Transcription
Good evening, uh, to you all. My name is George Magnus. I am a research associate now at the um China Center up at Oxford University. Also at um the School of Oriental and African Studies here in London and um sit on the advisory board of the China Observatory of a London-based think tank called the Council on Geostrategy.
I was the chief economist at UBS uh for about 22 years from 1995, 1996 till about 2016. And uh before that, I had um uh did a, I did a spell with Warbergs, which was a UK merchant bank of old um, and before that with Bank of America.
Anyway, enough about me as a person. Um, I'm going to have some fun with you tonight, hopefully, uh, talking about China. Now, I'd like to start by um quoting the words to you um of a leading American academic about um his country's principal adversary um and how he described his rival, or America's rivals' overall strategy, uh, quote, "as spectacular advances and growing supremacy in a variety of fields such as industrial ceramics, lasers, semiconductor ctors, biotech, solar energy, robotics, superconductors, and space exploration." These advances, in turn, he said, will be largely used in consumer products and will lead to increasing exports, rising technism, and deepening fears among Americans that, quote, "we can no longer compete."
This was part of a, an essay that he wrote in a well-known and still well-known international foreign affairs magazine called Foreign Affairs. And the author was a chap called George R. Packard, uh, who was the dean of Johns Hopkins University. [snorts] Um, but he was writing this in the summer of 1987, and of course, he was talking about Japan, although the whole purpose of my kind of mentioning that to you without referring to Japan was it could have been written about China today.
So, a lot of the current debate with respect to China nowadays is about its industrial policy and its manufacturing, and also um about how China's role in the rest of the world is really evolving, and what it's trying to do, and where it might succeed, and where it might run into roadblocks. Uh, and also, of course, all of this is kind of wrapped up in the geopolitics between China and the United States and the rest of the world, and about Xi Jinping's uh declared ambition to for China to dominate what he calls the fourth industrial revolution.
Okay, this is not just idle uh CCP banter. Um, the Communist Party is deadly serious about this. They don't want to kind of match and compete. They want to leapfrog in terms of industrial prowess and ultimately dislodge the United States from its perch as, uh, Alex Ferguson once said about his uh major rival across um across town in Liverpool.
What I'd like to propose in this talk this evening is that China, like Japan of 40 years ago, can actually boast two things that are simultaneously true. The first is that you can have islands of technological excellence with world-class firms, and you can have your own version or versions of innovation. But you can also have, uh, alongside that, a kind of a sea, if these are islands of technological excellence, you can also have these islands in a sea of what I would call macroeconomic turbulence, where there are fiscal, financial, and debt problems, and also a kind of a governance system that has rigidity and flaws. This one being Leninist in nature and in drive. And in this respect, I'm not going to carry the parallels and and dissimilarities between China and Japan too far unless you want to query me afterwards in Q&A, but that is suffices really um for the the comparison at this juncture.
How China arrived at some sort of closure between this in this dichotomy between a kind of a a very dynamic modern sector that is the envy of the world and the rest of the economy, which is the vast majority of it, because the modern sector is never going to be more than 12, 13, 14, 15% of of the economy, but how that closure happens is very difficult to say. I think we can though, at the outset, say three things that we can have a reasonable degree of certainty about.
The first is that under Xi Jinping, China is determined to push its industrial and manufacturing prowess to the limit in order to pursue uh the CCP's domestic and international goals. Secondly, there is no precedent for industrial policy and prowess to resolve the myriad of economic and social problems which um afflict China. I mean, not only China. I mean, lots of countries have problems, including our own, as you know. But industrial policy is not the way to resolve it. It helps, obviously, the firms that benefit, and it helps maybe to foster an environment of greater innovation and uh initiative and productivity eventually. Uh, but it's not in and of itself a solution. And thirdly, uh, unlike the last 20 or 30 years, um, we are now, I mean, the world is now in a process of what I would call managed disengagement between the US and China. So, summit meetings come and go. Uh, you know, deals, Trumpian deals, come and go. None of these things particularly have a long shelf life um necessarily. But we are disengaging or decoupling or de-risking, or whatever you want to, whichever word you want to kind of use, uh, to describe it. Uh, when it comes to technology, when it comes to supply chains, and when it comes to a whole array of things that we now call national security. Once upon a time, national security was just about the military and about intelligence services. Now it's also about technology. It's about energy. It's about um carbon capture. It's about a whole range of things um that the United States and China, and and we all feel are essential to um to our well-being and our security. And of course, this is changing in a huge way how international firms and global companies uh manage their business environment.
