CHINA
21 April 2024
The end of the China miracle?
John West writes about the choices China’s faced with given Xi Jinping’s leadership objectives.
The Chinese economy bounced back with disappointing torpor from the country’s “zero-COVID” policy. And there was nothing from the recent meeting of The National People’s Congress, China’s top legislature, to suggest a return to rapid economic growth, although an ambitious growth target of around 5% has been set for this year.
China’s high growth phase, with three decades of rapid economic growth, averaging 10% per year until 2010, has seemingly come to an end. And with the US’ GDP of $76,330 being six times higher than China’s $12,720, catching up to US productivity levels is very likely out of reach for China – although China’s total GDP is in a similar ballpark, thanks to its enormous population.
How could it be that the threat of China overtaking the US could fade away?
Between 1949 to 1976, Mao Zedong was able to put China back together again after decades of war and warlordism. But policies like the Great Leap Forward and the Cultural Revolution cost millions of lives and caused immense suffering. And repressive, state-dominated economic policies meant most of the Chinese population was living in abject poverty at the time of his death.
The Chinese miracle began when Deng Xiaoping, the new leader, started granting economic freedom to farmers and small business people beginning in 1979, unleashing entrepreneurial spirit and energy. The privatisation of inefficient state-owned small- and medium-sized enterprises also sparked economic initiative.
Deng started gradually opening China to international trade and investment, initially through special economic zones. Over time, China would become the world’s leading trading nation and the “factory of the world”, especially after it joined the World Trade Organisation (WTO) in 2001. The resurgent economy lifted 800 million people out of extreme poverty.
But the stimulus laid the foundations for China’s current economic woes. Ever since, China has relied on debt-fuelled growth. Thus, China is now burdened with an enormous national debt of close to 300% of GDP, more than double that at the outset of the crisis.
With much of this fiscal stimulus being directed to the state-owned enterprises rather than the private sector, it is hardly surprising that China’s productivity growth since the crisis has fallen by half, to 2.25% a year. And this stimulus has been behind China’s real estate bubble, which has been driven by reckless lending and poorly-conceived projects that have left “ghost cities” with no residents.
China’s total population began to decline last year and its working age population could decline by nearly a quarter, to some 700 million, by the middle of the century. The declining numbers of workers is hurting the economy and national budget. And in the meantime, efforts to reignite fertility have fallen on deaf ears. This can have severe long-term implications for economic growth.
One bright spot is China’s impressive advances in many technology areas, like electric vehicles, and increasingly in semiconductors. According to the Australian Strategic Policy Institute, China leads in 37 of 44 technologies tracked in a year-long project, notably for electric batteries, hypersonics, and advanced radio-frequency communications such as 5G and 6G.
These advances notwithstanding, productivity growth in China remains a challenge.
So following over three decades of pragmatic, pro-economic growth policies, the principal focus of Chinese policy under Xi Jinping has shifted to national security, especially regime security (meaning survival of the regime) and party supremacy. In this manner, Xi has turned Chinese politics on its head. He secured CCP agreement to end the post-Mao convention that the top leader retires after serving two five-year terms, and in October 2022, began his third term as China’s top leader. He is now potentially China’s leader for life, and there is no designated or plausible successor in sight.
“Xi Jinping Thought on socialism with Chinese characteristics for a new era” is now the driving force of China’s politics. And Xi’s Thought provides the navigational chart of a grand strategy for a China dream of national rejuvenation, to be realised by the year 2049, the centenary of the founding of the People’s Republic of China. Xi thought is committed to forging one strong country, one patriotic people, guided by one ideology and led by one party with one leader at the top. Needless to say, this is a highly ambitious project for China’s complex and diverse society.
Life is being made more difficult for foreign investors, who have contributed significantly to China’s development. The never-ending trade war with the US and “derisking” by European companies are certainly not helping the Chinese economy either.
And Xi-thought is now being incorporated into the education system, which is hardly conducive to innovation-led development.
A key aspect of Xi’s approach to governance is abandoning the collective leadership of the previous period which had enabled the CCP to avoid making major policy mistakes that could destabilise the system. Xi has effectively replaced collective leadership with an echo chamber, with the result that China has made mistake after mistake — like the zero Covid policy, and Hong Kong’s national security law in 2020, which is seen as the end of the “One country, two systems” regime.
China’s protectionist trade policies and intellectual property theft have provoked the trade war with the US, and Europe’s reversal of its previously relaxed relations with China. Moreover, its draconian policy towards the Uyghurs in Xinjiang is counterproductive and hugely damaging to China’s image. There are reports of disagreement and dissatisfaction towards Xi within the Party.
While the Chinese government chooses to blame the US and the West for its current woes, the shift in policy direction under Xi Jinping is to blame as much.
China’s high growth phase, with three decades of rapid economic growth, averaging 10% per year until 2010, has seemingly come to an end. And with the US’ GDP of $76,330 being six times higher than China’s $12,720, catching up to US productivity levels is very likely out of reach for China – although China’s total GDP is in a similar ballpark, thanks to its enormous population.
How could it be that the threat of China overtaking the US could fade away?
