Contrary to much popular belief, Beijing’s insistence on centralized economic control is far from a strength.
Many Western journalists, commentators, and politicians fear the complete political and economic control exercised by the Chinese Communist Party (CCP). They see it as a competitive edge over the seemingly chaotic market-oriented approaches of the Western democracies.
Indicative of this view is a recent article by The Wall Street Journal reporter Greg Ip. Entitled “Beijing’s ‘Industrial Policy of Everything’ Leaves the Rest of the World in the Dust,” this piece, like so many similar articles elsewhere, insists that China’s centralized control and ability to focus effort is an economic strength. Ip, and others who argue as he has, could not be more wrong. Beijing’s insistence on centralized control is, in fact, a source of economic weakness, and that fact is already apparent.
Whatever else may be said about Ip’s piece, it is a fine piece of reporting. Succinctly characterizing China’s approach to economic management, he notes how Beijing “targets almost every industry and region, demand as well as supply, services as well as goods, the sophisticated and the mundane.” Beijing control is “macroeconomic and microeconomic” and advances toward Beijing’s “economic, technological, and strategic” goals. All this is correct and quite openly acknowledged, indeed celebrated by President Xi Jinping and the CCP. The planners in Beijing, at the behest of the party authorities, direct and control just about every aspect of Chinese production and economic life.
But as the article’s title makes plain, Ip takes a step beyond straightforward reporting to suggest that this centralized and politically directed approach will help China leave its economic competitors, presumably the United States, in the dust. Ip contends that China is “doing something that the world has never seen” and, in so doing, overlooks a clear example of how such centralized control may not function as well as he suggests. Contrary to his assertion, the approach has been tried before and is the main reason the Soviet Union’s economy failed so utterly and dramatically less than 40 years ago. And it is this same approach that lies at the root of many of the problems presently beleaguering China’s economy.
Take, for example, China’s property crisis. It has held back the country’s economy since it first erupted in 2021. Beijing, unsurprisingly, blames the property developers for the problem. And they have acted in imprudent ways and deserve some of the blame. But the roots of the problem lie with Beijing’s economic planning. It was China’s central plan that, for decades, aggressively encouraged property development by keeping interest rates low, providing subsidies, and fostering a partnership between local governments and developers, making residential construction a major growth driver that, at its peak, accounted for over 25 percent of China’s economy.
And it was the planners who, in 2020, imposed the “three red lines” policy, which suddenly removed support. Developers, extended to comply with older supportive policies, immediately began to fail, starting with the giant developer Evergrande, turning this once growth-promoting sector into an economic drag and unleashing financial repercussions that have since severely limited the economy’s ability to finance other growth-promoting investments. China’s economy, five years on, continues to suffer.
Faced with this ugly situation, China’s planners proceeded to do still more economic damage. Partly in response to a new political ambition to leap ahead of the United States technologically and partly in an effort to find a new growth engine for the economy, the central planners developed the so-called “Made in China 2025” plan. Under this guidance, Beijing used its state-owned banks to pour investment funds into a designated list of industries, among them electric vehicles (EVs), advanced semiconductors, quantum computers, artificial intelligence (AI), and biomedical tech.
The flow of money built production capacity far beyond the needs of China’s domestic economy, in part because the property crisis depressed real estate prices and household net worth, thereby reducing consumer spending, and in part because a lagging Chinese consumer dampened the need for growth-supporting investments outside areas favored by Beijing. With surplus capacity in favored industries, China has experienced downward pressure on producer prices and the accompanying economic ills.
So now, as an unintended consequence of central planning, China has become more export-dependent than ever, and has done so just as the United States and, to a lesser extent, Europe and Japan have become increasingly hostile to China’s trade. President Donald Trump’s tariffs have experienced a wild ride in the US legal system. Still, there is no denying that China’s exports to the United States have fallen some 30 percent over the last two years.
China has so far succeeded in replacing American demand by promoting exports to Europe and the so-called “Global South.” Still, the European Union has recently begun to impose restrictions on China’s trade, and many less developed countries have also objected to the flow of Chinese goods. Whatever the planners expected, the excess production capacity has been used neither in China’s domestic economy nor in feeding expansive export prospects. Yet, in the latest five-year plan, Beijing has redoubled its commitment to an economic imbalance at home and to extreme dependence on foreign economies.
