August 28, 2023 ☼ The Intersection ☼ geopolitics ☼ geoeconomics ☼ China ☼ Indo-Pacific
Consistent with my 2018 assessment, Xi Jinping's undoing of Deng's reforms have led Chinese to be pessimistic about their future.
This is a draft of The Intersection column that appears every other Monday in Mint.
In the past few weeks the world has discovered that the Chinese economy has serious problems and might already be in a crisis. The impending collapse of a real estate behemoth is causing analysts to ask if China’s Lehman moment is at hand. One fifth of the stock of apartments is unoccupied. There are worries about how China will manage the nearly $9 trillion in off-budget domestic debt that its local governments have accumulated by building bridges and airports to nowhere. One in five young people are unemployed in a country where it takes just over two working adults to support one senior citizen. Economic growth might already be in the 3% range now and might fall to 2% by the end of this decade. Over the past few years, Beijing lent nearly $1 trillion to developing countries in an attempt to acquire global political influence. Most of that money is not coming back.
Lingling Wei and Stella Yifan Xie have a detailed report in WSJ on how the 40-year boom is coming to an end.
So quite a number of economic indicators are orange and many are now flashing red. The clearest signals come from looking at what Chinese citizens and private firms have been doing for the past few years. Households have put their savings in bank deposits and say that they intend to save more. They are neither spending their money nor investing it. Private investment is down to a third of what it was in 2015.
I agree with Posen’s diagnosis and assessment; but have some disagreements with his policy recommendations. He ignores demographics and culture. China is not Germany or Russia.
As Adam Posen points out in the a recent essay in Foreign Affairs, these “trends reflect people’s long-term economic decisions in the aggregate, and they strongly suggest that in China, people and companies are increasingly fearful of losing access to their assets and are prioritizing short-term liquidity over investment.”
Krugman says US investment and exports to China are relatively small and hence the American economy will not suffer much pain. I’m not willing to bet on that.
Reading Paul Krugman’s commentary last week I learnt that “the point at which everyone suddenly realizes that unsustainable debt is, in fact, unsustainable” is called the Minsky moment. Even if China avoids a full-blown crisis — that he says won’t become an economic pandemic — I think we are at a point where it is reasonable to say that China’s rise has ended.
Sadanand Dhume called this analysis prescient. I think it was merely observant.
Why did it happen, and why now? In March 2018, soon after Xi Jinping changed the rules to allow him to remain president for as long as he likes, I argued that it was the beginning of the end of China’s rise. That “China’s phenomenal economic and geopolitical ascendency will now begin to slow down and possible even decline is because, in a nutshell, Xi is reversing all the successful elements of the Deng formula and going back to many of Mao’s failed ones.” And what were these? Institutionalised party rule, high economic growth and an openness to the outside world.
Carl Minzner explains Xi’s deconstruction of the China Deng Xiaoping created in his 2018 book, End of an Era.
Xi wrecked all three. China went from institutionalised to personalised rule. Beijing conducted witch hunts against private entrepreneurs, entertainment industry icons, technology industry leaders and foreign executives before strangling the entire economy with a mindless zero-Covid policy. Xi’s regime picked fights with every one of its important neighbours, got into a trade war with the United States and contributed to the rollback of the very global multilateral trade that powered China’s rise.
China’s misfortune is to be ruled by a leader who considers himself infallible, admits no mistakes and hence rarely engages in course correction. Unlike his immediate predecessors he has surrounded himself with yes-men (and they are almost entirely men) who are unlikely to offer any negative feedback. The mistakes become very costly. It took massive public protests before zero-Covid was reversed. Hundreds of billions of dollars were spent on otherwise unbankable infrastructure projects as part of the Belt and Road Initiative before Beijing realised that most of that is bad debt. So BRI has been replaced with GDI, GSI and GCI but without any political reckoning. After beating down its flourishing technology industry, Beijing is back to promoting it after Washington imposed high technology export controls.
Greater economic freedom can ameliorate China’s woes. When individuals and firms find ways out their problems, the economy does so too. Yet the Xi regime’s predilection for state control and the imposition of its preferences on the whole country is taking China in the opposite direction. The Wall Street Journal reports that “The leadership also worries that empowering individuals to make more decisions over how they spend their money could undermine state authority, without generating the kind of growth Beijing desires.” Xi wants people to send money on ‘good’ things like sports, cultural events and convenience stores in rural areas. Canny Chinese are putting it into their bank accounts instead. I will not put it beyond Xi Jinping to go after bank deposits in some form. Posen captures the Chinese economic tragedy well when he writes that “the only reliable cure—credibly assuring ordinary Chinese people and companies that there are limits on the government’s intrusion into economic life—cannot be delivered.”
Power is the only currency that will work in dealing with China.
Tailpiece: China’s haughty and supercilious official statement on the meeting between Xi Jinping and Prime Minister Narendra Modi in Johannesberg is yet another reminder that we are dealing with a arrogant and foolish regime. Instead of being eager to strike a compromise, New Delhi’s approach should be unrelenting on all fronts. Why ease the pressure?
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