Perils of decentralisation with Chinese characteristics

Recent developments in China highlight the limitations of its decentralised economic model, once hailed as a key to its rapid growth. The shift towards increased central control under Xi Jinping and persistent issues of overcapacity reveal critical challenges in China's economic strategy.

China’s Approach

• Decentralisation and Overcapacity: China’s decentralisation allowed local governments significant control over economic initiatives, leading to rapid industrialisation and growth. However, this model also resulted in structural overcapacity, with local governments prioritising industrial expansion over public services, creating inefficiencies and financial waste.
• Centralisation under Xi Jinping: Since Xi Jinping's rise to power, there has been a move towards centralised control to address the inefficiencies caused by previous decentralisation. Central directives have become more specific, aiming to guide investment into strategic sectors like semiconductors, though this has often led to ineffective outcomes and increased financial losses among firms.
• Impact of Geopolitical and Economic Factors: China’s overcapacity issues are compounded by international geopolitical tensions and a drive for self-sufficiency. The Belt and Road Initiative (BRI) and efforts to substitute Western markets with domestic demand have not resolved these issues, partly due to insufficient economic strength in participating countries and increasing global resistance to Chinese products.

Challenges/Issues

• Inefficiencies and Financial Losses: Research has shown that a significant portion of China's investment has been ineffective, with large amounts of money wasted on projects that did not yield expected returns. As a result, many industrial firms are now facing financial losses, reflecting the broader economic strain.
• Challenges in Technology and Self-Reliance: China’s ambition to dominate in high-tech sectors, such as semiconductors, has not been fully realised, despite substantial investments. The focus on self-reliance has led to misaligned investments that do not align with market demands, further straining economic resources.
• Geopolitical Repercussions: China’s economic challenges are intertwined with its geopolitical strategies, which have strained international relations. The negative global perception of Chinese products and investments has exacerbated the economic difficulties, limiting China’s ability to expand its market reach effectively.

Practice Question

Q. Evaluate the economic and geopolitical challenges faced by China due to its decentralised economic model and recent shifts towards centralisation. How have these factors impacted China’s global economic position and international relations?