TOKYO – Recent economic news from China has triggered the same helpless, sinking feeling that gripped me when Japan’s property bubble collapsed in 1991-92. Will this sense of déjà vu continue, with China apparently heading down the same path of deflation and stagnation on which Japan embarked three decades ago?

Earlier this month, Evergrande – the massive Chinese real-estate developer that defaulted on its debt in 2021 – filed for Chapter 15 bankruptcy protection in the United States in the hopes of restructuring its dollar-denominated debts. (Chapter 15 allows a US court to intervene in an insolvency case involving another country.) And now the property developer Country Garden has missed $22.5 million in payments for offshore bonds and suspended trading in 11 onshore bonds, raising the prospect of a default.

These are hardly isolated incidents. China’s real-estate sector – long a leading engine of GDP growth – is buckling under the weight of falling prices, a huge and growing inventory of unsold housing and office buildings, and highly indebted developers. A property-bubble collapse seems likelier every day.

The implications for growth could be dire. Annual Japanese GDP growth amounted to 4-5%, on average, from the mid-1970s through the 1980s. After the property bubble burst, that rate sank to 0-2%. To this day, Japan’s economy has not recaptured its pre-bubble dynamism.

China is already experiencing a sharp growth slowdown. While it is perfectly normal for a fast-growing emerging-market economy to slow as income per capita increases, the scale of China’s slowdown in 2022 and 2023 is notable. In the second quarter of this year, quarterly GDP grew by just 0.8%, compared to 2.2% in the first quarter.

To be sure, second-quarter growth amounted to 6.3% in year-on-year terms, and the government’s annual growth target of 5% may yet be achieved. Nonetheless, China’s economic prospects appear to be dimming rapidly. Falling inflation – the consumer price index declined last month by 0.3% year on year – further darkens the outlook, as it points to possible deflation.

While China’s travails can be blamed partly on its delayed exit from its zero-COVID policy, weaker investment slowdown has played a major role. Foreign portfolio investors are pulling out of Chinese capital markets, and inward foreign direct investment is declining fast.

This is partly the result of the US-China decoupling. But it is also a reaction to China’s anti-espionage law, under which foreign businesses have been prosecuted for activities that are normal everywhere else in the world. It was under that law, for example, that a Japanese employee of the drug-maker Astellas was detained in March (he has yet to be released). Not surprisingly, foreign companies are finding it increasingly difficult to recruit employees willing to work in China.

The manipulation and obfuscation of data by Chinese authorities offers yet more reason for pessimism. China’s recent announcement that it would no longer disclose youth unemployment figures suggests that the level of joblessness among young Chinese people is truly dire. With even official data showing that China’s population began to decline last year, growing unemployment (and under-employment) can mean only one thing: the economy as a whole is weakening fast.

China’s demographic decline is its own cause for concern. As Japan can attest, a shrinking working-age population stokes powerful social and fiscal pressures, not least ballooning pension costs and worker shortages in labor-intensive industries, including medical and long-term care. Given decades of fertility-control policies, China will confront a much faster demographic transition than Japan did. And while it has expanded social-security protections in recent years, much more must be done to meet the demographic challenge ahead.

Two factors unique to China will affect how any economic crisis unfolds. First, because a large share of real-estate investment is carried out through so-called local government financing vehicles, the sector’s performance has a direct impact on public balance sheets. Debt held by LGFVs reached an estimated CN¥57 trillion ($7.8 trillion) – or 42% of GDP – at the end of last year.

Given this, if a property bubble bursts, local governments will suffer severe debt distress, and may even default, potentially delivering a sharp blow to both domestic and international investors. To help mitigate the risks, the central government has authorized local governments to issue their own bonds, revenues from which can be used to repay LGFV debts. But, while this would improve balance-sheet transparency, it is ultimately just substituting one form of debt for another.

The second factor unique to China is that its biggest four banks are state-owned, so the central bank and the government can always step in to provide needed capital and avert a banking crisis. Repeated capital injections might be viewed as a sign of moral hazard. But only 20% of non-performing loans (NPLs) in China are the result of risk-management failures by banks; the rest are loans that were directed by the government or issued to distressed state-owned enterprises (SOEs). So, any bailout is ultimately just a case of the government taking responsibility for the lending it directed.

