Mr. Sekihei analyzes China’s deep structural flaws—stagnant consumption, extreme inequality, and a dangerous dependence on investment and foreign markets.

The severity of economic inequality in “socialist” China is incomparable to that of capitalist nations such as Japan or the United States.
April 29, 2021

The following is from the serialized column by Ishii Taira that opens the latest issue of the monthly magazine Hanada.

China’s Economy: “A Fatal Disease” (Part I)

From this issue, this column will discuss the Chinese economy for two consecutive installments.
When it comes to “the Chinese economy,” many Japanese are first overwhelmed by its tremendous growth— and certainly, that impression is not entirely without basis.
For example, in 2020, when the COVID-19 pandemic ravaged the world and major countries all fell into negative growth, the Chinese authorities announced that the Chinese economy managed to maintain positive growth and achieved a growth rate of 2.3%.

There have long been voices inside and outside of China who doubt the numbers announced by the Chinese government.
For instance, Premier Li Keqiang, during his time working in local government, once told a foreign visitor, “I do not rely much on the growth rate announced by the central government.”
And in 2018, when the officially announced growth rate was 6.6%, Professor Xiang Songzuo of Renmin University publicly stated that “the real growth is at most around 1%.”
That the Chinese government inflates its growth figures is already one of the world’s common understandings.

Therefore, we should view the announced “2020 growth rate of 2.3%” with caution.
But if we look at several other figures showing the true substance of growth for that year, the real picture and problems of the Chinese economy immediately emerge.
One notable figure is that total retail sales of consumer goods nationwide in 2020 fell 3.9% from the previous year.
This means that consumption throughout China declined significantly in 2020— down 3.9% compared to 2019.

So what part of the economy grew?
There is another figure that shows the true state of affairs.
In the same year, nationwide real-estate development investment increased by 7.0% year-on-year— almost three times the overall growth rate.
This clarifies the reality of China’s growth structure.
In short, while national consumption fell, growth was somehow maintained by sharply increasing real-estate investment.

Weak consumption in China is not limited to 2020; it has been one of the major problems plaguing the Chinese economy for decades.
Economics uses the concept of “personal consumption,” which indicates the share of household consumption in a nation’s overall economy.
In Japan it is consistently around 60%, and in the United States it reaches 70%.
However, in China, personal consumption has remained around 37% over the past 20 years, and in 2019 it was 36.5%.
That 1.4 billion people account for less than 40% of total economic activity— this is truly an abnormal situation.

What causes such insufficient consumption?
One factor is the inadequacy of the social security system.
In both urban poverty areas and rural regions, there are vast numbers of people who are not enrolled in pension or medical insurance programs, and naturally, such people do not spend much money even if they have some savings.
They save for emergencies.
Thus, in China, the low consumption rate is accompanied by a high savings rate.

An even bigger factor dragging down consumption is severe income inequality.
The gaps between urban and rural areas, between coastal and inland regions, and between classes within the same region— the severity of inequality in “socialist” China far exceeds that of capitalist nations like Japan and the United States.
One often-cited figure within China is that just 5% of the population controls 70% of private wealth.
Of course, 5% still amounts to 70 million people.
That is why before the pandemic, large numbers of Chinese tourists came to Japan and engaged in “explosive buying.”
But the real problem is that if 5% are becoming extremely wealthy, then the remaining 95% of the population are left with only 30% of total private wealth.
This means money is not reaching the majority of the population.
Therefore, personal consumption in China constantly stays below the 40% level.

What, then, accounts for the remaining 60% of the Chinese economy?
One component is exports.
If Chinese citizens will not—or cannot—consume, then China sells cheap Chinese products abroad to target foreign wallets.
That is why supermarkets in Japan and the U.S. are filled with Chinese vegetables and clothing.
Large parts of the Chinese economy actually depend on the consumption of Americans and Japanese.
In other words, China’s economy is essentially an externally dependent model— a supplicant economy.
China depends on us far more than Japan or the United States depends on China (which is why China is fundamentally in no position to act arrogantly toward us).

Another major component supporting China’s economy, alongside exports, is investment— namely infrastructure investment and the real-estate investment mentioned earlier.
And it is precisely from this “investment-dependent” structure that the “fatal disease” of the Chinese economy arises, though discussion of that will be left for the next installment.