Lessons from the market regulation mechanism and China's social and economic development

In the past decade, China's economic development has undergone major changes, one of the most notable features of which is the serious overcapacity and overstock of the society as a whole. This imbalance not only endangers the healthy operation of the economy, but also causes a huge waste of resources. A large amount of ineffective investment has not only exhausted the wealth accumulated over the past few decades, but also caused the government, enterprises and households to generally bear heavy debts, which in turn has led to the current weak total social demand and the economy has fallen into deflation and structural depression.

The fundamental reason for this situation is that in the process of national development, the government has ignored the decisive role of the market mechanism in resource allocation and over-reliant on administrative means for economic intervention, thus deviating from the basic laws of economic operation.

In a healthy social and economic system, the market mechanism is like the human body's autonomous metabolic system, which can automatically adjust the rhythm and direction of economic operation according to changes in supply and demand. When administrative intervention is excessive, it will inevitably disrupt the self-regulatory function of this mechanism, leading to system imbalance or even dysfunction. The problems that have frequently occurred at the social and economic level in China in recent years are the consequences of this administrative dominance and separation from market logic.

1. Imbalance in population structure: a typical failure of policy intervention

In the 1990s, the Chinese government implemented a strict family planning policy based on the judgment of "overpopulation". Although it controlled population growth in the short term, it laid a deep structural hidden danger. Today, the birth rate has dropped precipitously, aging has accelerated, and the number of women of childbearing age has dropped sharply. It is predicted that if the current trend remains unchanged, China's population may drop below 1 billion in the next 30 years, or even fall to about 600 million. Urban obstetrics and gynecology hospitals, kindergartens, primary and secondary schools have been largely closed, social vitality has declined, and labor shortages are looming, which has greatly constrained economic growth.

Although the policy has changed from "restriction" to "encouragement", including the full liberalization of the three-child policy, the introduction of birth subsidies, and the extension of maternity leave, the results have been minimal. Once the population structure is distorted, it is extremely difficult to repair in the short term. This demographic change has become a systemic risk in the country's development prospects, and it also reminds us deeply that for a complex system like population that affects the country's destiny, government intervention must be based on long-term laws and careful considerations, and blind administrative control is not advisable.

2. Real estate and urbanization: debt traps caused by non-market dominance

In the past decade, the pace of urban construction in China has been led by the government, far exceeding the actual market demand, resulting in overdevelopment of real estate, and a large number of "vacant buildings" and "unfinished buildings" across the country. Real estate prices are abnormally high, and residents' leverage ratios remain high. The "three high debts" pattern of government, enterprises, and households has gradually formed, and debt risks have been concentrated and exposed, becoming a heavy burden on social and economic growth.

In contrast, mature market economies such as North America and the European Union, whose housing construction is mainly controlled by market regulation, are not prone to such serious structural surpluses. It can be seen that the market mechanism is the key to preventing resource mismatch and ensuring the healthy development of real estate.

Someone vividly said: "The wealth accumulated in 40 years of reform and opening up has been swallowed up by houses." This is not an exaggeration. Real estate has become a tool for the whole nation to incur debt, overdrawing not only future income but also future consumption capacity. The heavy debt has caused the entire society to fall into a dilemma of demand contraction and growth.

3. "Big project impulse" and mismatch of national resources

In recent years, China has launched a large number of grand engineering projects, such as Xiongan New Area, "One Belt, One Road", domestic chips, high-speed rail, airports, new energy, etc. Many of these projects are based on administrative promotion rather than market demand, resulting in low return on investment and even a large number of idle assets

For example, Xiongan New Area, as a "millennium project", has invested huge amounts of money, but the city is still seriously vacant and the industry has not yet been formed. Although its high-speed railway station is the largest in Asia, it has few passengers and it is difficult to drive the development of the surrounding areas. Another example is the "Belt and Road" initiative. Due to insufficient market demand and operational difficulties, some projects of ports and airports built by China in Sri Lanka, Pakistan and other countries have fallen into debt crises and even affected bilateral relations.

Such super-large projects fail to follow market logic and risk assessment, and are prone to cause systemic fiscal pressure. In market economies, this phenomenon often leads to the collapse of commercial banks and financial system crises; in China, although the national finances are used to cover the bottom, the final cost still needs to be borne by all citizens.

Conclusion: Let the market play a decisive role in resource allocation

The difficulties faced by China's current economy are a severe test of the "market regulation mechanism" and a profound revelation. Government intervention is not completely useless, but its role should be to "supplement" the market rather than "replace" the market, and it must not forcibly intervene in violation of economic laws.

The economic governance of a modern country should gradually shift from "administrative command-led" to "market mechanism-based, rule of law-based". Only by respecting market laws, optimizing the role of the government, and stimulating corporate vitality and residents' confidence can China's economy achieve long-term healthy and stable growth.

Peter Lee in Toronto