If the property bubble bursts, China’s banks and government must avoid the mistakes Japan made three decades ago. For starters, full and timely disclosure of NPLs is essential. Chinese banks must not succumb to the “evergreening” temptation and extend new loans to insolvent “zombie” borrowers so that they appear healthy. And where capital injections are needed, they must be delivered quickly.

Likewise, China’s government should be taking steps to stop the evergreening of SOEs and real-estate companies, and ensure that banks and LGFVs pursue debt restructuring, supported by capital injections if needed. Local governments should also be allowed to raise taxes, so that they can use the added revenues to pay down their debts.

If China fails to address the risks that are piling up in its economy, a Japan-style period of stagnation and deflation will become inevitable. And this time the entire world will suffer.

CHICAGO – In May, China reported that youth unemployment (among those aged 16 to 24) had reached a record-breaking 20.8%, with the high-paying, high-skilled jobs that university graduates are trained for growing scarcer. Since mid-2021, hundreds of thousands of positions have been eliminated in the tech sector, owing to the COVID-19 pandemic, stringent capital and antitrust regulations, and the government’s broader “tech crackdown.” And, as the rapidly changing policy environment adds to the uncertainty, cutbacks are also coming to other high-skilled sectors like finance.

In June, the Chinese internet was flooded with despairing photos and messages from new graduates whose only employment prospects lay in low-paying sectors, where there is still some job growth. Chinese students and their parents are finding this new economic reality difficult to accept, given the tremendous sacrifices they made for higher education.

The Chinese education system is one of the most competitive in the world, not least because college admission is determined by a single standardized national exam, the gaokao. By the time most graduates from good colleges arrive on the job market, they have committed many years of their youth to intensive study. The pressure to master the core curriculum – math, science, and literature – is so great that even elementary schools have cut back on non-academic classes such as physical education and music.

Meanwhile, these graduates’ families have made sacrifices that are hard to imagine in many other countries. Children as young as ten often do four hours of homework per day, requiring constant encouragement, monitoring, and coercion from parents. All this is done with the expectation of enjoying future security in a rapidly growing economy – except that now economic growth has waned.

Young women tend to suffer more than young men in the labor market. Although Chinese girls outperform boys across subjects and age groups, they have long been prevented from entering traditionally male industries such as civil aviation, which previously had explicit anti-female quotas. These hurdles reflect China’s strong tradition of preferring sons. There are 116 boys for every 100 girls among those aged 15-19, compared to 98 boys for every 100 girls in the United States.

Moreover, women’s employment prospects were further reduced after the government started pushing, in the mid-2010s, to increase fertility. With the birth rate falling to an all-time low – setting the stage for massive economic problems down the road – the central government abandoned its one-child policy, and many provinces have increased maternity leave above the national minimum.

But this has made employers more reluctant to hire women, with many voicing concerns about the cost of future time off for bearing and rearing children. The assumption is that a man will work as many hours as you need, no matter how many kids he has, whereas a woman might not.

These cultural norms are colliding with the contraction of high-skill jobs. If there are more jobs than workers, employers have no choice but to hire women and provide the necessary support and benefits. But with 11-40 applicants for every opening, China has become a buyer’s market. The immediate result is that young women will be forced to take even lower-paying jobs than men with similar qualifications; and some may simply exit the labor force altogether.

Young women’s darkening employment outlook is just one of many signs that the Chinese economy is headed in the wrong direction. For decades, China’s growth has followed the pattern of advanced economies, with rising incomes and educational attainment, shrinking family size, and growing female labor-force participation. But now it is heading back toward lower incomes and educational outcomes (as parents conclude that higher education will not result in high-paying jobs), larger families, and lower female labor-force participation.

The slowdown from 10% annual GDP growth was inevitable. But current patterns raise profound concerns for China’s economic outlook, especially considering that the government’s policies for addressing them have not worked. For example, to reduce some of the pressure on schoolchildren and their parents, the government abruptly banned online tutoring in 2021, arguing that this would help level the playing field. But all the policy did was drastically reduce the value and the number of jobs in tech (and in the parts of the financial sector that had invested in it).

