Inspiration at the China Development Forum

Pespiration vs. inspiration as China's toughest challenge on the path to high-income status

After last year, I wasn’t certain I would be back. But I was welcomed warmly to the annual China Development Forum, my 24^th consecutive appearance in what I have long called China’s most important conference. I even had a cameo role in the 25^th anniversary video that was shown at the opening night banquet. As I concluded in last year’s missive, “it pays to show up.”

The conference is shorter than it used to be and lacks the spirited back-and-forth debate and engagement of its earlier years. You need to work harder to read between the lines and distill the important messages. But for seasoned veterans — and I would put myself in that category — it remains a great opportunity to get a good sense of China’s shifting sense of priorities and risk assessment. Three issues stood out:

• First, the consumption focus is now legitimate. I have used the CDF to pound the table on this theme for seventeen years in a row. I went back and hunted through my files and found a 2008 presentation entitled “China’s Consumer-led Rebalancing Imperatives.” Each year thereafter, I updated and tweaked the message, but my analysis has remained largely the same. I urged Chinese authorities to focus on three building blocks of a consumer society — services led employment growth, urbanization-led increases in real wages, and social safety net reforms to reduce the excesses of fear-driven precautionary saving. Over the years, my friends in China urged me to stick with the message, suggesting that someday, it might sink in. That day is now at hand. But focus and action are two different matters. The challenge has shifted as to how China might convert that realization into action.

• Second, Beijing now takes external risk for granted. From the Asian Financial Crisis of 1997-98, to the Global Financial Crisis of 2008-09, and now to the trade shocks of Trump 1.0 and 2.0, every ten years or so, export-led China has had to scramble for resilience. Premier Li Qiang opened this year’s CDF by underscoring China’s well-developed arsenal of resilience — pro-active fiscal policy, accommodative monetary policy, and intensified focus on household consumption. Unlike earlier years, when Chinese senior leaders addressed the perils of external shocks, there was no expression of moral outrage directed at the mounting forces of de-globalization. It was more of a sense of acceptance, accompanied by Premier Li’s conviction that there was ample policy space for a resilient and prepared China to counter yet another external threat.

• Third, there was a clear sense of disbelief as to what is currently going on in the United States. Notwithstanding a steady build-up of anti-China sentiment in America over the past fifteen years, the CDF crowd has long displayed an almost reverential feeling toward the US. Seven years ago, at the onset of Trump’s tariff war, there was a clear sense of indignation and anger directed toward Washington. That has now given way to a grim sense of acceptance of a nation that has now lost its way. Many Chinese admire Donald Trump as a deal-focused businessman. They clung to that view during his first administration. That is no longer the case. While there is hope for a Trump-Xi “birthday summit” in June, such an event is no longer viewed as the ultimate solution to an increasingly worrisome conflict. After all, two such meetings in 2017 failed to prevent the first round of tariffs that followed quickly in 2018-19. Few at CDF-2025 expressed hope for a different outcome this time.

While the tightly scripted public sessions of the CDF offered little chance to probe these issues during official sessions, I found plenty of opportunities to do so on the sidelines and in several closed-door meetings — before, during, and after the CDF. In doing so, I framed the Trump shock in terms that were all too familiar to the Chinese, as a manifestation of the early stages of “America’s Cultural Revolution.” There were a few who dismissed this comparison, especially some Americans. One went so far as to claim that he came to China for the first time right after its Cultural Revolution, when China was in shambles. As bad as it may now seem in the US, he countered, there is no comparison with he saw back then.

Fair point — but not really the point I was making. I see the US as currently in the early stages of its upheaval which is very different than comparison to China of the late-1970s. Both periods of chaos qualify as revolutionary in relative terms, in that they deviate so sharply from previous norms. While the US may never experience the sheer horrors like those inside of China in the late 1960s and early 1970s, the current deviation from America’s earlier norms may be every bit as extreme. Moreover, I stressed what I believe is a key difference between the two Cultural Revolutions: China’s chaos was inward focused with literally no impacts on the rest of the world. The US strain has both internal and external dimensions to its shock, which could have major impacts on the rest of the world. As an aside, this is the first time in all my countless trips to China over the years when I found my Chinese counterparts willing and open to discuss their Cultural Revolution.

I went on to suggest that China’s vaunted resiliency framework might be much tougher to execute than was suggested at the CDF. With basically 20% of its GDP still going to exports, there is considerable vulnerability to another external shock. I cautioned that the export-diversification strategy of Trump 1.0 that enabled China to offset a loss of US external demand by shifting into other markets, especially Vietnam, Russia, and India, may not work as neatly this time. Not only is China’s economy weaker than it was back then, but the trade shock of Trump 2.0 is likely to be far more multilateral in scope. Trump’s so-called reciprocal tariffs, slated to be announced on what he has dubbed the “Liberation Day” of April 2, underscore the distinct possibility of an outright contraction in global trade. Diversifying into a declining trade cycle puts a formidable crimp into China’s time-tested resiliency tactics.

Finally, I also voiced concern over a key overlooked aspect of the consumption story — that the missing link of reducing fear-driven precautionary saving requires a significant shift in the behavioral response of Chinese consumers. It is relatively straight-forward to put policies into place aimed at boosting labor incomes. It is considerably more difficult to change behavioral incentives, confronting the deeply ingrained emotional sense of fear of an uncertain future that fosters precautionary saving and inhibits discretionary consumer demand. My long-standing advocacy for more robust Chinese safety net reforms has always been aimed at replacing this fear with confidence.

I went on to argue that a comparable behavioral constraint is bearing down on private sector Chinese entrepreneurs, what I have called the animal spirits deficit. The regulatory crackdown on China’s Internet platform companies of mid-2021 brought this issue to a head, posing a major challenge to what had long been a very dynamic private sector. Last month, on February 17, Xi Jinping attempted to unwind this campaign, summoning many of China’s tech leaders to a well-publicized meeting aimed at boosting private sector sentiment. I suggested that it could well take more than this on-again, off-again oversight campaign to reignite animal spirits — the “spontaneous urge to action” that Keynes stressed was so vital for dynamic market-based capitalist economies.

China is at a critical transition point on its development trajectory, closing in on the threshold to a high-income society. History is replete with many nations who stall out at this threshold, never quite getting to the promised land as the so-called middle-income trap might suggest. While that challenge was very prominent in CDF discussions this year, I was left with an uneasy sense of China’s understanding of this key issue.

For most of the past forty-five years, the Chinese economic miracle has been driven largely by mobilizing factors of production, especially labor and capital. That strategy worked well in the early stages of its development. But as China closes in on living standards of the advanced economies, the perspiration of factor mobilization will need to give way to the inspiration of organic changes in deeply entrenched behavioral norms. At CDF 2025, there was a clear understanding that the road to high-income status is not easy. For China, the inspirational impetus to the last mile may well be the toughest mile of all.