So, quite a long-winded introduction, but I just wanted to kind of set out my stall really right at the beginning. And my talk now is going to divide really up into kind of three sections. First is, I'm going to give you a very, a bit of a sort of a crow's nest view about um China's economic development over the last 60 years. It'll be very quick. [clears throat] Obviously. Um, the second is, I want to talk a little bit about both why and how China's economic model has frayed uh compared with the way it was, but yet why industrial policy is giving the Chinese government cause for optimism about how Chinese manufacturing can flourish. Um, also, I want to talk about what the consequences of all of this are for the rest of the world. And then third, right at the very end, I'm going to conclude with um a page or a slide u which is really about whether China is really on a precipice about to kind of fall over the edge, or whether it's just reached a plateau where it's going to relatively speaking kind of mark time.
Now, uh, so first, sort of a general chart really. Um, left-hand side of this chart, you can see leaders of China over the last several decades. Um, then you can see the decades, 50s, 60s, etc., etc. The blue bars describe the kind of the the main meme really of that decade. Um, and then, uh, the numbers at the end of those blue bars are how fast the economy was growing during those decades. And then the the numbers uh under income per head at the end of the decade is exactly what it says it is. So, um, you know, back at the end of the Mao period, you know, China had income per head of around $76. Even in 1990, it was still only about $300 uh per capita. Uh, but now it's about $13,000. So, China's economy is about 19ish, 20 trillion. America's is getting on for 30. Um, income per head in the United States is over $60,000, but still in China, even though many, just quick hands up, and I can't see people obviously outside of this room, but how many people have been to China? Okay, quite a few. Uh, so you'll know that if you visit Shenzhen or Beijing or Shanghai, any of the big sort of tier one cities on the eastern uh seaboard states, you could be in any European, you know, modern city. Income per head in some of these places is like 25, 27, $28,000. Uh, but for the country as a whole, it's only $13,000. So, um, still got a long, long way to go in terms of um catch-up, if it can note some things.
For example, the theme, the main themes, if you look at say the 19, the 1980s, the 1990s, the 2000s, these were the kind of decades really of market reforms, liberalization of the economy, integration into the global system, with China joining the World Trade Organization, for example, in 2001. Uh, and to do, I mean, it wasn't just a question of, oh well, we're going to sign a WTO agreement. There were at least 12 to 15 years of preparation that the country had to go through in terms of getting the infrastructure, just, I don't mean just roads and highways and airports and so on, but the commercial infrastructure, the regulatory infrastructure. There was a lot, lot of work went into uh preparation for that event. Uh, so those were the kind of the go-go years for China's rise, um, which um, you know, felt very benign at the time.
And then, if we come to the 2010s and the 2020s, you can see that some sort of, there's a change it's kind of taking place. Obviously, growth is going to slow down as it does in every country when you get to a certain level of economic development. You cannot keep double-digit growth going forever and ever. And in any case, once [clears throat] you've got a GDP of like, you know, 14 trillion, 15 trillion, 16 trillion, you don't have to grow at 10% per annum to get a lot of GDP. Uh, you can grow at 4% or 6% or 7%, you still get a lot of GDP, much more than you do when you're uh much smaller. But as we come into the 2010s and the 2020s, things do begin to change quite a lot for China. [clears throat] And gradually, the the main kind of thrust of what the government is trying to do is is shifting towards the development of industrial policy and manufacturing. And of course, as we get into the 2020s and the first Trump administration, self-reliance becomes the kind of watchword really for the CCP.
Uh, we are in now, of course, in 2025, and this is the fourth consecutive year of the crisis, crippling crisis in real estate, which only four or five years ago, according to uh Rogoff and Young, famously have written quite a lot of um uh quantitative work on the Chinese property market, four or five years ago, real estate broadly defined was probably about 26% of the economy. Um, and it is shrinking and will continue to shrink for the foreseeable future. Um, and there really isn't anything to take its place. The modern sector is just, is very dynamic. It's very impressive. It's just not big enough to substitute for real estate and also for infrastructure.
But it's not just the crippling crisis in real estate. It's also deflation, uh, over capacity, um, over production. They're sort of, you know, as successful as, you know, half a dozen Chinese electric vehicle brands are, um, not just in China, but also in Europe and the UK and elsewhere, rest of the world. Um, there are 145 other electric vehicle companies that are losing money and probably won't be around, or most of them won't be around for another five or six years, if they're allowed to go bust. Uh, which is a moot point. Um, unemployment is a particular problem um in China. Uh, the labor market statistics are things that can't always kind of give a lot of credibility to, but certainly for the young, 16 to 24 year olds, uh, very, very high um youth unemployment. Um, inequality, fiscal squeeze, tax revenues running dry, particularly because of land, uh, which is such an important part of the uh revenue sources of local governments.
