If Xi Jinping was hoping for an uneventful and stable 2022 before his planned “re-election” this fall, he must be disappointed. In January I wrote that “China’s economic future isn’t looking all that bright and is starting to have political implications for President Xi Jinping.” That turned out to be an understatement.
Today China’s economic prospects look significantly weaker than at the beginning of the year, with the International Monetary Fund cutting its forecast for Chinese growth to 4.4% while other economists predict figures below 4%. Capital has been fleeing the country, with foreign investors dumping $18 billion in Chinese bonds and more than $7 billion in Chinese stocks in March alone. What happened? Four things:
First, the crisis in China’s property sector, which represents as much as 29% of gross domestic product, has proved worse than expected ever since real-estate giant Evergrande went into default last year. The contagion has spread and at least 10 Chinese developers have defaulted on dollar-denominated debt, spooking investors.
Second, Mr. Xi’s crackdown on China’s technology sector has helped drive down the market capitalization of China’s 10 largest technology companies by more than $2 trillion over the past year. Those companies are now laying off thousands of people.
Third, the invasion of Ukraine by Mr. Xi’s “best friend in the world,” Vladimir Putin, has sent energy and commodity prices soaring and has snarled supply chains already backed up by the pandemic. That’s terrible news for the world’s largest manufacturer, exporter and energy-consuming economy.
Fourth, there is Mr. Xi’s insistence on China’s zero-Covid strategy, which has led to mass lockdowns in cities including Shanghai. Mr. Xi declared “victory” over the virus last year, having staked his political reputation on a strategy he declared superior to those employed by the West. In Chinese Communist Party politics, the leader can never be wrong on anything, so Mr. Xi can’t be seen to be changing his zero-Covid policy—at least not until the 20th Party Congress in November has concluded and Mr. Xi is safely reappointed. But some 373 million people in 45 cities have been under some kind of lockdown since late April. Those places represent roughly 40% of China’s total economic output, or around $7.2 trillion in annual GDP.
In combination, these factors are enough to make Mr. Xi’s formal target of 5.5% growth this year look unrealistic. For Mr. Xi, failing to reach the target would be politically disastrous. He has to find a way to end the year with the right number. In April he reportedly told party officials that China’s economic growth must outperform that of the U.S. this year to demonstrate that the country’s authoritarian system is superior to that of a declining West. That will be difficult given that China’s private sector—the engine of its economic growth—has been marginalized by Mr. Xi as he has pushed the center of economic gravity toward the state.
Mr. Xi has therefore ordered a wave of fiscal and monetary stimulus. In late-April meetings, he said China needs to make “use of a variety of monetary policies” and “strengthen infrastructure construction” to “expand domestic demand.” To justify this, he declared an urgent need to build infrastructure necessary to ensure “national security” in the face of potential “extreme situations.”
He also signaled a reluctant pullback on the tech crackdown. The latest meeting of the Politburo notably pledged to “promote the healthy development of the platform economy,” hinting at possible relief for China’s beleaguered internet companies. Chinese regulators have reportedly met with tech executives to explain that they will ease their regulatory onslaught.
None of this will solve the Chinese economy’s most fundamental problems. Stimulus measures won’t restore confidence in a private sector that—having learned the hard way that Mr. Xi will always put political control before economic freedom—is very much once bitten, twice shy. Nor will stimulus spending do more than paper over the reality that China’s investment-driven economic model is reaching its limits. China’s population is peaking and aging rapidly. Its workforce is shrinking and productivity growth is stalling.
Recent economic assessments have predicted a sharply slowing Chinese growth trajectory, to around 3% by 2030 and 2% by 2050. If this proves to be the case and Mr. Xi doesn’t radically change course, the global strategic and economic significance will be profound. China would cease being the world’s growth engine. It may not surpass the U.S. as the world’s largest economy by decade’s end after all—and if it does, it won’t be by much.
The economic problem rests with Mr. Xi and his pivot to the state. He unleashed the crackdown on the property and tech sectors. He described these decisions as part of an overall policy framework that has moved Chinese economic policy well to the ideological left. Mr. Xi has begun strangling the goose that, for 35 years, has lain the golden egg.
The big question is whether Mr. Xi has gotten China’s underlying policy direction badly wrong—and if so, if he is willing and able to change course. If not, the world may enter an even more dangerous phase if Mr. Xi turns to nationalism and greater foreign-policy assertion to reinforce his domestic political legitimacy in the face of a slowing Chinese economy
The only way out of this future is for Mr. Xi to lead China on a more sustainable policy path. But given his Marxist-Leninist ideological predilections, that will be hard. As the American economist Dan Rosen put it in a recent essay: “China cannot have both today’s statism and yesterday’s strong growth rates: It will have to choose.”
Mr. Rudd is global president of the Asia Society and author of “The Avoidable War: The Dangers of a Catastrophic Conflict between the U.S. and Xi Jinping’s China.” He served as Australia’s prime minister, 2007-10 and 2013.
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