China’s extreme decentralization has led to overcapacity and wasteful investment

Source: The post China’s extreme decentralization has led to overcapacity and wasteful investment has been created, based on the article “Perils of decentralisation with Chinese characteristics” published in “The Hindu” on 12th August 2024

UPSC Syllabus Topic: GS Paper 2 – International Relations – Effect of policies and politics of developed and developing countries on India’s interests

Context: The article explains how China’s extreme decentralization, once key to its economic growth, has now led to problems like overcapacity and wasteful investment. Centralized control under Xi Jinping hasn’t fixed these issues, causing China’s economy to struggle globally.

For detailed information on Macroeconomic differences between India and China read this article here

What Led to China’s Economic Challenges?

1. Decentralization and Overcapacity: China’s economic model allowed local governments to control 51% of spending, pushing them to prioritize industrial growth over public services. This led to structural overcapacity, where more goods were produced than needed, causing inefficiency and waste.
2. Central Control and Investment Issues: Under Xi Jinping, China tightened central control, leading to narrow directives that focused on sectors like semiconductors without considering market demand. This approach resulted in a lot of wasted investment—approximately $6.9 trillion between 2009 and 2013.
3. Failed localization efforts: Despite pouring funds into semiconductors through the “Big Fund,” China has not mastered advanced chip production.

How Did China’s Policies Impact Its Global Economic Position?

1. Shift in Economic Strategy: China tried to replace Western markets with domestic demand and new international markets through the Belt and Road Initiative. However, this shift failed because the domestic and BRI markets weren’t strong enough to sustain the demand needed.
2. Geopolitical Challenges: Global perceptions of China worsened due to its aggressive foreign policies and security concerns over Chinese technology, especially in sectors like electric vehicles and telecom equipment. This resulted in declining international acceptance and economic partnerships.

What Are the Consequences of These Economic Strategies?

1. Industrial Losses and Economic Decline: By June 2024, 30% of Chinese industrial firms were reporting losses, the worst since the late 1990s Asian financial crisis. China’s focus on self-reliance in key industries has not yielded the expected technological advances, further straining its economic viability.
2. Future Outlook: China faces significant challenges. Without changing its approach to international relations and economic policies, it risks continued economic decline despite potential short-term gains in exports in some sectors.

Question for practice:

Discuss how China’s decentralization and subsequent central control under Xi Jinping have contributed to its current economic challenges.