Worse, families now must pay even higher prices for in-person tutoring, lest their child fall behind. And with the broader reduction in high-paying jobs, an already hyper-competitive system will become even more cutthroat, adding to the costs parents must bear to secure their children’s financial future. Again, these increased costs will hurt girls more than boys. Under the one-child policy, urban parents with daughters invested all their resources into their only child. But now that Chinese parents can have two or more children, many will allocate their limited resources to sons over daughters.

To be sure, one way to address youth unemployment is to encourage young graduates to return to rural areas and take lower-paying manual jobs. But for a middle-income country where economic development is closely associated with the growth of cities, ruralization would represent regression. It would not increase wages, motivate future generations to pursue a higher education (which is necessary for creating higher-paying, high-skilled jobs), or provide women with more equal opportunities.

To stem the reversal of its economic fortunes, China must address the root of the problem: the lack of high-paying, high-skilled jobs. If the economy is going to grow (or at least avoid a contraction) in the long run, the government must create the conditions for job creation in high-productivity sectors, and for greater investment in higher education.

MADISON, WISCONSIN – More than four decades after China began opening up to the world, the Chinese government’s decision-making process remains shrouded in secrecy. The country’s population-control policies, and my own ongoing efforts to challenge them, are a case in point.

In 1980, the rocket scientist Song Jian and the economist Tian Xueyuan predicted that China’s population would exceed 4.2 billion by 2080, alarming Chinese authorities and leading to the implementation of the country’s notorious one-child policy. In reality, even without any official restrictions, China’s population would have peaked at roughly 1.6 billion and then gradually declined.

Growing up in China, I personally witnessed the brutality of the one-child policy, which inspired me to initiate a campaign against the country’s population-control measures in 2000. At first, my efforts were restricted to posting articles on overseas websites. I later adopted a more scholarly approach, and by 2003 some of my essays were occasionally allowed to appear in Chinese forums.

In October 2004, a state-controlled newspaper published my article calling for an end to population control, which paved the way for a national discussion about the one-child policy. As my campaign gained traction, senior officials began to take my research seriously. For example, Jin Renqing, China’s finance minister at the time, personally reviewed five of my reports.

In 2007, I published a book in Hong Kong, Big Country With an Empty Nest, challenging the assumptions underlying China’s population-control measures and advocating their immediate end. The book created a stir among family-planning officials and demographers, who tried to belittle and silence my heretical views, and it was quickly banned in China. But the online version received tens of millions of views, defying official efforts to suppress it.

Three years later, an article of mine was included in an anthology titled New Critical Debate on Population Policy as an “opposing” view. With a foreword by Song and articles by Tian and two deputy directors of China’s National Family Planning Commission, the book strongly criticized my work.

For ten years, I was labeled a “traitor” and refrained from traveling to China. But in 2010, I managed to sneak into China’s annual population conference, where one of the drafters of the 1980 open letter that triggered the one-child policy criticized me (his speech was later published). Once my identity was revealed, I was told that the police were searching for me as a suspected troublemaker, prompting me to flee the city overnight.

Over the years, I must have received tens of thousands of requests for help from women facing forced abortions, and I am proud that my efforts have helped to save many babies. To highlight the policy’s human toll, I distributed brochures to almost every member of the national parliament and various provincial and ministerial officials. The responses I received – at least before the government intensified its censorship regime in 2015 – were surprisingly positive.

As it turned out, my predictions were accurate. Nevertheless, when a 50,000-word internal report I wrote was included in 40 Years of Reform: Selected Economic Works – a 2020 collection of 116 reports that had the greatest impact on Chinese policymaking between 1979 and 2018 – my paper was the only one advocating reform of the country’s population-control policy.

For a while, however, the public and academic debates seemed to shift. Between 2010 and 2017, I received more than 100 invitations to speak at China’s top think tanks and universities. Remarkably, some family-planning officials traveled across provinces to attend my lectures.

