China Watch: Contradictory Response To Economic Slowdown

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SUMMARY: Beijing is willing to accept slower economic growth to avoid a financial crisis caused by mounting debt and a struggling property market.  PRC leader Xi Jinping plans to transform China’s current development model by boosting strategic industries, scientific innovations, and domestic consumption, but his preferences for state-led initiatives and ideological fealty work against his own economic goals.  His apparent aloofness amid serious economic challenges casts doubt on his economic stewardship.

Beijing has thus far refrained from a hefty stimulus package to spur economic growth because it aims to curb excessive debt and avoid a financial crisis.  The government has lowered interest rates and implemented a series of policies to spur domestic demand, but most economists assess that the measures are too modest to have a significant impact on China’s struggling domestic economy.

  • The prolonged property slump has led to serious liquidity problems for China’s real estate developers and increased risks of broader financial contagion.  Zhongrong International, a major Chinese investment trust company, has missed payments to its investors since July, in part because it is heavily invested in the real estate sector.
  • Local governments are struggling to pay debts because their revenue is dependent on real estate transactions.  Current local government debt is estimated to be about USD 12.8 trillion, about 71 percent of China’s GDP in 2022.  Local governments are cutting back on investments, essential services, and benefits, at a time when citizens are the most vulnerable because of the economic slowdown and rising unemployment.
  • Beijing needs to strike a delicate balance between stimulating the economy and exercising fiscal discipline to avoid a financial crisis.  This balancing act limits Beijing’s ability to implement bold pro-growth policies to spur demand, create jobs, and boost investor confidence.

PRC leaders understand that China’s economy is in a transition period in which the old development model has run into problems but a new one has yet to emerge.  As such, Beijing will accept a slower growth rate and a degree of economic dislocation in favor of structural changes away from the high-growth model that relied on high debt, heavy infrastructure investment, a booming property market, and low wages.  

  • Beijing’s strategy is to pursue what it calls “high quality” growth focused on indigenous technological breakthroughs in strategic industries such as semiconductors, quantum computing, artificial intelligence, information technology, advanced manufacturing, biotechnology, electric vehicles, and green energy.  Chinese economists have also called for policies to increase consumer spending, such as higher wages and improvements in the social safety net. 
  • According to a 25 August article in the South China Morning Post, PRC Premier Li Qiang, during an inspection tour to Guangdong province, made clear that Beijing’s policy focus was on the strategic sectors rather than the traditional export-oriented manufacturing sector that had fueled much of the province’s past growth.
  • Beijing likely expects social discontent to rise as policymakers try to address structural economic challenges.  The government will rely on the surveillance apparatus it has built over the past two decades to suppress dissent and protests.  In August, PRC police warned some of the investors in Zhongrong’s financial products to refrain from protesting to get their money back. 

Beijing will face challenges in regaining the confidence of business leaders, investors, and consumers in part because of Xi’s emphasis on ideology and apparent indifference toward China’s economic difficulties.  Xi, whether intentionally or coincidentally, appears to be undercutting Premier Li Qiang’s efforts to assure private businesses and foreign and domestic investors that the government is pro-business and pro-market.   

  • On 15 August, state media released the text of an internal speech Xi made in February on “Chinese-style modernization.”  Xi reiterated the importance of “common prosperity” and “spiritual civilization” to counter what he sees as Western capitalism’s overemphasis on individualism and materialism. 
  • Both concepts are anathema to private businesspeople, investors, and white-collar professionals in general.  “Common prosperity” has been associated with the crackdown on wealthy individuals and the private sector.  The term “spiritual civilization” is code for opposition to Western, liberal political and economic ideas.  Since December 2022, leadership statements on the economy have avoided these two terms as Beijing was trying to reassure private businesses that the regulatory crackdown against them was over.  The August article serves as a reminder that Xi will not allow any relaxation in the Party’s adherence to Marxist-Leninist orthodoxy even as Beijing tries to attract private investment.
  • Xi has been conspicuously absent from public view amid mounting economic problems, even though he has centralized economic decision-making in his own hands.  China experienced serious floods in August, but Xi did not visit any of the affected areas, in a departure from his predecessors.  Xi was not seen on state television from 1 August to 20 August, which was unusual though not unprecedented.[1] 
  • Xi also appeared to be out of touch as youth unemployment hit a record high of 21.3 percent in June.  State media in July cited Xi’s comment that the youth should “proactively embrace hardships” just as he did as a young man during the Cultural Revolution.  Anecdotal information from Western press and Chinese social media suggests that many recent college graduates are opting out of the full-time job market as a form of quiet resistance.  In 2022, the number of marriages was the lowest since records began in 1986 due to economic uncertainties, and the decline in marriages is correlated with China’s falling birthrate because it is unusual for unmarried couples to have children in China.

[1] Observers have speculated that Xi may have refrained from domestic inspection tours out of security concerns.  As we wrote in the last China Watch, signals in authoritative PRC media suggest that the dismissals of senior military commanders were driven by Xi’s perception of political disloyalty.  Xi travelled to South Africa on 21 August to attend the BRICS summit, but he skipped a scheduled speech on 22 August without any explanation.  Xi could have cancelled the  appearance due to last-minute security concerns, as he is known for stringent security protocols when he travels domestically and internationally.