Creative Destruction

Weekend Special From Bloomberg Businessweek

Businessweek — China Learned What the US Forget: Creative Destruction 

Bloomberg Businessweek

China's economy is currently navigating a complex landscape of challenges, including rising US tariffs, a struggling property market, and deflationary pressures. Contrary to expectations of a large stimulus package, Premier Li Qiang is shifting away from traditional Keynesian economics. Instead, China is embracing the concept of "creative destruction," championed by economist Joseph Schumpeter. This involves allowing inefficient industries to fail, paving the way for innovative sectors to emerge and drive growth.

This strategic shift is already visible in China's approach to its property sector, where the government is permitting developers to face the consequences of overbuilding and excessive borrowing. The real estate downturn has had significant spillover effects, impacting industries like steel and leading to decreased household spending. However, this restructuring is freeing up capital and labor for more productive areas. High-tech industries, such as electric vehicles and artificial intelligence, are poised to increase their contribution to China's GDP.

The embrace of "creative destruction" fosters intense competition in emerging sectors. In the electric vehicle market, numerous companies like BYD, Geely, Nio, and Xiaomi are driving rapid innovation. Similarly, the e-commerce arena is fiercely contested, and China has made significant strides in artificial intelligence. While the transition from a Keynesian approach may not be seamless, China's focus on innovation and competition signals a move towards a more sustainable and dynamic economic future.