In 2013, a new edition of Big Country With an Empty Nest was released by a publisher answerable to the Chinese State Council and ranked first among the year’s 100 best books selected by China Publishing Today. As my work received greater recognition, I was invited to the 2016 Boao Forum for Asia conference, China’s answer to the annual World Economic Forum meeting in Davos, as a featured panelist. In a remarkable turnaround, my previously-banned book had become a bestseller and a favorite among policymakers. Once labeled a “traitor,” I had become a distinguished guest of the state.

But my insistence on speaking the truth strained my relations with Chinese officials. In 2016, I told the New York Times that China’s economy could not surpass that of the United States. This infuriated family-planning officials, who successfully lobbied the central government to put me on China’s official blacklist. I further angered the authorities by pointing out that China’s population had been vastly overestimated and, in fact, had started declining in 2018.

Rather than heed my advice and completely lift all population-control measures, China’s leadership adopted a cautious approach. In 2014, China implemented a selective two-child policy, allowing couples to have two children if one of the parents was an only child. This was followed by the introduction of a universal two-child policy in 2016. Finally, in 2021, China allowed parents to have up to three children. Unfortunately, these measures were too limited and came too late to make a significant difference.

China is still on the wrong track, partly because of fears raised by official demographic projections that suggested that if the one-child policy were to remain in place, the fertility rate would stabilize at 1.8, and the population would peak at 1.5 billion in 2033. These projections also estimated that if all couples were allowed to have two children, the population would peak at 1.6 billion by 2044, and the fertility rate would increase to 4.4-4.5 births per woman.

We now know that all these predictions, much like the ones made in 1980 to justify the one-child policy, are nonsense. Even according to China’s exaggerated official figures, the country’s population began to decline in 2022, with the fertility rate falling to 1.0.

In reflecting on my experiences of challenging China’s population-control policies over the past quarter-century, I find some solace in the fact that my estimates have been vindicated. On the other hand, it deeply saddens me that China has persistently disregarded sound research, leading the country into a nightmarish demographic trap and a looming humanitarian catastrophe that could have profound implications for the global economy.

CAMBRIDGE – The 2008 financial crisis in the United States kicked off a debt supercycle, which spread to Europe in 2010 and has recently engulfed many of the world’s low-income and lower-middle-income countries. Could the debt woes of Country Garden, the behemoth Chinese real-estate developer now facing billions of dollars in losses, augur the cycle’s next turn?

The answer remains unclear. While the Chinese authorities have a remarkable track record when it comes to containing economic crises, the challenges posed by a significant growth slowdown, combined with high debt levels – especially for local governments and the property sector – are unprecedented.

China’s current problems can be traced back to its massive post-2008 investment stimulus, a significant portion of which fueled the real-estate construction boom. After years of building housing and offices at breakneck speed, the bloated property sector – which accounts for 23% of the country’s GDP (26% counting imports) – is now yielding diminishing returns. This comes as little surprise, as China’s housing stock and infrastructure rival that of many advanced economies while its per capita income remains comparatively low.

At the same time, in what had once seemed like a race between a tortoise and a hare, the US is speeding toward artificial-intelligence-powered technological innovation and higher long-term economic growth. As highly respected Wall Street Journal economics commentator Greg Ip recently put it, “No one talks about secular stagnation now,” referring to a theory that a chronic deficiency in global demand and economically important innovation will hold down growth and real interest rates long into the future.

Funnily enough, I said much the same at a conference seven years ago. In my presentation, which was based on my 2015 paper “Debt Supercycle, Not Secular Stagnation,” I explained that post-crisis malaise was typical and would at least partly fade. I then conjectured that “in nine years, nobody will be talking about secular stagnation” – a perhaps hyperbolic remark to underscore the point. (I am grateful that one of my co-panelists, J. Bradford Delong, quoted me on his blog, perhaps forgetting that the conference was held under Chatham House rules.)