So, it's this dichotomy which I think is really, really fascinating. It's a dichotomy between a futuristic economy, a dynamic uh modern sector, uh, world-class brands coping pretty well actually with tariffs and export controls. Um, but China, perhaps most countries have their own paradoxes. But China is a country of paradoxes. So, what we see is a kind of a virtuous circle for 10%, 12% of the economy, uh, but a vicious circle uh for much of the remainder. And they're linked, really, this vicious and virtuous circle through the uh ubiquitous ways in which industrial policy and massive resource mobilization for manufacturing affects both the modern sector and the rest of the economy.
Other paradoxes. I mean, if you look at um again, the sort of historical period for China under Mao, uh, there was the paradox of um roaring growth and massive widespread poverty. There was the paradox of um uh obviously the Great Leap Forward and the Cultural Revolution, but also of huge improvements in educational attainment, in social and health facilities, and in the development of heavy industry like coal and steel. Under Deng Xiaoping, from the 1990s until the 2000s, uh, and from the 90s to the 2000s, you had the paradox of industrialization, openness, uh, integration. But there was no real change in property rights. I mean, you know, if you're a dyed-in-the-wool capitalist, you'll think, well, you can only really make progress if you have property rights, if you have neutral contract enforcement, have an independent judiciary, if you have market prices for inputs and outputs. China had really, it had market prices for outputs, not for inputs, but it really didn't have any kind of of the features of a capitalistic society which we normally associate with um success, and yet China was able to do this um often through its own kind of version really of social arrangements between companies and local governments and so on and so forth.
Now, we have a paradox of uh cutthroat competition in China, uh, which is part of the reason why you have this over capacity and price decline and so on and so forth, but also very, very strong government involvement in the economy. You have the paradox of wildly successful EV and solar and wind turbine firms, uh, but actually massive amount of waste and loss in the same sectors. And you have the um paradox really of, you know, the the sort of the Shanghai student syndrome, the highest PISA scores in the world, etc., etc., and yet, according to an excellent book by a chap called Scott Rozelle, with um assistance from Natalie Hell, it's a book called Invisible China, which I strongly recommend, China has educational attainment in the workforce which is no higher than it is in some of the middle-income or lower middle-income countries in the world. So, updated for census numbers, probably not more than about uh a third of the workforce have a tertiary, in other words, university-level educational uh qualifications, and um uh or sorry, sorry, secondary school attainment, and not more than about 20% have um university-level attainment. So, it's this kind of contrast really between, you know, very successful go-ahead um kind of schools and universities in big urban conurbations, but actually half the population still live in the countryside where um educational attainment is um nothing like it is in uh some of the big urban centers.
A couple of structural things that I just want to kind of talk about at the beginning before we get into a little bit more current um things. First of all, I just want to sort of run this through what the key drivers of China's economic success were. And a lot of these are things that you can only do once, right? So, you can only transfer labor from low productivity agriculture to high productivity manufacturing once. You can only put all of your kids through secondary school uh once. You can only have high investment rates uh financed by high savings for a limited period of time. Eventually, you get to the point where investment, if it maintains extremely high levels of activity, you get diminishing returns, you get misallocation of capital, and so on. You can only uh introduce privatization, and you know, well, you can probably go further than than the government in China has done, but certainly during the 1990s and the 2000s, there was a big move to change the ownership structure of enterprises, privatization, development of civil society institutions, non-governmental organizations. These kinds of things were discretionary and allowed by the Communist Party at the time. Uh, but they've since kind of gone back. You can only join the World Trade Organization once, which they did in 2001. You can only establish a nationwide housing market, um, which they did in the late 1990s and the 2000s. Um, nowadays, probably almost all of the private developers in the real estate market have gone bust, and the government de facto uh is essentially, or government developers are essentially displacing um the uh private sector developers. So that, in a sense, you know, the real estate market is going backwards, or going back to uh being much more socialized than it has been for 20 years.
