Deng Xiao Ping’s evangelism of socialism with Chinese characteristics promoted wealth creation and the idea that “it is glorious to be rich” even though he didn’t explicitly say so. The seductive appeal of Gǎigé kāifàng (opening up and reform) saw the United States facilitate China’s entry into the WTO and American and European enterprises export growth and jobs as they poured billions as FDI in pursuit of productivity and profitability.
The social contract scaffolded the rise of the Chinese economy from under $300 billion to over $19 trillion and per capita incomes for the average Chinese from under $300 to $12,000 plus. The western world described China as the miracle economy and Beijing defined the new millennium as the Chinese century.
Cut to the present and the miracle and the social contract seems to be coming apart. In 2023, the Chinese economy sputtered to a decadal low of 3% in 2022, the post-Covid reopening is sub-par, exports slumped threatening recovery, its central bank is struggling to prop the currency, its real estate sector is in a shambles, youth unemployment is over 21%.
The creeping consequences of structural issues and the return of paranoid politics under Xi Jinping are manifest. Earlier, the discourse was when China would overtake the United States. The question now is if China’s growth can sustain and rise to top the global GDP rankings. Epithets ranging from ‘Peak China’ to ‘Japanification’ define the debate.
In 2023, the Chinese people, particularly the youth, find themselves facing a future with fewer liberties and poorer prospects!
Viewing the decline through the prism of Xi’s reign and rhetoric is instructive.
Youth unemployment has been spiralling for over a year. In itself the phenomenon is paradoxical in a country ageing rapidly. Total fertility rate in China at 1.2 is lower than that in Japan and in 2022 its population declined in absolute terms.
The Chinese youth—over 11.58 million graduated this year—have been restless over lack of opportunities. In an earlier era, under Hu Jintao and Jiang Zemin, the regime would calibrate context and comments to damp down discontent. Not so with Xi.
On May 4, designated as Youth Day in China, Xi told them “the countless instances of success in life demonstrate that in one’s youth, choosing to eat bitterness is also choosing to reap rewards”.
Under Xi the buzz word among the youth is neijuan which translates as endless self-flagellation.
The Property Ponzi
Home ownership was opened up in China in the mid-1990s. Households seeking returns saw this as an avenue for building life-time equity and rushed. It is estimated that China’s property market is worth $62 trillion, accounts for between 17 and 29% of GDP depending on definitions, and about 70% of household assets.
The real estate sector is a driver of wealth effect and GDP growth. It is also a constant in China’s economic crises. Developers match long-term trends of population with medium-term view of land and borrow short term, effectively setting up a Ponzi funded by buyers, banks and shadow banks. Bailouts followed in the earlier era.
How does the Xi regime manage need and control greed in a sensitive sector? Tactful balance is off the table and sermons signal policy trajectory.
Xi Jinping told the Party in 2017 “we must not forget that housing is for living in, not for speculation”.
Buyers and speculators brushed the sermon aside even though realty majors were being downgraded. By 2021, the bubble had expanded. Xi repeated the “housing is not for speculation” warning and signalled there would be no bailout. In 2023, Evergrande declared bankruptcy and Country Garden is teetering on the brink of insolvency.
The froth in hope is ebbing. Meanwhile, developers in Tongling, west of Shanghai, as per Nikkei Asia, are advertising “buy one floor get one free” deals.
Return Of Ideology
The descent of China’s economic fortunes coincides with the ascent of Xi Jinping. Barring post-Covid 2021, GDP growth has not crossed the 7.9% recorded in 2012.
In the run-up to Xi’s anointment for a third term in 2022, his votaries in China argued “it would be misleading to lay all of the past decade’s accomplishments and failures at Xi’s feet”, and that the biggest problems were inherited.
The argument is a defensive premise in search of subscription. Leaders must play the hand they are dealt. Large economies do slow down as they expand. Under Xi, poor strategy, laced with arbitrariness, accelerated the slide and expanded the magnitude.
Soon after taking over, Xi Jinping set the stage, airing the existential threat: “Why did the Soviet Union disintegrate? Why did the Communist Party of the Soviet Union collapse? An important reason is that ideals and beliefs have been shaken.”
This hypothesis informed and influenced politics and economics in China. Top down centralised policy making replaced bottom-up decentralised thinking. This was most visible in the Zero Covid policy which afflicted the economy with Long Covid.
Xi purged the landscape of competing ideas and individuals such as the former boss of the Communist Party boss Bo Xilai, a princeling and the son of one of the ‘eight immortals’. Xi also resurrected the theme of ‘common prosperity’ first popularised by Mao in 1953.