Over the past decade, the overwhelming consensus in academic and policy circles has been that the world is deeply mired in an era of ultra-low interest rates driven by weak growth fundamentals. And in fact, it remains so today. For example, Northwestern University economist Robert J. Gordon’s magisterial history The Rise and Fall of American Growth offers persuasive arguments for the death of innovation and the end of growth. Gordon posits that post-1970s inventions – even the computer revolution – are not nearly as economically important as, say, the steam engine or electricity generation.

Billionaire investor Peter Thiel and former world chess champion Garry Kasparov made similar arguments in a 2012 debate on the topic of “Innovation or Stagnation” at the University of Oxford. Arguing on the “innovation” side of that debate, I pointed to advances in chess that heralded the coming of an AI age, while also noting that commercial innovation invariably stalls at times, for example during the Great Depression. In fact, my greatest concern has never been an end to innovation, but rather that the rise of AI will outpace our ability to control it.

There are strong arguments for secular stagnation on the demand side, owing to demographic decline. In a brilliant 2013 speech, Harvard economist Lawrence H. Summers argued that only a continuing shortfall in global demand could explain the era’s ultra-low interest rates, triggering an avalanche of research on fundamentals that could explain the demand deficiency. Progressive politicians have used this work to make the case that bigger government is needed to fill the void. Summers, however, was more circumspect, advocating increased investment in infrastructure and education, and outright transfers from rich to poor – ideas with which I strongly agree.

But despite some good arguments for secular stagnation, concerns about sustained slower growth are overblown. Charles Goodhart and Manoj Pradhan have challenged the view that demographic decline inevitably lowers demand by pointing to the rapidly growing elderly population.

Moreover, long-term trends are not wholly responsible for the spectacular collapse in real interest rates after the 2008 crisis; the collapse was at least partly because of the crisis itself. After all, interest rates also fell to zero during the Great Depression and stayed there – until they didn’t. Notably, the rate on ten-year inflation-indexed Treasury bonds is currently well above its average level of about zero from 2012 to 2021.

The debt supercycle may have lasted longer than initially expected, perhaps because of the pandemic. But it was a critical piece of the story, and now, as China’s economy falters, it is the best explanation for what might come next.

NEW HAVEN – Economist Min Zhu, speaking at a World Economic Forum panel in China in late June, was among the first to hint at China’s underwhelming post-COVID policy stimulus. Zhu, a former deputy managing director of the International Monetary Fund, as well as a former deputy governor of the People’s Bank of China (PBOC), is no casual observer of the Chinese economy and its role in the world. He is also one of my oldest and wisest friends in China, and I have learned to take his views very seriously.

Zhu’s prediction has proven to be accurate. Despite a promising snapback after the abrupt zero-COVID exit, China’s economic rebound has faltered in recent months. Many had hoped that the government would respond to this shortfall and introduce another large-scale stimulus package, as is its usual practice. Yet a series of announcements in mid-August from the PBOC, the China Securities Regulatory Commission (CSRC), and the State Council has dashed those hopes.

The PBOC guided short-term lending rates only marginally lower, while the CSRC focused on enhancing market mechanisms, including longer trading sessions, reduced brokerage fees, and support for stock buybacks. The State Council, for its part, scrambled to slow the carnage in the property sector, as Country Garden faces liquidity pressures and Evergrande filed for bankruptcy protection in the United States.

For a country that has long prided itself on implementing proactive policies to preempt economic pressures, the latest stimulus measures are surprisingly reactive. The question is why. Zhu, in his remarks during the WEF panel, pointed to China’s debt problem.

By now, of course, the broad dimensions of China’s debt problem are well known. According to the Bank for International Settlements (BIS), non-financial debt stood at 297% of GDP at the end of 2022. That is more than double the ratio at the onset of the global financial crisis in late 2008, when it was 139%, and up more than 100 percentage points since late 2012, when Xi Jinping became General Secretary of the Communist Party of China (CPC).

Zhu’s argument is straightforward: an over-leveraged Chinese economy cannot afford another round of debt-financed stimulus. Chinese policymakers have been attuned to the risks of a debt build-up since 2016, when the now-infamous “authoritative person” publicly warned that China faced potential Japanization.

But understanding a lesson is different from acting on it. While China clearly needs to wean itself off debt-fueled growth, it is less clear why that hasn’t happened yet.