Other structural factors. Um, I hope you will get your heads around this quite quickly. This is uh a graph that shows you u what demographers call the demographic dividend, which is really uh a period in economic development when youth dependency is dropping, old age dependency is dropping, and the working-age population is uh expanding as a share of the total population. So, this is a period supposedly of great um dynamic uh advancement and so on. So, year T, which you can see on the bottom, is a year when income per head is at or greater than China's income per head was in 2019. And essentially, what this graph is showing you is that in China's case, which is the red line at the top, um, the share of the working population, working-age population, was rising from, let's say, 1999 or 198, 2019, so 20, 1999 to 2019, China's share of the working-age population was rising, and the dotted line is showing you that since 2019, it's been dropping. The same charts, or the same lines, were drawn here for Japan, South Korea, Taiwan, and Singapore. And you can see that in year T, when they had China's 2019 income per head, they were able to look forward to another 20 years of expanding working-age population. So, from a demographic point of view, China is the fastest aging country on the planet. And the reason for that is not specifically the one-child policy, whose principal outcome was gender imbalance, but because of policies that they were adopted under Mao um to limit fertility or limit um the growth of children, um partly because of population control u mechanisms which they introduced at the time. So, uh, China does have kind of a demographic issue, um, which I'm sure everybody understands. It's not the only country in the world that's got an aging population, declining workforce, etc., etc. Um, and there are coping mechanisms to deal with it. Um, so I don't think that this is necessarily the most pressing urgent problem in China, but it's one which the government will have to deal with um very significantly uh as things accumulate over the coming 10 or 15 years.
The other structural chart that I thought I would just show you here, has to do with um income per head. And here, um, again, if you look at the sort of T year, T is the year in which income per head is more than $3,000 um in purchasing power parity terms. We don't have to get into the mechanics of this. Um, but everybody in year T, as you can see, is sort of um at 3,000, and then >> [clears throat] >> uh, depending, you can look at it 10 years later, 20 years later, 30 years later, and so on. And Argentina and Brazil are the laggards here. So, these countries are basically stuck in what economists call a middle-income trap. In other words, they, they had their kind of development phases, but for various reasons, a lot of which have to do with institutions and flexibility of uh politics, etc., etc., these countries got stuck. Actually, Argentina has not been doing too badly relatively speaking of late, but um still compared with uh South Korea, Japan, and Taiwan, for example, uh, they are certainly laggards. Um, China. I mean, the numbers that I've sourced here actually only go up as far as um 2022 or something like that. So, that sort of orange blob really is my kind of estimate about where China's income per head is now or has developed into. And the issue really here is whether this is beginning to flatten out in a way that is more reminiscent of really of what happened in Japan after the 1980s, 1990s, u before Japan resumed. And really, whether um China, it raises a question about whether what China's prospects are, whether they will, whether it'll follow Japan and Korea, Taiwan, or whether it'll um go its own way somewhere between the Asian economies and the LatAm economy is at the bottom.
So, it's really against this structural backdrop of demographic deterioration and uh kind of income per head um stalling a bit that Xi Jinping [clears throat] came to power, really, in 2012. And and the significance of this is because um there were a number of kind of economic problems that were emerging already before he came to power, um but were uh um his basically to either address or or not. So, by 2012, China's development model uh was already beginning to fray at the edges. Premier Wen Jiabao, who um had left office in 2011 or 2012, had previously whilst in power spoken about something that were called the four uns. Well, they're not really formally known as the four uns, but we call them the four uns because he had said that China's development model had become unsustainable, unstable, unbalanced, and uncoordinated. This is the Prime Minister of China in 2007 and again in 2011. So, he was right, and it happened on his watch. So, um, it was obviously something that he, his legacy, uh, as it were, to um to Xi Jinping and to Li Keqiang when they took over in in 2012.
But the the main kind of presentation of the fraying of the economic model really is summarized in the uh bullet points I've put underneath here, which is misallocation of capital, too much debt, um specifically in the sense that there's too much, not enough capacity to absorb and carry uh more debt. Now, an overstretch of the financial system, um, which was manifest in a financial crisis that happened in 2015-16, the boom and bust in the property market, the stall in productivity, rapid aging, significant shift in politics and governance, um, and these concerns, as I said, about um middle income, about the middle-income trap um in particular. Um, I mean, I can't stress the sort of real estate part of this enough. I mean, we'll keep coming back to this because it was such a big part of the economy. And they didn't really, I mean, we had a real estate crisis, you know, in the West, Lehman's subprime mortgages, Northern Rock, you may remember some of this, um, if you were old enough to be there at the time, um, or you've read about it, um, but of course, um, these problems which are kind of endemic in um capitalist societies were clearly not um avoided in China either. It's quite serious, really, because depending on how we measure property prices in China, the destruction of household wealth um is estimated to have been anywhere between 7 and 10 trillion, which is uh a very, very substantial amount of money, as you can imagine, for a 19, 20 trillion economy. It's quite where we fit in terms of 7 to 10 trillion because it's get the Queen Elizabeth liner through that range um, but quite where it depends on, you know, how you define property prices. Government estimates, private estimates are quite different. Anyway, I'm just going to now kind of run through a number of features of this frayed economic model very quickly before we come to industrial policy, which I did want to spend just a little bit of time explaining to you.
