite the fact that China has excess coal-generated energy, leaving many redundant coal-fired power plants. Global Energy Monitor said the 360 coal-fired power plants added in China from 2015 to 2019 absorbed at least $ 80 billion in wasted investment in construction costs.
China’s capitalist-authoritarian model means that the Communist Party’s control over key aspects of the economy is much greater than that of other governments. China’s GDP figures represent real economic activity, but it is not just productive economic activity. Thanks to huge investments in unproductive businesses – such as redundant coal-fired power plants – China is able to inflate its GDP numbers to meet its targets. Since investments are backed by government entities, failed investments are not amortized in the same way as in other countries. Companies that make a bad investment don’t go bankrupt (and therefore reduce GDP) because they are backed by the government.
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“GDP means something very different to China than it does to most other countries,” Michael Pettis, a finance professor at Peking University, told me. “In China, GDP growth is an objective which, as long as it has debt capacity, [the government] can still achieve by forcing local governments to spend. In 2020, the Chinese economy performed poorly, like the economies of the rest of the world. “
China’s economy is currently unbalanced due to inequality, low levels of consumption and heavy dependence on exports, and last year’s growth was made possible by the increase in its level of debt – what the Communist Party had hoped to avoid.
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