The answer lies in the mix of the Chinese debt cycle. Over the first decade of Xi’s leadership, BIS data reveal that growth in corporate debt accounted for 47% of the total increase in China’s indebtedness, the share of government debt was 30%, and household debt made up the remaining 23%.

Researchers at the International Monetary Fund have identified two main reasons for this debt surge: increased leverage of debt-intensive, low-return state-owned enterprises (SOEs), and a higher concentration of public indebtedness in local-government financing vehicles. The former is a byproduct of the unmistakable shift in economic power from the private sector back to the state sector under Xi’s leadership. The latter is an outgrowth of runaway land sales and property development, which have now hit a wall.

That gets to the essence of Zhu’s point about Chinese stimulus: enough is enough. By opting for surprisingly small measures, CPC leadership is drawing a line in the sand. Although the Chinese authorities would never openly admit to poor stewardship of the economy, increasingly worrisome debt dynamics in SOEs, combined with the possibility of a full-blown property-market crisis, have left them with no choice but to shift away from the current unsustainable growth model.

Their decision has important implications for China’s economic future. Absent support from the property sector, which accounts for roughly 25-30% of GDP, a Japan-like sustained shortfall of economic growth is a distinct possibility.

Mindful of this, the Chinese government has made yet another push for consumer-led rebalancing, with a 20-point plan released in late July. This should be music to my ears, given that I have written two books on the topic and for years have taught a course about it at Yale. But a careful look at the plan leaves me cold.

Specifically, the new consumer plan makes no mention of strengthening the social safety net – especially health care and pensions – for a rapidly aging population. Yet, unless this urgent challenge is addressed, Chinese families will continue to opt for fear-driven precautionary saving over discretionary consumption.

Barring a successful consumer-led rebalancing, it will be exceedingly difficult for China to recapture its previous growth momentum. Since the 2008 global financial crisis, the economy has grown about 7%, on average, accounting for nearly 35% of the cumulative increase in world GDP during the same period. If China’s growth rate slows to 3-4% – a distinct possibility – its contribution to global growth will be halved, with obvious knock-on effects for the rest of the world.

While the media focused on Zhu’s prediction that the Chinese government would not roll out a massive stimulus, his main point at the WEF panel was that a growth shortfall would necessitate structural reforms – an argument that I have also made over the years. Yet the benefits of such reforms, if they do occur, are likely to be realized only in the long term, while the headwinds of China’s current shortfall are blowing fiercely in the here and now. As China’s most powerful leader since Mao, the increasingly muscular, security-focused Xi seems willing to accept this tradeoff for the time being.

NEW YORK – China’s economic reality, until recently, was nothing short of extraordinary. China’s annual economic output soared from under $500 billion to $18 trillion between 1992 and 2022, with years of double-digit growth pushing annual GDP per capita from less than $400 to $13,000.

In recent years, however, growth has slowed significantly. To some extent, this was inevitable: moving hundreds of millions of people from inefficient rural agriculture to higher-productivity factory work in cities can only be carried out once.

Along the way, China received the support of the United States and much of the developed world. They invested, extended loans, and transferred technology, while welcoming China into the World Trade Organization. They also tended to look the other way when China stole intellectual property, violated its WTO commitments, and kept important parts of its economy closed to foreign competition.

The West was motivated partly by a simple economic calculation: the promise of gaining access to a consumer market of 1.4 billion people. In principle, as China got richer, its people would be able to purchase more from the West. China’s low labor costs also enabled multinational corporations to produce and sell their goods for less, keeping inflation down and allowing consumers to purchase far more.

In addition to the West’s economic logic, there was also a political one: a hope or even expectation in the US and Europe that China’s economic rise would bring political liberalization. Many envisioned a wealthier China that would become more open, democratic, and market-oriented.

It was also believed that a China increasingly benefiting from investment and trade would act with restraint abroad in order to safeguard the relationships that were contributing to its rise. As a principal beneficiary of the existing international order, China, it was hoped, would become a “responsible stakeholder” within that order, rather than seeking to overturn it.

