Economist Huang Yasheng: 'More and more people blame the system.'

What is your take on the recent negotiations in the trade war between the United States and China?

China has clearly won this round. The United States has lost a great deal of trust worldwide. After all, the Chinese and everyone else know that the US cannot sustain the trade war. The American government will cooperate, and so will the Chinese leadership, as it faces its own economic challenges. I do not think the trade war will escalate any further.

Hasn't the Chinese leadership also lost something in the process? With its quasi-monopoly on rare earths, it holds a powerful trump card, but by playing it now, all countries will try to reduce their dependence on China.

China's strength lies in the processing of rare earths. No other country even comes close to China's capacity. The US and others will consider expanding their processing capacity. But since China has almost total control, they will have to rely on Chinese equipment. So, I don't see that leverage disappearing anytime soon.

The dependence of the US military on a raw material such as samarium has also become apparent. Isn't it surprising that the Chinese leadership does not save such a powerful tool for a potential conflict?

I am not surprised, because China's economy is in a tough situation. The property sector isn't doing well, and although the high-tech sector is doing well technologically, it's not really generating employment, income and growth. The only sector that is generating growth and employment is the export sector.

You claim that it is precisely the Chinese leadership's pursuit of technological autonomy that makes it very vulnerable to external trade shocks. That sounds paradoxical.

There are two types of external shocks to the Chinese economy. One technological and one economic. In 2018, Trump initiated the tariff war with China at a relatively low level. He also began restricting China's access to US technology. The Chinese leadership has focused on solving the technology problem, not the economic shock. They have massively stepped up investment in technological independence. But this has not generated income for the people. China is not pursuing an industrial policy; it is only pursuing an industrial campaign.

What is the difference?

Industrial policy is targeted. A campaign means that everyone does everything. A current example is AI and data centers. That comes with a lot of waste. China's response to the technology shock involves so much investment and capital that it doesn't lead to a real increase in income. If you can't generate income at home, you need foreign markets. This pushes China into ever greater dependence on the external market. Estimates suggest that the Sino-US trade war could threaten 15 to 20 million Chinese jobs. In addition to the massive job losses caused by the Covid measures.

For decades, China's citizens have experienced a tremendous rise, but now the leadership is telling them to push through. Are you surprised that there aren't more protests?

Part of it has to do with political control, but that's not all. Numerous studies show that Chinese people tend to blame themselves when things are not going well, not the government or society. In surveys, they say: "I'm not working hard enough." Interestingly, this could now change. Researchers have found that more and more people in China are now blaming the system for their problems.

Why is that?

The Covid measures have fundamentally changed the psychology of the Chinese population. It was very obvious that the government's policy has lowered their income and restricted their entrepreneurship.

Could the trade war lead to the Chinese leadership changing its export-based economic model and now – as so often proclaimed – actually focusing on domestic consumption as a driver of growth?

They should. In the 1980s, China had the highest share of consumption in GDP, about 50 percent, today it is only 39 percent. In the 1990s, the income growth of the rural population slowed dramatically, affecting 60 to 80 percent of the population.

This includes migrant workers who are registered in rural areas.

You don't have to be a genius to realize that this results in slower growth in consumption. Between 2003 and 2008, the government tried to change this. However, the financial crisis soon followed, and the government abandoned this policy. It launched massive infrastructure programs.

An investment-driven growth model.

Essentially, they still adhere to the same investment model. The products have changed, it's no longer about building another apartment building or a high-speed railway. With the start of the trade war in 2018, they pivoted to technology. It got even worse. Between 2003 and 2012, the investment share of the GDP was roughly 40 percent. In the last twelve years, it increased to 44 percent.

Why is it so difficult to change this model?

The leadership has always pursued a supply-oriented policy because it requires state power. If they want to build a factory in China, it can be done very quickly, they can simply relocate the rural population. Funding is also very easy in China. However, if the government wants to increase the income of its citizens, it would have to support pensions, education and the healthcare system.

That would be a very socialist thing to do, wouldn't it?

Yes, but Chinese socialism is primarily about owning the means of production in line with Marxist ideology. The government would then have to grant the rural population more rights. Land rights, for example. However, if you do that, you must negotiate with farmers to build a factory.

The former Chinese Finance Minister Lou Jiwei said that a hukou reform could boost consumption by 30 percent. Is that realistic?

He made this statement when growth was relatively strong. The fact is that every decision, regardless of its direction, will have costs. If you continue to follow the investment-based model, you shift the problems into the future. Debt will rise, production growth will fall. A hukou reform is not a miracle cure, but at least it does not put the problems on the back burner.

Xi Jinping values loyalty above all when choosing his top staff. How much economic expertise is there in the leadership?

It's actually quite simple. It's a question of political economy. It's about the role of the government, of capital, of households. Compared to other countries, households in China make up the smallest sector of the economy. So you would have to reduce the share of the government and increase the share of households.

All the technocratic proposals that are being made in China do not address the essence of this problem. I can understand that. I now live in the US and have the freedom to talk about such things, but Chinese economists do not. Since the political economy solution is out of the question, they have to look for technical solutions. But I don't think that will solve the problem.

Beijing-born economist Huang Yasheng is the Epoch Foundation Professor of International Management at the MIT Sloan School of Management. He has authored numerous books on economics, politics and development in China and is a sought-after expert in international media such as The Economist, Financial Times and The New York Times. He lives in the USA.