So, [clears throat] this exhibit really shows you uh on the left-hand side um the inefficiency of capital, and on the right-hand side the intensity of the use of credit. So, um on the left-hand side, this is um what we technically call the incremental capital output ratio. Sounds like a bit of a mouthful, which it is, but it's basically the amount of additional um capital you need to get one extra unit of economic growth or GDP. So, as [clears throat] you can see in this chart, during the 2000s, the uh this measure of efficiency of capital is quite stable, and then it gradually starts rising after 2009, 2010. Not particularly alarming to begin with, but as that rate of ascent continues up into 2024 or 2021 and subsequently, and the numbers haven't really changed since then, that's kind of indicative of the fact that uh capital utilization is becoming more and more inefficient and loss-making. Uh, and the chart on the right um, I mean, you only need to basically look at the kind of mustard-colored line there. It's it's the credit intensity of GDP. In other words, how much extra credit do you need to generate an additional unit of economic growth or additional unit of um uh of GDP? And again, uh this is something which we saw in our own countries in the West in 2006, 2007, and leading up to the Lehman crisis in 2008, was that credit was kind of pouring out of the banking system, um, but actually not going to productive use, essentially. Same thing is happening in China. So, even though the rate of growth of credit has slowed from about 18% per annum a few years ago before COVID to now about 7 or 8%, um, the growth rate of GDP has slowed down a lot too. So, there's still twice as much credit being uh kind of pumped out as there is uh GDP. So, both in terms of capital efficiency and credit allocation, um, there are signs of stress uh in the rest of the economy.
Um, again, we're coming back here to look at a little bit of property um uh indicators. The graph on the left-hand side shows you official numbers for um property prices for uh existing properties, which are the um um the gray line, and new properties, which are the orange line. So, according to official numbers, since 2021, uh, it's just after COVID, um, existing property prices have dropped by about 20%, and new home prices by about 11, 12%. But private estimates are bigger than this. So, there are some estimates, for example, that suggest that existing property prices, or actual transactions at which properties change hands, have dropped um, you know, maybe somewhere in the region of 30 to 40%. So, that's why, I mean, when you look at the kind of potential destruction of household wealth, it kind of depends where you kind of pitch your uh decline in property prices. Uh, but it's quite a serious problem because you're not going to really bolster the confidence of households and consumers until this really comes to an end, and it might not come to an end for quite some time.
So, if you look at the right-hand chart here, this shows you the amount of construction activity in real estate um in China. So, in 2005, you know, there are about 500 billion square feet of uh property being built. At the peak in 2021, we were up to about 1.7 um uh billion square meters, 500 million, sorry. And now, uh, we're down to, you know, where we are in 2024, something around the level of about 800, 900 million. This is probably, uh, it's probably a rate of decline which has happened too quickly, even. In other words, you could get some kind of a cyclical kind of bounce if if things were um went um optimistically. But the problem here is that there is far too much inventory of unsold property. So, by some estimates, there are between four and six years of unsold properties in China, mostly in cities and towns that people don't want to go to. In other words, the kind of tier three, tier four, tier five cities. So, not so much the problem in big cities like Shanghai and Shenzhen, but in smaller towns and cities. And the huge problem overhanging the property market is demographic. So, if you look at the age cohort of first-time buyers who are aged say 25 to 35, this cohort of the population is going to drop by about 30 to 35% between now and 2040. So, household formation is just not going to support these kinds of elevated levels of um housing transactions which we saw in the past. So, this is a long-running saw. I mean, it'll be noisy. Sometimes you'll have good years, sometimes you'll have bad years, uh, but fundamentally, the property market is in shrinkage mode and will have to continue to do so until obviously the inventory uh situation has been um relinquished or or passed over.