Over time, though, many of these hopes were dashed. Jobs at home were lost as less expensive Chinese exports displaced domestically produced goods. China did not become more open or moderate at home or abroad; just the opposite happened. As a result, the US and other Western countries are becoming more selective about the technologies and products they make available to China and the investments they allow their companies to make there.

These restrictions have contributed to China’s slowdown. But the principal reasons for the country’s economic difficulties are internal; like much else, they are made in China.

Above all, the economy has remained overly reliant on increasingly unproductive investment (especially infrastructure) and exports, bloated and uncompetitive state-owned enterprises, and ballooning debt. All of these problems stem in whole or in part from Chinese leaders’ decision to expand the role of the state in the economy, to ignore or suppress market forces, and to stymie the emergence of a private sector and middle class.

Chinese leaders now have three choices. One is to stay the course, prioritizing political control over economic growth. This will be the most likely path if current difficulties ease. But if today’s problems linger or even fester, the resulting prolonged period of modest economic growth could stimulate the very challenges to political control the leadership seeks to avoid.

High levels of unemployment among young people could be a powder keg. Making matters worse, time is not on China’s side, as a shrinking and aging population will be an additional drag on economic growth and productivity.

The second option for President Xi Jinping and his inner circle is to change course. Chinese leaders tend to resist policy change, as it suggests a degree of fallibility that could be seen as weakness and invite challenges by political rivals. For now, they will likely resist doing so, fearing that major economic liberalization could create pressure for liberalizing political reforms.

Nevertheless, they may choose to change course if the alternative to more of the same were judged to be less risky. There is recent precedent for such a calculation. For several years, the government’s approach to COVID-19 featured frequent testing and extended lockdowns. Popular frustration grew.

Suddenly, in December 2022, the authorities abandoned the “zero-COVID” policy in favor of one that allowed the virus to move more freely among the population. An unknown number of people died, but within a few months the country reached a new equilibrium that allowed for more normal activity at acceptable levels of risk. It is possible that economic policy, too, will one day become at least somewhat de-politicized.

There is a third option, an alternative to either staying the course or changing course: China could opt to change the conversation. The simplest and most likely way to do this would be to accelerate efforts to alter the status quo on Taiwan. The regime could embrace even more aggressive nationalism, rather than economic growth, as its source of legitimacy.

This path could well prove tempting. Some might argue that it would be less difficult and risky than engineering an economic turnaround. After all, China enjoys advantages of geography, and its military is far stronger than it was. Moreover, Taiwan and its would-be partners have allowed themselves to grow economically dependent on China, and a politically polarized US has its hands full in supporting Ukraine and lacks the military might and manufacturing base to continue arming Ukraine and fight a war over Taiwan simultaneously.

But, as Ukraine demonstrates, wars are unpredictable. China’s military lacks any recent battlefield experience. Taiwan enjoys strong bipartisan support in the US, and economic sanctions levied against China would cripple its economy. Moreover, the war in Ukraine and China’s aggressive behavior have stimulated defense efforts in and coordination among Japan, South Korea, Australia, and the US.

It will be impossible to change China’s dreams, but it is possible to affect its calculations. The goal for the West ought to be to persuade China’s rulers that changing the conversation, that aggression, would be folly, and that their only real choice is economic, between staying the course or changing course. What is certain is that this decision will determine Xi’s legacy, China’s future, and quite possibly the course of history this century.

TOWNSHEND, VERMONT – Three recent articles in The New York Times have signaled a “new” narrative about China. Only weeks ago, China was America’s fearsome “peer competitor” on the world stage. But now, we are told, it is a wounded dragon. Once a threat by dint of its inexorable rise, now it poses a threat because it is in decline.

US President Joe Biden set the terms of this new narrative. As The New York Times’s Michael D. Shear reports, the White House now worries that “China’s struggles with high unemployment and an aging workforce make the country ‘a ticking time bomb’ at the heart of the world economy.” Biden warned that, “When bad folks have problems, they do bad things,” but he did not explain how, exactly, unemployment and an aging population turn China into a threat.

