[Interview] Yaseng Hwang "China Trapped in Middle-Income Trap... The Core of Overproduction Problem is Low Purchasing Power"

[Insights from US Scholars and Experts] ②
Yasheng Huang, Professor at MIT Sloan School of Management
China's Debt-Driven Infrastructure Investment Over Economic Reform
Leading to Productivity Decline and Entry into Low-Growth Era
Low Education Levels and Low Wages Reduce Purchasing Power
No Buyers Despite High Production
Chinese Government Control Undermines Economy and Corporate Competitiveness
South Korea Should Strengthen Ties with the US, Expand Trade Partners, and Reduce Dependence on China

Editor's NoteWith the U.S. presidential election just five months away this November, global macroeconomic uncertainties and geopolitical risks continue to persist. The U.S.-China technological hegemony war surrounding advanced industries such as semiconductors and artificial intelligence (AI) is intensifying, and the U.S. has signaled a second trade war by raising tariffs on 'overproduced' Chinese imports. While global financial markets are solely focused on a U.S. interest rate cut, the Federal Reserve's pivot timing remains uncertain as the U.S. economy continues to prosper. Countries around the world, including South Korea, are closely monitoring the repercussions of U.S.-China conflicts, U.S. industrial and trade policies, and changes in the macroeconomic environment, seeking ways to respond. Accordingly, Asia Economy has planned an interview series covering four sectors?U.S. macroeconomics, trade, China, and semiconductors?featuring American scholars, experts, and former trade officials to examine key issues, future prospects, and response strategies. The interview articles will be published in the order of Chris Miller, Professor of World History at Tufts University's Fletcher School; Yasheng Huang, Professor of International Management at MIT Sloan School of Management; David Wessel, Senior Fellow at the Brookings Institution and Director of the Hutchins Center on Fiscal and Monetary Policy; and Barbara Weisel, former Deputy U.S. Trade Representative (USTR).

Professor Hwang Yaseng, an international business professor at the Sloan School of Management, Massachusetts Institute of Technology (MIT), USA, is being photographed during an interview with Asia Economy in Washington D.C. Photo by Haeyoung Kwon, Washington correspondent

"The problem of China's overproduction is not government subsidies but the low wages and consumption relative to GDP, which means there is no purchasing power to absorb the massive production. Also, productivity has significantly declined as a result of halting reforms and relying solely on debt for growth over the past 20 years. China is now facing the 'middle-income trap.'"

Yasheng Huang, a leading China expert in the U.S. and Professor of International Management at the Massachusetts Institute of Technology (MIT) Sloan School of Management, recently stated in an interview with Asia Economy in Washington D.C. regarding the controversy over China's overproduction, "The fundamental issue is not that China subsidizes electric vehicles or solar panels, but that the fruits of growth are not reaching the people."

Earlier, the Biden administration significantly raised tariffs on Chinese electric vehicles, steel, aluminum, semiconductors, and solar cells last month under Section 301 of the Trade Act, citing China's overproduction and unfair trade practices.

Professor Huang assessed China's current economic situation as having entered a low-growth era due to a sharp decline in productivity caused by debt-based infrastructure investment. He said, "The Chinese government monopolizes decision-making processes, leading to misjudgments and inefficiencies. In the long term, productivity must be improved, and purchasing power increased through investment in education, wage growth, and expansion of the middle class."

Regarding South Korea's strategy amid the U.S.-China de-risking era, Professor Huang advised, "South Korea should closely align with the U.S., which shares values such as democracy and market economy, while diversifying trade partners to Southeast Asia, India, Mexico, and others to reduce dependence on China."

The following is a Q&A with Professor Huang.

- Is the Chinese economy in crisis?

▲ The current situation in China should be viewed more as an economic slowdown rather than a crisis. China's GDP growth rate over the past decade (2012?2021) was between 6% and 8% (except 2020). Now it is around 5?5.5%. It will likely fall to 4% or even 3% in the future. It is a difficult challenge for China, which has experienced rapid growth until now, to adapt to economic slowdown and low growth.

- What is the biggest problem of the Chinese economy?

▲ Over the past 20 years, China has focused on increasing debt rather than economic reform. In the 1980s and 1990s, many reforms such as economic reform, privatization, and globalization were implemented, but efficiency-oriented reforms have disappeared in the last 20 years. Instead, China borrowed money to build buildings and develop cities, investing in infrastructure. This is inefficient and unsustainable. China must grow through long-term productivity improvement. Although investment should have been expanded, it was not, causing economic growth to slow. China's productivity figures have deteriorated significantly. China's total factor productivity (TFP) growth rate has slowed to one-third since the 2008 global financial crisis. Before 2008, the TFP growth rate was about 3%, but now it is around 1%. Productivity has sharply declined. As the economy requires more resources, China had to borrow more and now faces the challenge of repaying that debt.

- Has China fallen into the 'middle-income trap' of prolonged stagnation? Can China overcome this and advance to a developed economy?

