I meant to post this about 6 months ago. I meant to do more research. But I didn’t, and I haven’t, so this will just be stream of consciousness, like always.

When I was a kid, China was the world’s miracle economy. In the 20th century, the world’s developing economies actually tended to grow slower than the developed ones, but when China adopted capitalism (or “socialism with Chinese characteristics”) under Deng Xiaopang, their economy exploded with exactly the sort of dynamic growth that western capitalists dream of.

The rural “villages” of China were themselves already the homes of 10 to 50 thousand people, and giving these people the right to start businesses and open up shops meant China speedran the exact same capitalist development cycle that Europe had in the 18th and 19th centuries, when most European cities were themselves just tens of thousands in population. A successful shoemaker had the right to keep his profits, buy better tools, a factory floor etc, and before you knew it shoe factories and businesses for every other consumer good were popping up everywhere in China. China became a bastion of consumer surplus at exactly the time the USSR was sliding into consumer shortages.

Not only that, unlike “Indian socialism,” “Chinese socialism” had emphasized universal literacy and education. Thus, when foreign firms invested to build factories using cheap Chinese labor, they could do so with the knowledge that every worker hired would be able to read their instructions as well as any reminder safety posters all around the factory floor. Retraining a laborer for a new machine could be as simple as giving them a pamphlet saying “we’re doing this now” rather than the floor manager having to walk each worker through their new job, as happens when retraining illiterate workers.

So not only did China’s domestic capitalists start churning out factories and goods, foreign investment poured into China in unimaginable sums, lured by the exceedingly low wages yet high skill ceilings of its massive, literate workforce.

Even the Great Recession of 2008 couldn’t break China’s stride. The Chinese Communist Party decided on a massive stimulus package to maintain their high rate of growth, which saw China posting near-double digit growth rates at a time when Europe and America languished in stagnation.

But 2008 was almost 20 years ago (feel old yet?). What’s happening today?

I’m just going to throw some factoids at you to get things started. In 2025 China experienced capital flight to the tune of about $500 billion, more than any other nation in the world. That’s more than the capital flight experienced by Russia, India, Mexico and Brazil combined for that year.

Capital flight, if you don’t know, is the large scale exit of money from a country. In a nation like America, capital flight is perfectly legal: if I think the American stock market is going to crash and the American government will go bankrupt, I’m free to sell all my stocks and buy Eurobonds instead. There’s no barrier to moving money around (anti-money-laundering regulations notwithstanding), and America usually records net capital *inflows* rather than outflows. This is because the vast majority of investors don’t think the American stock market will crash or the American government will go bankrupt, rather most investors currently see America as the safest port in the current storm, not perfect mind but better than the other choices.

China on the other hand has massive capital controls. To move large sums of money out of China requires clearance from the federal government of some kind, whether as a business or an individual. The fact that half a trillion dollars of money is still leaving China *despite* these laws (and their onerous penalties) shows just how little faith many investors (especially Chinese investors) have in the overall economy, and how much they’re willing to do to get around those laws and get their money somewhere safe.

This money leaving China is hardly consequence free either. That’s half a trillion dollars of spending and investment that has vanished. If that half a trillion was spent on goods and services inside China, then perhaps more young Chinese people could find jobs in the consumer economy. Instead, China is experiencing a youth unemployment crisis, with outside estimates putting Chinese youth unemployment at greater than 20%, over twice as high as in America or Mexico, and close to the worst nations in the EU like Spain.

This capital flight tells us there’s a problem *right now*: investors, especially Chinese investors, don’t think the Chinese economy is trustworthy. They don’t think their money can grow their and turn a profit, and even if they can eke out a profit, they think the Government could take it from them like what it did to Jack Ma and the school tutoring industry.

This capital flight *also* tells us there’s going to be problems in the future: money is fleeing China and so the next generation of business and jobs aren’t being created. Future growth will be well below where it “should” be if that capital was reinvested into the economy.

But ok, why are Chinese investors so down on the Chinese economy? They’re still the factory of the world, right? They’re still dominant in solar panels and EVs, right?

Remember that investment is forward looking. China built up its dominance throughout the 2000s, but its future might not be so bright. Chinese green tech companies are facing unprofitability now, and the possibility of further unprofitability ahead even if they “win” the price wars. Let me explain.

China is made up of provinces just like America is made up of states. And both provinces and the central government will give funding to companies to build factories and create jobs locally. The original spark to the Chinese solar/EV revolution was these very government subsidies.

But eventually some of those funded companies won’t be able to compete. It happens all the time, see Solyndra in America at roughly the same timeframe. In a normal economy a company that can’t make it, even if it received government funding, will eventually go bankrupt. But bankruptcy would lead to job loses, lose of province prestige, and perhaps social unrest. So the Chinese central and provincial governments have become experts at propping up failing companies.

A government might mandate that local banks give low or zero interest loans to keep bailing out one of these companies. Now there’s zero incentive for the bank to do it, it would rather write profitable loans to good companies instead. But the banks must answer to the government and so the loans get written. These toxic loans remain a drag on the bank’s balance sheet, reducing their profitability and reducing the amount of loans they can write to actually good companies.