A look back at history
It is important to take a historical perspective. Although China has always had an enormous population, for a few centuries now both the West and Japan have had more productive economies.Between 1949 to 1976, Mao Zedong was able to put China back together again after decades of war and warlordism. But policies like the Great Leap Forward and the Cultural Revolution cost millions of lives and caused immense suffering. And repressive, state-dominated economic policies meant most of the Chinese population was living in abject poverty at the time of his death.
The Chinese miracle began when Deng Xiaoping, the new leader, started granting economic freedom to farmers and small business people beginning in 1979, unleashing entrepreneurial spirit and energy. The privatisation of inefficient state-owned small- and medium-sized enterprises also sparked economic initiative.
Deng started gradually opening China to international trade and investment, initially through special economic zones. Over time, China would become the world’s leading trading nation and the “factory of the world”, especially after it joined the World Trade Organisation (WTO) in 2001. The resurgent economy lifted 800 million people out of extreme poverty.
Global Financial Crisis a turning point
China’s massive fiscal stimulus package in response to the crisis had important consequences. In the short term, it kept the Chinese—and indeed world—economy humming along.But the stimulus laid the foundations for China’s current economic woes. Ever since, China has relied on debt-fuelled growth. Thus, China is now burdened with an enormous national debt of close to 300% of GDP, more than double that at the outset of the crisis.
With much of this fiscal stimulus being directed to the state-owned enterprises rather than the private sector, it is hardly surprising that China’s productivity growth since the crisis has fallen by half, to 2.25% a year. And this stimulus has been behind China’s real estate bubble, which has been driven by reckless lending and poorly-conceived projects that have left “ghost cities” with no residents.
Concurrent trends
A couple of concurrent trends could shape the future of Chinese economic growth in the years to come – those of its demographics and advances in technology.China’s total population began to decline last year and its working age population could decline by nearly a quarter, to some 700 million, by the middle of the century. The declining numbers of workers is hurting the economy and national budget. And in the meantime, efforts to reignite fertility have fallen on deaf ears. This can have severe long-term implications for economic growth.
One bright spot is China’s impressive advances in many technology areas, like electric vehicles, and increasingly in semiconductors. According to the Australian Strategic Policy Institute, China leads in 37 of 44 technologies tracked in a year-long project, notably for electric batteries, hypersonics, and advanced radio-frequency communications such as 5G and 6G.
These advances notwithstanding, productivity growth in China remains a challenge.
President Xi Jinping to the rescue?
When he took over the leadership of China in 2012, Xi saw a Chinese Communist Party (CCP) that had lost its way. Corruption was rampant, and different party leaders had built up their own fiefdoms. They were seen as pursuing private interests, disloyal to the CCP leadership and devoid of any ideological conviction. Xi blames not only the West for China’s problems, but also the reform and opening up strategy pursued by Deng and following him, Jiang Zemin and Hu Jintao.So following over three decades of pragmatic, pro-economic growth policies, the principal focus of Chinese policy under Xi Jinping has shifted to national security, especially regime security (meaning survival of the regime) and party supremacy. In this manner, Xi has turned Chinese politics on its head. He secured CCP agreement to end the post-Mao convention that the top leader retires after serving two five-year terms, and in October 2022, began his third term as China’s top leader. He is now potentially China’s leader for life, and there is no designated or plausible successor in sight.
“Xi Jinping Thought on socialism with Chinese characteristics for a new era” is now the driving force of China’s politics. And Xi’s Thought provides the navigational chart of a grand strategy for a China dream of national rejuvenation, to be realised by the year 2049, the centenary of the founding of the People’s Republic of China. Xi thought is committed to forging one strong country, one patriotic people, guided by one ideology and led by one party with one leader at the top. Needless to say, this is a highly ambitious project for China’s complex and diverse society.
Xi Jinping Thought endangers the economy
Xi-thought may help the political survival of the CCP, but it is hardly likely to strengthen the economy. Notoriously inefficient state-owned enterprises are being favoured over the private sector, which is being forced to toe the Party line.Life is being made more difficult for foreign investors, who have contributed significantly to China’s development. The never-ending trade war with the US and “derisking” by European companies are certainly not helping the Chinese economy either.
And Xi-thought is now being incorporated into the education system, which is hardly conducive to innovation-led development.
A key aspect of Xi’s approach to governance is abandoning the collective leadership of the previous period which had enabled the CCP to avoid making major policy mistakes that could destabilise the system. Xi has effectively replaced collective leadership with an echo chamber, with the result that China has made mistake after mistake — like the zero Covid policy, and Hong Kong’s national security law in 2020, which is seen as the end of the “One country, two systems” regime.
China’s protectionist trade policies and intellectual property theft have provoked the trade war with the US, and Europe’s reversal of its previously relaxed relations with China. Moreover, its draconian policy towards the Uyghurs in Xinjiang is counterproductive and hugely damaging to China’s image. There are reports of disagreement and dissatisfaction towards Xi within the Party.
While the Chinese government chooses to blame the US and the West for its current woes, the shift in policy direction under Xi Jinping is to blame as much.