Moving on to uh again, the sort of imbalances in China's economy. Um, this shows you uh sort of investment as a share of the economy on the vertical axis and uh sorry, the horizontal axis, and household consumption on the vertical axis. So, there are some outliers like Luxembourg and Ireland, for example, but most countries, as you can see, industrial countries and some middle-income countries are clustered um in kind of same kind of area. But of course, what I want you to do is look at the triangles that represent China. First of all, in 2002, when it was least imbalanced, then 2012, when it was much more unbalanced, and then a slight change that's happened in the last 10 or 12 years um where China is kind of moving back towards the left, but it still has household consumption that is very low as a share of the economy, about 40%, um, and investment that is very high, which is about um 40% as well.
So, this is um an imbalance which the government has become increasingly conscious of over the last three or four years, and the rhetoric that you hear from China's policy leaders is increasingly about consumption. And in fact, as you may know, if you kind of follow China quite closely, they've just concluded uh a very important party meeting called the Fourth Plenum, where they were doing the preparatory work for uh the 15th Five-Year Plan, which is from 2026 to 2030, and which will be announced to the world uh at the National People's Congress next March. Um, and in the sort of preliminary summaries that we've had about these discussions, uh, there's quite a lot that corroborates what government leaders have said over the last couple of years, which is, we must do more about consumption.
But of course, they find it very, very difficult to do this. It's not that I think they don't understand it. I do think they understand it, and I do think they know what the problem is. But to radically change the model in China away from industrial production, you know, capacity, manufacturing, etc., and prioritize private enterprises, consumers, households, welfare, income, support, maintenance, and so on and so forth. That's a huge political shift. Once you start shifting economic power from this side of the economy to the households and private firms, you can't really do that without changing the distribution of political power as well. That's something which the CCP has a huge problem with. It just can't happen. I mean, it could happen maybe under a different leadership. Um, but it can't happen, I don't think, under Xi Jinping.
So, this um imbalance in Chinese country, they'll try to do things with consumption. They have, for example, this year and last year and this year introduced programs where you can sub, well, they'll subsidize your, well, we used to call it cash for clunkers, which is where you, you know, basically would take in your old consumer durables or your old car, and you'd get a new one that was kind of subsidized by the state. So, they do this in China for consumers and for household, for small firms, where it comes to, you know, capital equipment, computers, cars, etc., etc. Um, but it's pretty small. I mean, small beer, you know, next to the size of the economy. Um, they also increase, for example, um pensions, and uh try to reduce people's out-of-pocket expenses for healthcare. Um, but at the same time, you know, the measures are relatively minor. Um, they don't really change the lot of 250 million migrant workers who don't have urban registration, and therefore they don't get access to um public goods and services for health, education, schooling, and and welfare, and unemployment benefit, and so on. So, there's a political blockage here which is really difficult uh for the government to overcome. Uh, and this chart um shows you also just comparatively speaking, you know, China set against uh some other countries. So, on the left-hand side, you can see private consumption as a share of the economy. So, China is down at about 40%, but you know, even countries like Turkey, Russia, Mexico, Chile, um, and so on, so let alone the kind of richest countries of the world, have much higher rates of consumption in the economy than China does. And then on the right-hand side of this chart, you can see a slightly expanded version of household consumption to include in-kind benefits. So, these would be state handouts, for example, or state [clears throat] benefits, but still um China is relatively uh inferior uh to its peers and to its um aspirants.
This is a chart about struggling investment. So, here you can see total investment, the change year-over-year, which is the blue line, which is sort of just above zero. Um, obviously, real estate is the is the real problem still, and will continue to be so. But even manufacturing is um is kind of less than 10% per annum. Um, and equipment purchases, which is basically capital expenditure on factories and uh manufacturing, is obviously doing pretty well, for obvious reasons, to do with the conduct of industrial policy.
One of the upshots of having an economy in which your domestic demand isn't really doing very well is that a lot of your production tends to end up going overseas. So, here you can see the volume of exports in red, and the volume of imports in black. So, we all, I think everybody lives and breathes this kind of story about how well Chinese exports are doing. Uh, and that is certainly true. Uh, but we need to kind of bear in mind, you know, when people talk about, you know, that China is contributing this amount of global growth and, you know, outdistancing its peers, etc., etc. This is actually um a bit of sort of hype, really, which actually doesn't reflect the reality. Because obviously, countries that are involved in international trade are supposed to do exporting and importing. In fact, the whole purpose of trade, according to Adam Smith, Wealth of Nations, Ricardo, other kind of trade theorists of the 18th and 19th century, is that the whole purpose of exporting was so that you could import. So, if you have comparative advantage, the idea is you do what you're really good at, and you do, you import what you're not so good at, because other people will have comparative advantage in that kind of thing. So, that's the way that trade actually ought to work in theory. Um, but um, there is a kind of a phenomenon which Adam Smith was very vocal about called mercantilism, which is when countries make a kind of a virtue of exporting, but also do not really want to import very much. [clears throat] For various different reasons, and in China's case, the weakness of demand is the reason that they don't really import very much.