Or perhaps a government might coerce a profitable company to merge with its unprofitable competitor. This new company is bigger sure, but the profitable bit is now being dragged down by having to still pay laborers and leases on the unprofitable bit. Sure they could try to restructure the unprofitable bit to make it profitable, without cutting jobs of course as the state doesn’t want them to do that. But trying to fix someone else’s company is like trying to rewrite someone else’s code, at times it’s just so much more efficient to start over and write it yourself. But efficiency isn’t being rewarded here, party loyalty is. So a profitable company gets an albatross hung around their neck, and their growth and efficiency is hamstrung going forward.

So we’ve got zombie companies propped up by toxic loans, plus severe misallocation of capital so that no province’s pet factory goes bust. All this leads to lower profits, and profits have indeed been unusually low in Chinese companies of late.

Low profits aren’t just painful for the fat cat sitting at the top of the ladder, they’re painful for everyone.

First, an unprofitable company can’t afford to grow by enticing the best workers with higher wages. Americas most profitable companies like Google, Facebook and so on also have the highest wages, as they can afford to compete for the best of the best. Unprofitable Chinese companies can’t afford to do that. Wage growth in China was actually lower than in America during the post-pandemic period. With American wages already so much higher than Chinese wages, this should be almost impossible, but the Chinese economy was just that stagnant.

Second, there’s the stock market. Americans by in large invest in the stock market for retirement, the majority of Americans own some sort of stock. The long-term reason for a stock to grow in value is if its profits are or expected to start growing soon. But Chinese companies are unprofitable. This means Chinese stocks don’t grow in value. And this means most Chinese people can’t have a nest egg for retirement like Americans can. The Chinese workers used to use real estate as their nest egg, with 70% of Chinese household wealth tied up in real estate (often second and third homes that are supposed to be sold or rented out in retirement). That real estate has dropped by half in value. Compare this to the numbers for America during the Great Recession, just 35% of American wealth was in real estate, and prices dropped by only a third. Chinese citizens have experienced a destruction of their household wealth on an apocalyptic scale, far in excess of anything experienced in America.

And even if you live in your home, you’re likely now paying back a mortgage on property worth less than the mortgage. You’re now inexorably tied to your current location, unable to move for a better opportunity because you literally can’t afford it, selling your house won’t cover your mortgage and let you get a new one for a new house. Many Chinese people are even paying mortgages for houses that don’t exist, mortgages written and sold to them with the expectation that the house *would* be built, but in the meantime the company building those houses went bankrupt.

So Xi Jinping is sitting there looking at an economy with the following characteristics:

• High youth unemployement
• Low investor confidence, everyone wants to get their money out of China even if they have to break the law
• Low profitability for companies
  • This in turn leads to low growth of the stock market, and the inability for the middle class to save and invest for retirement the way Westerners do
  • This also leads to low growth of wages
• Low consumer confidence. Chinese consumers just experiences Great Depression levels of wealth destruction, and most are preferring to stick their money in a bank rather than increase their spending or invest in their future.
  • These banks meanwhile are being told to take this consumer money and hand it as a loan to zombie companies that will never pay it back

And what does Xi Jinping do about all this? He makes it worse.

It’s clear that the state-backing of companies has created a problem. Low profits, low growth, and any growth to be had is sustained not by Chinese consumers (who are refusing to spend) but instead by selling products to foreign countries (who are increasingly erecting tariffs to “protect” local businesses). But Xi has doubled down on this state-directed, state-funded growth model.

China’s most recent innovations to kickstart the economy have been for the state to increase how much it directs the economy. Xi Jinping wants China to be the builder of the “new productive forces” of the 21st century. Things like AI, quantum computing, autonomous robots, etc.

From a “video game” perspective of economics, this looks like Xi Jinping is making all the right moves. Europeans online so often look back with despair at how their continent missed the boat on the tech industry. Why didn’t Europe build its own Google and Microsoft? Why are all the big tech companies American? So if you believe that these “new productive forces” are the future, then surely Xi is ensuring China won’t make the same mistakes as Europe did, China will be a leader, not a follower, in these new technologies.

But the world isn’t a video game. We don’t know beforehand which techs will succeed, or even which specific companies will succeed. Plenty of people thought that supersonic jets were the “new productive force” of the late 20th century, and I’ve extensively catalogued all of those failures. And some European tech companies *did* exist, they just didn’t grow as fast or were hamstrung by regulation and eventually got bought or outcompeted by American companies. If these European tech companies had instead been funded and propped up by European governments, they wouldn’t have turned into a European Google or Microsoft, they weren’t profitable or efficient enough, *that’s why they lost*. They’d have turned into a zombie company and a drag on government finances or a drag on the balance sheet of whatever bank was ordered to bail them out.

So the last time Xi Jinping unleashed the “new productive forces” of China, he created a green manufacturing economy that has nonetheless led to stagnant wages, low profits (which in turn leads to low consumer wealth since you don’t want to invest in the market), rock bottom investor confidence, and a huge number of zombie firms propped up by government handouts or by leeching off more profitable firms and banks. There’s no reason to believe that this current crop of “new productive forces” will do anything differently.

But Xi Jinping is at his heart a Marxist. At his heart, he clearly believes that the State (with a capital S) can always manage and direct the economy better than the private sector can. He joins the long list of ideologues who believed just that, from the Soviet Union to pre-1990 India to South America and beyond. And every time they were wrong.

China used to post double digit growth. Americans used to believe that China overtaking them was right around the corner. But at the rate they’re going, that’s not going to happen for a long time, if ever.