The article published in the editorial section of The Hindu Newspaper highlights how China’s once-successful strategy of decentralization, which played a big role in its rapid economic growth, is now causing significant problems.
Recently, the Indian Prime Minister encouraged Indian states to compete with one another to attract investors. But in China, a similar approach of encouraging competition between different regions has started to backfire, leading to economic difficulties.
One major difference between China and India is how much control local governments have over spending. In China, local (or sub-provincial) governments are responsible for a large portion of government spending, about 51%, whereas in India, local governments manage only around 3%.
In China, these local governments also take care of things like unemployment insurance and pensions—duties that, in India, are typically managed by the national government. Despite all this, China is not a federal country like India because local governments in China don’t have the same protections from the central government. In a federal system, higher-level governments cannot take away the powers given to lower-level governments, but China doesn’t have this kind of legal structure.
During the early 1990s, China’s local governments were allowed to spend freely, but after reforms in 1994, their ability to raise money was restricted. Because of this, local governments had to find other ways to support their economies.
Since economic growth played a key role in determining whether local leaders could advance politically, they began focusing on building industrial projects rather than improving public services. To attract businesses, local governments sold industrial land at very low prices, which made it easier for companies to set up factories and increase production. These factories took advantage of low costs to produce large quantities of goods, which were then sold worldwide.
While this system helped China grow rapidly, it also created problems. One major issue was overcapacity, meaning too many factories were producing more goods than there was demand for. This led to wasteful investments and industries that couldn’t make a profit. It was like a car with two accelerators and no brakes—the economy kept speeding up but couldn’t slow down in a controlled way.
This model worked well during the leadership of Hu Jintao, where central authorities set broad goals, and local governments were allowed to experiment and find their own ways of achieving them. This helped create massive wealth, but it also resulted in waste, loss-making companies, and industries that were producing too much.
Two things helped China succeed during this period. First, local governments had the freedom to try different methods to grow their economies, without too much interference from the central government.
For example, the province of Guangdong decided to open up its economy by experimenting with special economic zones, while other regions chose different models. Second, China benefited from a favorable international environment. Other countries were happy to buy the large amounts of goods that China was producing, helping to absorb the extra capacity. China’s steel industry is a good example—within just a few years, China became the world’s largest steel producer and a major exporter.
However, around the time Xi Jinping came to power, this approach started to show its limits. In 2014, researchers estimated that half of the investments made between 2009 and 2013, worth around $6.9 trillion, were wasted. To fix this, Xi Jinping tightened control, focusing on directing investments into specific areas that the government thought were important, like the semiconductor industry.
Despite pouring a lot of money into these industries, China has struggled to make advanced chips, and many companies continue to rely on government funding to survive. By mid-2024, 30% of Chinese industrial firms were losing money, which is worse than during the Asian financial crisis in the 1990s.
Another issue is that other countries now see China’s overproduction of goods as a threat to their own economies. This is particularly true in sectors like electric vehicles and telecommunications, where geopolitical tensions have increased. Additionally, China’s aggressive behaviour on the international stage has worsened how other countries view Chinese products and investments.
Xi Jinping tried to shift China’s focus from relying on exports to boosting domestic demand through the Belt and Road Initiative (BRI), which aimed to find new markets in developing countries. However, this plan hasn’t worked out well. China’s economic system is more focused on supply (producing goods) than demand (consuming goods), and many of the countries involved in the BRI are not rich enough to create strong demand for Chinese products.
In summary, China’s decentralized economic model, which once powered its rapid growth, has now reached its limits. Overcapacity, wasteful investments, and strained international relations are all contributing to China’s current economic struggles. If China doesn’t change its approach and improve relations with major economies around the world, it could face a serious economic decline.
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The Editorial Page of The Hindu is an essential reading for all the students aspiring for UPSC, SSC, PCS, Judiciary etc or any other competitive government exams.
This may also be useful for exams like CUET UG and CUET PG, GATE, GMAT, GRE AND CAT
To read this article in Hindi –https://bhaarat.hellostudent.co.in/