So, this is, we'll kind of come back to this in a few minutes, um, because this is kind of a big problem for the rest of the world. In other words, just as a sort of a teaser, if we take a lot of Chinese exports, let's say into the UK or Europe, um, because they're cheap, we, you know, we like the green agenda, solar panels, wind turbines, etc., etc. So, the whole idea, you know, government has sort of China as its center of its growth agenda, etc., etc. That only works if we can export to them. It doesn't really work if they keep on exporting to us. If we can't export very much to China, which is what these import numbers are suggesting, um, it's not really very much doing very much for our growth prospects at all.
Um, so, up until now, um, I've been trying to talk about uh the uh domestic economy in China, um, in so far as how it's developed and some of its features that it presents with. I want to talk a little bit about industrial policy. Now, I'm going to do this quite quickly because I haven't really, I'd like to leave obviously time for some questions. So, the backdrop to the 15th Five-Year Plan, which is now being uh going through the party's kind of machinations, is it has an economy in which there's persistent need for stimulus every year. It can't grow at 5% per annum, which is the government's target, without constant stimulus. There's a widening bifurcation between modern manufacturing and the rest of the economy, which I've talked about before. The government is quite candid about the problems that it's facing, but it actually finds it very difficult to address those problems. Um, and there's a big change in the plan emphasis, the 15th Five-Year Plan, from uh concentration of sectors to a focus on national security, self-reliance, and industrial strength.
Industrial [clears throat] policy really didn't exist in China before about 2005. But then, uh, on the left-hand side, I've listed here, uh, again, I'm not going to go through them one by one, but a number of campaigns, which have been launched by the government or successive governments to propagate and promote uh industrial and manufacturing strength. And as you can see, uh, some of the things that we ought to kind of just mention: Made 2025, it stands for Made in China 2025. The Chinese stopped talking about this a few years ago because the Americans used to get very, very upset about it. But, uh, but Made 2025, which is basically setting self-sufficiency targets for about 8, 9, 10 strategic industries, are still very, very much alive. And you can see there a number of campaigns: Innovation, Smart Solar, Military-Civil Fusion, Infrastructure, Common Prosperity, Digital China, New Productive Forces, is straight out of Marx, which is about taking advantage of technological change to beat your enemies, etc., etc.
Um, [clears throat] so the modern sector really accounts for about 13.5% of GDP. The government had an aim to that it should account for 17% of GDP by this year, which it didn't miss. Um, and it's probably the most expensive uh industrial program on Earth. The IMF recently estimated in a paper that industrial policy costs China about 4.4% of GDP each year. But the IMF could only measure what they could measure. There's a lot of stuff that they couldn't really measure very well, which I think, uh, which I've written a paper about, and which I estimate is probably going to the ballpark is much closer to 6 or 7% of GDP, which is probably, well, it's twice as much, if not more, than most countries, all countries spend on national defense. So, it's what Barry Naughton, who is really sort of the grandfather of um of industrial policy in China, has called the biggest single commitment of government resources to industrial policy objective ever.
So, China already accounts for about 30% of global manufacturing. And just imagine that the goal, I mean, they haven't set a goal for how much bigger they want it to be. But if the goal of Chinese industrial policy is to continue to build out its manufacturing strength in the world economy, it can only grow that 30% at somebody else's expense. Most Western industrial countries paid the price for this by having manufacturing decline relatively speaking in the last 20 years. The new losers will be countries like Turkey and Brazil and Indonesia, Malaysia, a lot of the Global South countries that are trying to industrialize and which China wants to befriend because they think that this is where, and I mean rightly, this is where the struggle for influence is going to be in years to come. So, there's a kind of a contradiction here, which the CCP likes to talk about contradictions all the time. There's a contradiction between having this kind of export-led um investment, export-led economy, where you're basically simultaneously undermining the industrialization efforts of a lot of the countries that you want to um have align with you.
