With the 2024 presidential election around the corner, looming economic issues of the housing crisis, unemployment, high inflation, and a large federal budget deficit are top voting issues for many US voters. For Americans, as well as citizens of other countries, the outcomes of the 2024 election will have enormous ramifications on international relations and the health of a global economy. As Deerfield students, we must pay attention to the health of the American economy; it will invariably affect us and our institution in some form or another. In Today’s highly trade-reliant global economy, every major nation’s economy is intricately and inseparably connected. As the largest economy by gross domestic product (GDP), America accounts for 25.32% of the world’s GDP. A declining economy can put people out of job’s, unable to pay mortgages, and sink more families into poverty. But not all problems are found internally. Many economic problems that American families struggle with have much more international roots.
China, the world’s second largest economy by nominal GDP and its largest by purchasing power parity (adjusting for differences in the price of a basket of goods at varying locations) is currently experiencing a flurry of economic challenges. A prolonged real estate crisis and massive overproduction are serving causing turmoil within the Chinese economy.
By understanding the root of China’s declining economy, we can see that all of China’s current problems can be sourced back to its fiscal and monetary policy. To incite economic growth and uphold the health of both Americans. and Chinese economies, China’s President Xi Jinping must discard his anti-capitalist and nationalist robe and change his policies immediately.
To talk about China’s rapid ascent to become one of the largest economies in the world is to attribute a large portion of that growth to the country’s housing sector, Bipartisanship Destroyed Democracy JOHN LIU Associate Editor which emerged as a global leader after the 2008 financial recession. Since its housing reforms in the 1980s, China has poured copious large amounts of investments into its real estate market, stimulating economic growth and boosting its overall economy. Although this created a financial bubble, the real estate sector was thriving until Xi Jinping enacted policies that burst the bubble. As part of his efforts to counterdenounce Western philosophies surrounding real estate economies and capitalism, President Xi shifted the dynamic in the housing market from housing being an asset to a focus on purchasing houses to live in.
In 2020, the Chinese government passed the “Three Red Lines” policy. Although it was intended as a healthy check on speculative behavior, in actuality it heavily regulated Chinese property conglomerates by setting a limiting ratio of debt to cash, equity, and assets. Companies could no longer take on certain amounts of debt and were restricted access to financing based on their existing financial health. Thus, many companies defaulted on bonds and went insolvent, with the highest profile case being Ever- grande, one of the largest real estate developers in China.
The “Three Red Lines” policy killed investor and consumer confidence in the market. People feared buying new property as debt-related issues halted many construction projects. Housing prices declined, and then perpetuated a negative feedback loop where prices have continually dropped, which has continued and worsened in 2024. Like a bank run that liquidates a mostly healthy bank, Xi’s policies directed toward eliminating key traces of capitalism within the economy rather induced financial turmoil into a sector that was once the backbone of the Chinese economy.
Another facet of China’s declining economy is due to Xi Jinping’s stance on production. China is the world’s largest manufacturing economy. Xi Jinping wants to limit Chinese dependence on Western suppliers for everything from advanced technology to basic essential goods. On top of this, he wants China to establish a commanding position in future growth sectors such as semiconductors and artificial intelligence. In short, he wants China to achieve self-sufficiency and produce everything that they need, limiting imports to as little as possible while exporting anything that the country doesn’t use.
Xi is essentially a mercantilist but the modern economy offers no success for this strategy. He doesn’t recognize specialization for international trade, which is abiding by the principles of comparative advantage. In short, his policies create huge inefficiencies within China’s production capacity, constraining economic growth. This strategy has even more gaping holes when you consider China’s weak domestic demand. Their overcapacity creates a need to export goods, which thus forces China into competition with other countries such as South Korea. This competition however, only incites a trading war, which would serve to hurt China the most given that they are the ones sitting upon the largest supply of unused goods. In addition, it would disrupt global supply chains and hurt exports, affecting all major economies. A larger quantity of excess supply would result in prices falling precipitously, which would further slow down economic growth.
Classical economics states that when prices fall, quantity supplied would also drop to force prices to rise, but Xi Jinping artificially keeps the quantity supplied the same. Thus, manufacturers would be producing at a huge loss, perhaps even below their average variable cost (variable cost incurred per unit by a business), where they would be losing money by supplying goods but would have to do so anyway. Here Xi Jinping is working towards cutting off Chinese dependence on the Western world as a way of consolidating more political power. But his economic policy derived from his political ambitions is destroying his own economy, which will have ramifications beyond China and untold consequences on a global economy.
Most metrics that measure China’s economic health predict a bleak future and top experts from Bank of America, Citigroup, and others have also lowered their forecast of China’s economic growth for 2024 to be below 5%. Data reveals that China’s retail sales, industrial production, and urban investment have all fallen short of predictions in August, urban joblessness is at a six month high, and home prices fell at their fastest pace for nine years due to lack of demand. Driven by his desire to portray capitalists (by extension the Western world) as terrible beings, Xi’s fiscal and monetary policies so far have only hurt the Chinese people and will soon spread to hurt the rest of the world.
In order to rejuvenate the economy, Xi Jinping must enact policies such as expansionary fiscal policy by increasing government spending on social programs, private sectors, and towards innovation and technology. This would increase spending power, boost consumer confidence, and specialize the economy to make itself more efficient and profitable for the parties involved. By seeking to censure Western economic policies, Xi Jinping is only condemning his own people to a future of financial insecurity. Xi Jinping must adopt policies to promote entrepreneurship, innovation, and expansion. In an increasing global economy, countries are becoming more interdependent upon each other, but isolating a country’s economy will only hurt it. By liberalizing the economy, Xi Jinping will also foster new trade relationships and develop dominant Chinese markets for the future. Xi’s current actions don’t only affect Chinese people, but for the whole world.
As Americans, our economy is deeply interconnected with China’s. A drop of 1% for their GDP results in a loss of 0.3% of our own. From the recent presidential debate, we saw how the economy was a major source of division between Republicans and Democrats in an already torn political system. China’s declining economy from Xi Jinping’s anti-western fiscal and monetary policies will not only serve to drag down our economy and threaten the roots of our democracy itself. A declining United States economy will have ramifications upon all The Deerfield Scroll Opinion and Editorial Thursday, October 10th, 2024 | 3 classes of American society. Politicians will be at each other’s throats assigning blame and any semblance of a cohesive society will cease to exist.
Thus, it is paramount for President Xi to resuscitate his own economy by separating his political ideology from influencing economic policy. It is his duty to enact policies with his country and the world in mind. If he continues on the path blurring economic decisions with political ones, his own political ambitions will destroy his economy and reduce his political power. A reduced economy could even incite Chinese commoners or the bourgeoisie to overthrow his regime, two possible rebellions that could have drastically different but equally detrimental outcomes on China and the other major powers for the decades to come.
Equally, it is our responsibility to help, or at the very least, care. The recent trade war between China and America is exacerbating economic issues for both countries. Retaliatory policies are entrapping both the Chinese and American economies into a perpetual negative feedback loop that are only hurting consumers, driving climbing prices for consumer staples even higher as producers in both countries deal with moreless competition. Change would start with both countries both withdrawing their harshest tariffs hurting the other country; if only one country withdraws their tariffs, they would be at a major disadvantage so by prisoners’ dilemma there will not be unilateral change.
Better US-China relations could help stabilize trade, introduce profitable investment opportunities as well as broader market access, and support geopolitical stability. All of this would lead to a more resilient and more successful economy for both countries involved. We can’t wait for China to change if we are unwilling to adapt ourselves.