Policy followed politics. Chinese dollar billionaires in 2016 outnumbered those in America. The party which once encouraged “some people to get rich first” targeted icons like Ant Group and its chief Jack Ma—once lauded for creating wealth. In November 2021, Xi intensified the drive with a diktat to “regulate excessively high incomes” to encourage them to return more to society.
Threat to wealth brought in its wake a swathe of implications for growth.
China‘s growth model in the ‘miracle years’ was a catch-up race. As in many Marxist economies, consumption was curtailed and savings were corralled to create seed capital to be leveraged for state-led investment.
It opened up private farming, built manufacturing scale using zero cost debt and subsidies, lured FDI through local governments, enlarged export market share, instituted mega projects to keep the GDP meter ticking. The surge in growth perpetuated asset, debt and credit bubbles—total credit to non-financial sector as per BIS data, is 297% of GDP.
The low hanging fruits had been picked. Sustaining growth now called for the “productivity edge” and expansion of demand.
Xi had a formula. In April 2020 he declared “China is the world’s largest potential consumer market” and can sustain a new development pattern of “mutually reinforcing domestic and international dual circulation.”
The formula called for greater integration with global markets and expansion of domestic demand.
Domestic demand is daunted by a curiously Chinese paradigm. Gross domestic savings in China, at 46.1% of GDP, is highest among large economies—it is 29% in India, 26.9% in Germany, 25.1% in Japan and 17.4% in the United States. In stark contrast, final consumption expenditure is the lowest at 53.9% of GDP among large economies—it is 82% in the US, 74.9% in Japan, 73.1% in Germany and 71% in India.
And the saga of international circulation is challenged by China’s global conduct under Xi Jinping.
Decoupling And De-Risking
Xi has never been coy about his vision of a muscular China. As early as in 2013, he reiterated China’s intention to annexe Taiwan. In 2014 on the eve of his visit to India, Chinese clashed with Indian forces in Ladakh.
In 2019 Xi declared “we make no promise to renounce the use of force and reserve the option of taking all necessary means”.
In 2020, Chinese troops infiltrated into India in the Galwan valley. In June 2022 following the decimation of democracy in Hong Kong, he announced Hong Kong has been “reborn from the ashes”.
Military adventures and wolf warrior rhetoric are scarcely conducive for building trust. The Belt and Road Initiative fist mooted in 2013, in Kazakhstan, now costing around $4 trillion is described as the road to nowhere. The pandemic exposed the risks in the global supply chain which essentially was a Chinese supply chain.
In April 2020, Xi Jinping told his government “we must tighten international production chains’ dependence on China”.
In 2023 reshoring, nearshoring, friend-shoring and de-risking are active policy options exercised by developed and developing economies. The Molotov mix of economics and politics is fuelling the shift of supply-chain centres away from China—India, Vietnam and Mexico are emerging beneficiaries.
Mexico’s exports as a percentage of GDP has shot up from 31% a decade back to 43% and it surpassed China as the top US trading partner. China’s exports as a percentage of GDP slid from 24% in 2013 to 20% in 2022. Companies and countries are migrating from ‘just in time’ to ‘just in case’ economics. The phenomenon, informed by Russia’s invasion of Ukraine, has since accelerated.
History shows technology has fuelled the rise of industrial powers and challengers. A number of countries including the U.K., Denmark, Italy and Germany have initiated measures to wall off China.
The impact of actions by the United States—the reshoring under the Inflation Reduction Act, close scrutiny of Chinese investments by CFIUS, ban on hi-technology exports to China and on investments by U.S. companies in China—is showing up on data. Dollar denominated FDI dropped to $4.9 billion in the second quarter, the lowest in 25 years.
Geopolitics Of Economics
The question being aired is whether the 40-year boom is over! The jury is yet out.
Defining China’s decline as Japanification misses a critical fact. Japan grew rich before it aged and China is ageing before getting rich. In 1990, when Japan was described as a ‘bubble economy’, the average Japanese per capita income was over $44,000. In contrast, as the world debates the bubble in China, per capita income of the average Chinese is $12,720.
It is useful to note that economics and geopolitics have both entered new paradigms. The global economy is shifting from a period of insufficient demand to insufficient supply as it confronts a confluence of disruptions—climate change, accelerated induction of technology and ageing demography. This has implications for businesses and sovereigns. The rise in cost of capital renders the resurrection of the miracle economy rather implausible.
History may not repeat itself but it often rhymes. Xi Jinping, who is haunted by the collapse of the Soviet Union, may want to revisit history. It was economic, not ideological vulnerability, which triggered the disintegration of the Soviet Union.
China, it can be argued, is poised at a similar intersection.