This is um again, just a sort of a a rah-rah chart which just shows you China's unquestioned, almost unrivaled success in important areas. So, this is China's, Chinese firms' global market share in what sort of, you know, 10 different areas of activity, from basic metals and electrical equipment, um, machinery and equipment, all the way down to pharmaceuticals, transportation, IT, etc., etc. So, this is, uh, this is unequivocal success. This is kind of unparalleled. Um, and we [clears throat] shouldn't be cherish about, uh, um, you know, how China has managed to do this, and that it is very, very likely, as uh things stand at the moment, that it will carry on um continuing to succeed in some, if not all, areas.
This one I thought you'd like simply because it's just um shows you very dramatically China's uh share of global electric vehicle sales in millions, going back to when there were no electric vehicles, back in 2012, 2013, um, but now it's um, you know, China's around about sort of 8 million vehicles out of a total of 14. So, it's um pretty impressive. But as I said before, bear [clears throat] in mind, you know, that there were about five, four or five years ago, 500 EV producers in China. There are now only about 150, and only about half a dozen of them actually make any money. So, um, that's like BYD and a few others. Um, so, there is a, a kind of a problem there of um, you know, some a small band of very, very successful companies, but also quite a large number of companies that are never going to make any money.
And you've probably heard of the phrase involution competition, which is uh a new kind of CCP uh campaign which they're trying to wage, a kind of a struggle against. It's basically about overproduction. They don't want companies to engage in disorderly competition. They don't want prices being cut left, right, and center. Um, and they have taken measures um um through, you know, direct central government uh attempts, and also through local and provincial governments, which are really important in the administration of policy in China, to try to clamp down on this. The trouble is, it's a bit, kind of, it's a bit like getting an alcoholic, you know, to sort of train somebody not to drink by using alcohol as the method to do that. Um, because a lot of the reasons that there is overproduction and overcapacity in China is because of China's industrial policy, which they're trying to try and clamp down on. So, it's a bit like kind of chasing your tail.
I wanted to show you this chart. You can't really see what's going on here, unfortunately, but it is a map of the world, as you can see. And those little circles, if you want to look at the charts in your private time, for example, by asking Grayson to send them to you, show you the range of countries that have introduced uh trade defense measures against uh Chinese dumping or cheap Chinese imports. So, it's not just the usual suspects, which is the US, the EU, Japan, Australia, etc., etc., but also Mexico, Indonesia, Brazil, uh South Africa, India, Thailand, Vietnam, lots of countries are basically getting um concerned really about the inroads being made into their own domestic industries by uh Chinese imports. So, this is a big problem for um the Chinese um economic policymakers going forward, because this isn't going to end um, and it will be something that they will have to manage.
So, finally, let me [clears throat] get to my kind of conclusions here. Is China on a plateau or is it at a precipice? Put another way, is China facing a doom spiral, or can manufacturing-led growth um and dominance lead them out of this um difficult kind of set of circumstances? Well, um, some of the things that I've said already, I just kind of repeat. You know, two things can be simultaneously true. You can have, for a while at least, a very, very dynamic, efficient, modern sector which is the envy of the world, but also um a rest of the economy which is suffering, and uh, and which is um replete really with imbalances and misallocation of capital and inefficiency and waste, loss, corruption. Um, and these two can persist as kind of bedfellows for a while, um, but obviously not forever, one imagines.
Another point about this really is again, uh, because you read about it very often about, you know, that China is ahead in this, and China is ahead in that, and Baidu has got, you know, a margin over, you know, ChatGPT, or it doesn't, um, you know, semiconductors, artificial intelligence. I mean, there is this whole kind of issue of uh technological dominance, which is important, but I don't think it really makes any sense to assess um, you know, whether China is making huge, huge progress or huge regress by simply looking at its accomplishments in technology, because China's always been good at technology. It's always been good at um entrepreneurial initiative, and it's always been quite innovative, and I don't think there's any reason why we should expect this to stop. Far from it. Um, but the area that is relevant, I think, in my judgment, as to whether we should, what we should be focused on, is really on not so much on the technology, because China and the United States, or China and its allies, and the United States and its allies will constantly be in competition and try to leapfrog one another in different technologies. But in terms of macroeconomic policy and governance, and whether the door is open to more inclusive and robust um institutions and political change, that really is where the focus should be. And on this basis, I think China is at a kind of a plateau, and has to be quite careful that it stays there and doesn't allow its macroeconomy, macroeconomy, to deteriorate to the point where it drives it closer to that edge.
So, that's where I'm going to finish. Um, sorry if I just sort of went on for a little bit too long. Um, but I'm sure we do have some um time for some questions. Well, thank you very much for that. [music] [music] >> [music]