▲ China faces a major problem that South Korea and Taiwan did not experience. While China invested in buildings, airports, and highways, it did not invest sufficiently in education. About 40% of China's 1.4 billion population lives in rural areas and does not receive quality education. Countries stuck in the middle-income trap mostly have low education levels. In contrast, South Korea and Taiwan succeeded because their people received excellent education and did not suffer from the middle-income trap. (Low education levels do not lead to expanded purchasing power.) Moreover, compared to the U.S., China's GDP is relatively small, and purchasing power is weak. Based on purchasing power parity (PPP), China's per capita GDP is about 20% of the U.S. China is not a wealthy country but still a middle-income country. Despite rapid growth, it faces the middle-income trap. Again, the biggest cause is education.

- There are debates about 'Peak China' and concerns that China might fall into a 'lost 30 years' like Japan.

▲ China is different from Japan. China has developed entrepreneurship, competitiveness, and manufacturing, and is globalized. Therefore, it does not need to spend lost decades like Japan. The problem lies in Chinese politics, i.e., the Chinese government. The government always tries to control the economy, society, and people, and does not entrust decision-making to the market and entrepreneurs. Government decisions lead to misjudgments and inefficiencies. The government is eroding entrepreneurship and competitiveness.

- The controversy over China's overproduction and 'China Shock 2.0' is spreading.

▲ It is clear that China is overproducing and oversupplying. The fundamental problem is not that China subsidizes electric vehicles and solar panels, but that a large portion of GDP growth does not reach the people. China is strong in production but weak in consumption. The consumption level relative to GDP is very low. The cause is low wages. If wages are low, no matter how much is produced, there are no buyers. South Korea also controlled wages and labor unions during the Park Chung-hee developmental dictatorship era, but over time wages rose, and consumers gained purchasing power for products and services created by the economy. When a middle class with purchasing power emerged, South Korea changed its strategy. South Korea's private consumption ratio to GDP is 48%. The U.S. is 67%. Income absorbs production. In contrast, China is below this at 38%. Again, the Chinese political system is the problem. In democratic systems, workers receive higher wages, but this is not the case in China.

- There are concerns that China's overproduction will trigger global inflation and lead to a domino effect of tariff increases.

▲ Raising tariffs could increase inflation, which is not good for the U.S. economy. However, in the long term, if imports of non-Chinese products increase and China adjusts its economic strategy accordingly, this could be positive. The biggest variable is Chinese politics. It is uncertain whether the Chinese government will change its economic strategy.

- President Joe Biden's China trade policy is becoming similar to former President Donald Trump's.

▲ President Biden made a mistake in his first year in office in 2021. He should have negotiated tariffs with China but did not lower the tariffs imposed by his predecessor, former President Trump. During the COVID-19 pandemic, which caused global supply chain disruptions, China still produced goods that the U.S. could not source elsewhere, which ultimately contributed negatively to rising U.S. inflation. It would be much better to lower tariffs on many products that the U.S. does not want to produce domestically. The recent tariff increases on Chinese electric vehicles and solar panels by the Biden administration are more political than economic issues. The U.S. market is not important for China's electric vehicle industry. This is a political game ahead of the next election.

- Can the U.S. prevent China's rise amid the U.S.-China hegemonic war?

▲ If there is any country that can stop China's rise, it is only China itself (politics).

- South Korea's top export destination has shifted from China to the U.S. Is South Korea's de-risking from China now in full swing?

▲ From an economic perspective, it is wise for South Korea to maintain good relations with both the U.S. and China. However, politically, it is difficult. China supports North Korea and clashes with the U.S. over Taiwan issues. The trilateral alliance of South Korea, the U.S., and Japan is also becoming closer. For South Korea, the U.S., which shares values economically and politically, is important. South Korea must reduce economic dependence on China. By developing relationships with various countries such as Southeast Asia, India, and Mexico, South Korea should keep options open. Regarding de-risking from China, there is no choice for many countries. China supports Russia and Palestine, which many Western countries oppose. South Korea must also prepare for possible financial and economic sanctions against China.

About Professor Yasheng Huang

Professor Yasheng Huang is one of the leading China experts in the U.S. He is a Professor of International Management at the Massachusetts Institute of Technology (MIT) Sloan School of Management. He has also served as a professor at the University of Michigan and Harvard Business School. He is a member of the Asia Society Task Force on U.S.-China policy and serves as an advisory board member on U.S.-China cooperation at top U.S. think tanks such as the Brookings Institution and the Center for Strategic and International Studies (CSIS), which have strong influence on government foreign policy. From 2023 to 2024, he is a research fellow at the Kissinger Institute at the Woodrow Wilson Center in Washington D.C.

Professor Huang is highly critical of the Chinese-style socialist market economy and political system. In his book published last year, The Rise and Fall of EAST, he focused on how China's Examination system (Exams), Autocracy, Stability, and Technology contributed to China's success and why they could lead to its decline. Born in Beijing, China, he emigrated to the U.S. and studied at Harvard University and the Harvard Kennedy School.

This content was produced with the assistance of AI translation services.