For his part, Shear gives another reason for China’s newfound decline: “the president has moved aggressively to contain China’s rise and to restrict its ability to benefit militarily from the use of technologies developed in the United States.” Given the scope of Biden’s new semiconductor restrictions, he might have added “and non-militarily as well.”

Meanwhile, Peter S. Goodman, an economics reporter, points to a “slew of developments” supporting the new narrative. These include declining Chinese exports and imports, falling prices “on a range of goods, from food to apartments,” a housing slump, and a real-estate default that has produced losses of $7.6 billion (a sizeable event, but nothing close to the typical US bank bailout). In responding, Goodman writes, “Chinese authorities are limited in their options ... given mounting debts now estimated at 282% of national output.”

According to Goodman (and to many economists, including in China), China’s difficulties stem from deeper problems such as a high savings rate, vast deposits in the banking system, a new wariness about real estate, and, consequently, a growing need “to boost domestic demand.” He and his sources agree that the proper cure is “stimulus” – meaning more consumption and less investment.

Moreover, Goodman cites MIT economist Yasheng Huang, who notes that exports plus imports in China total 40% of GDP (much of which comprises final assembly and re-exports of imported components). But while Huang appears to have left Goodman with the impression that reducing this “pass-through” trade would have a big effect, the fact is that the effect would be quite small, since imports are a subtraction from GDP. China is losing merely the value-added, a fraction of the overall product value.

Finally, the Nobel laureate Paul Krugman rounds out the paper’s coverage of China’s “stumble” by offering an economist’s “systemic view.” According to Krugman, China previously grew “largely by catching up to Western technology,” but now it faces the problem of too much saving, too much investment, and too little consumption. It therefore needs “fundamental reforms” to “put more income in the hands of families, so that rising consumption can take the place of unsustainable investment.”

In fact, there is nothing new about Krugman’s key point about savings. Western economists were already pushing that line 30 years ago, when I became (for four years) chief technical adviser for macroeconomic reform to China’s State Planning Commission. “Invest less! Consume more!” – the mantra made no sense to me then, and it still doesn’t today. One wonders what it even means. Should China have more cars but worse roads and fewer gas stations (not to mention subways and high-speed trains)? Does it need more televisions, but fewer apartments to put them in? Does the population need more food and clothing, even though it was already mostly well-fed and decently dressed three decades ago?

True, Chinese families save prodigiously for education, health care, and old age. But they can do that because they have incomes, which come in large part from jobs in the public and private investment sectors. Chinese workers are paid for building the factories, homes, rail lines, roads, and other public works that have transformed China within our lifetimes. Contrary to Krugman, the typical (statistically average) Chinese family is not income constrained. If it were, it would not be able to save as much as it does.

Moreover, if China were to run out of investment projects, incomes would fall, savings would slow, and consumption as a share of income would necessarily rise. But this decline of savings would make Chinese families less secure, deepening today’s slowdown. No wonder the government has taken pains to keep investment flowing through major programs like the Belt and Road Initiative. Even after China itself is fully built (or overbuilt), it still will have plenty to do in Central Asia, Africa, and Latin America. China’s investments have been welcome in those regions, where it is said that, “When we’re engaged with the Chinese, we get an airport. And when we’re engaged with you [Americans], we get a lecture.”

Yes, China’s economy is slowing. It will be hard to scale anything to match the cities and transport networks that are already in place, or the recent campaign to eliminate extreme poverty. China’s main tasks now lie elsewhere: in education and health care, in matching skills to jobs, in providing for the elderly, and in curbing pollution and carbon dioxide emissions. There is no guarantee that these efforts will succeed, but at least they are on China’s agenda. That means they will be pursued in Chinese fashion: step by step, over time.

So, what is the new narrative really about? It is not so much about China as it is about the West. It is about our lead in technologies, our free-market system, and our ability to wield power and to keep all challengers at bay. It is about reinforcing what Westerners like to believe: the inevitable triumph of capitalism and democracy. Above all, it is about our American leaders winning out against “bad folks” who may do “bad things.” It’s a narrative that’s made-to-measure for the 2024 election campaign.