Admittedly, China’s planners have met some success with the long-term effort to corner the market on rare-earth elements, but that, too, has limits. For years, China developed its capacity in rare earth elements not because of any geographical advantage, for these metals, despite the name, are not especially rare. For a while, the mining and refining of these elements migrated to China because its leaders were willing to accept the highly polluting nature of both activities. To reinforce this advantage, China, as would any aspiring monopolist, undercut foreign rare-earth development by flooding the market with the product for a time, depressing prices, and thereby destroying the profitability of any non-Chinese competitors.
China today commands some 70 percent of the world’s rare-earth mining and 90 percent of its refining. The power implicit in this control of crucial inputs to technology was sufficient to stop Donald Trump’s tariff war, but it, too, is unsustainable. Washington has already launched Project Vault to develop non-Chinese sources of these elements, as have the Europeans, partly in conjunction with the United States. It will take time to counterbalance Chinese power, but the writing is on the wall for this plan, too.
These are only a sample of the pitfalls brought by China’s embrace of central planning. It is not just that planning mistakes have led to considerable waste and, as should be clear, have created huge economic imbalances. Each mistake has brought the economy a burdensome legacy of debt. Largely because of the missteps outlined here, overall non-financial debt in China—at all levels of government and in the private sector—has risen to some 300 percent of GDP. The comparable figure for the United States is 719 percent, and for the European Union, it is 689 percent. To be sure, these figures are higher than in China, but that is to be expected for more thoroughly developed economies. A fairer comparison would be to India, where total debt amounts to about 83 percent of GDP.
Even more telling is the portion of China’s debt burden denominated in foreign currencies. According to Beijing’s State Administration for Foreign Exchange, China carries an external debt burden of about 17.6 trillion yuan (about $2.4 trillion), about half of which is denominated in dollars. This debt amounts to a not insignificant 13 percent of the Chinese economy. With government revenues in China running about 22 trillion yuan ($3.25 trillion ) a year, it would take some 80 percent of a year’s revenues to discharge this debt. Assuming conservatively that this debt carries an interest expense of about 5 percent, the carrying costs for foreign lenders account for some 4.5 percent of the nation’s annual budget.
It would be easy to blame these failures on the incompetence of the planners. Perhaps a more thoughtful team could have avoided some of the current mess. But fundamentally, smarter planners cannot solve the problems inherent in centralized economic planning. Central planning misses the economic fact that the root of economic prosperity lies in the uncertain task of anticipating the future needs of consumers and businesses. It is fundamentally a game of guesswork. Some guesses are better informed than others, but they are still guesses. And no one, not even the cleverest planner, can do that with assurance.
Since central planning marshals huge amounts of economic resources—physical, labor, and financial—in support of its guess, the economic payoff is huge when the guess is right, as it was in China when it was a much less developed nation and future needs were obvious. When that guess is wrong, that remarkable marshaling of resources creates the great waste and mountains of dubious debt so evident in China today.
To be sure, market-based economies make many bad guesses about the future. Those mistaken efforts fail, too. But because each player in a market economy is only a small part of the whole, each mistake involves a smaller part of the nation’s economic resources, making the waste and debt legacy of mistakes easier to handle. Meanwhile, the greater diversity of effort in a market system—what can look chaotic at times—offers a greater chance than in a focused, centralized effort that one or more of this multitude of guesses will meet a future need, promote growth, and create wealth.
China, by choosing its planned communist approach, loses this potential for success and, when it makes mistakes, tends to do so on a grander, more destructive scale. The country today is reaping the economic and financial burdens of some huge planning errors, that is, poor guesses. China’s centrally planned, command economy, though it can dazzle foreign observers when it is successful, nonetheless stands at a disadvantage to a market-based system in guessing that future, especially as the economy becomes more sophisticated, because it makes fewer bets on that future and because many of its economic bets seek political or diplomatic or military rather than economic payoffs. On this basis, it is hard to see how China can quickly recover from its past mistakes, much less command the future or leave others “in the dust.”
About the Author: Milton Ezrati
Milton Ezrati is a contributing editor at The National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, the New York-based communications firm. In his long career in finance, he has held positions as portfolio manager, director of research, and chief investment officer. His latest books are Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live and Bite-Sized Investing. Follow him on X: @MiltonEzrati.
