Should China “lessen the role of the state”?

Every so often the Financial Times publishes its periodic instruction to China on how to run its economy. The latest comes from Eswar Prasad of the Brookings Institution, and it follows the established template: concede the achievements in a subordinate clause, then explain that catastrophe looms unless Beijing adopts the policy mix of the countries currently growing at a third of its rate.

China, we learn, is “in serious trouble” – while growing at about 4.3 percent, a figure no G7 economy has come close to in years, and roughly double the US rate. Inflation has turned positive after a deflationary spell; industrial profits are rebounding. In any other country this would be reported as a soft landing. For China it is presented as calm concealing catastrophe.

Let us take the prescriptions in turn.

First, China must “reduce reliance on public investment and exports”.

But since around 78 percent of China’s growth derives from capital inputs, cutting investment means cutting growth. This is simply the United States inviting China to engage in economic self-harm. Public investment is the key mechanism through which China has built its infrastructure, energy, transport and industrial base. It is also the mechanism through which it has lifted hundreds of millions out of poverty. And it is the mechanism through which it has built a high-tech economy that now competes with, and even out strips, the West across the board.

As the Marxist economist Michael Roberts has repeatedly shown, it is high levels of productive investment, not the debt-fuelled consumption favoured in the West, that drive sustained growth and rising living standards over time – exactly the relationship mainstream commentary is determined to invert.

On exports, trade accounted for about 20 percent of China’s growth in 2025; the rest came from domestic consumption and investment. Household consumption, meanwhile, grew at 4.4 percent, in line with GDP. The claim that China free-rides on foreign demand is simply not what the data shows.

Next, China must “move away from low-wage, low-productivity manufacturing”.

This is frankly bizarre, because two paragraphs later Prasad concedes that China “has achieved remarkable success in high-tech manufacturing” and is delivering on Xi Jinping’s push for a high-value-added economy. He is demanding a transition that he has just acknowledged is already well underway.

China’s share of global patents rose from four percent in 2000 to 26 percent by 2023, while the US share fell by more than eight points; it now produces about a quarter of the world’s semiconductors against 16 percent for the US; and it leads on green energy, electric vehicles, 5G and satellite navigation. Average urban real wages have risen something like 2,400 percent since 1978. Whatever else this is, it is not a low-wage, low-productivity economy standing still.

Then comes the central demand: China must “lessen the role of the state”.

Here we reach the actual argument, and everything else turns out to have been scaffolding. The reason China has not experienced a recession in fifty years – through the Asian financial crisis, the 2008 crash and the pandemic – is precisely the large state sector that can direct investment counter-cyclically and hold to plan targets when private confidence falters. This is the mechanism Roberts identifies as the decisive advantage of China’s model, and which its latest five-year plan places at the centre of national development. Prasad’s proposal is that China discard the very instrument that produced the results he spends half the article praising, in favour of the arrangement that has given the West secular stagnation, crumbling infrastructure and nearly two decades – and counting – of austerity.

Then the closing flourish: China’s claim to global leadership “rings hollow”, we are told, while it “continues to count on the rest of the world to keep its own economy afloat”.

This would be hilarious were it not so revealing. China runs a trade surplus approaching a trillion dollars and a net asset position with the rest of the world of around 18 percent of GDP. The United States runs a trade deficit of roughly $900 billion and net liabilities to the rest of the world of about 76 percent of GDP – a position that would trigger a currency run anywhere else, and is survivable only because of the dollar’s role as the global reserve currency. It is Washington, not Beijing, that is counting on the rest of the world to keep its economy afloat.

None of this is to pretend that China’s economy faces no difficulties. Youth unemployment is a serious problem, the urban–rural income gap remains wide, and the adjustment in the property sector has further to run. But these are the difficulties of an economy in transition to higher-value production – growing pains, not the symptoms of impending collapse.

And it is collapse, always, that the Western commentariat foretells. The “coming collapse of China” has been predicted, on a more or less annual basis, for the best part of thirty years. The Economist asked “Will China be next?” during the 1997 Asian financial crisis; then declared “A dragon out of puff” in 2002, on the eve of a decade in which China’s economy grew by 173 percent; and in 2010 it predicted that India would soon outpace it. As John Ross has observed, a remarkably reliable guide to China’s economic future has been to read these forecasts and confidently assume the opposite.

The advice on offer from the Financial Times is not, in the end, a serious diagnosis. It is an invitation to dismantle the socialist foundations of the most successful economic development in human history, and to replace them with a model that is visibly failing the countries that practise it. It is, thankfully, advice that Beijing shows no sign of taking.