Made in China 2025' Succeeded But Alarmed the West

It helped China pivot to high-end production but provoked a backlash that has added to its challenges

- AJIT RANADE

An after-effect of the global financial crisis of 2008 was that by the following year, China's exports dropped by 16%. This led to widespread factory closures and mass layoffs in provinces like Guangdong. China's prosperity had been built on the large-scale export of low-cost, labor-intensive manufactured goods for three decades. The crisis exposed the vulnerability of that strategy and overdependence on Western markets. Also, China was stuck in low-end assembly roles in global supply chains, with low value addition. Undoubtedly, its economic reforms from 1978 onwards made it possible for 300 million workers to move from rural and agricultural livelihoods to higher-paying industrial and urban jobs. But 2008 was a rude reminder of several weaknesses. Real wages had not grown much. As a result, consumption spending was stuck at just 35% of GDP even as late as 2009. Domestic demand could not pick up the slack caused by falling external demand.

In 2009, Chinese policymakers responded with a 4 trillion renminbi stimulus, with big spending on infrastructure. This restored growth to 10% next year, but also led to industrial overcapacity in sectors like steel and cement, and reinforced the dominance of state-led investment. Consumption was not picking up even as deflationary pressures were building, while state-owned enterprises were struggling, plagued by overcapacity. This in turn caused a debt explosion. China's debt has grown from 150% of GDP in 2008 to about 280% now. A real estate over-build-up made a crisis in this sector imminent, as was later demonstrated by the fall of Evergrande.