China’s President Xi Jinping has faced and survived many challenges in life. He spent years as a teenager toiling in the countryside after his father was persecuted. He rose to the upper echelons of power and carried out a massive anti-corruption campaign that earned him many enemies.
But as he is on the cusp of an unprecedented third term, Xi faces what is perhaps his toughest challenge – fixing the grave problems that have spread in China after four decades of rapid, unbridled and wasteful economic growth, and putting the second-largest and soon-to-be-greater economy in order.
Experts say it won’t be easy, and Xi himself may be his biggest obstacle.
“China has essentially reached the peak of its growth period, largely fueled by debt. The result is that they will have a hard time unless he wants to reform the economy and he has no plans to do that,” said Andrew Collier, a China macroeconomics expert in Hong Kong.
In the last four decades of China’s opening up, its economy has grown 18 times – from a GDP of US$149.5 billion in 1978 to US$17.7 trillion last year, representing about 18.5% of the world economy. Since Xi took power in 2012, it has doubled in size, surpassing the European Union last year.
But much of that growth has been unhealthy, especially in the manufacturing and construction sectors, where excessive growth has resulted in “ghost towns” and unnecessary infrastructure. This not only harmed the environment but also created a lot of domestic debt.
real estate developers
A symptom of the problem has recently erupted when overambitious property developers, financed by state banks, went into default, leaving apartment buildings unfinished and angry buyers boycotting their mortgages and piling up rare protests.
Xi seems unable to contain these excesses. Although he has said that “houses are for living in, not for speculation,” the housing bubble has continued to grow in the last decade he has been in power.
“It was a bubble before, but it got a lot bigger, so obviously the talk wasn’t followed by action,” said Shanghai-based independent economist Andy Xie.
He estimated that Chinese property developers owe at least $10 trillion in debt and says that is a “very conservative estimate.”
While some companies can be bailed out, China just can’t keep growing like this, and Xi knows that.
In his speech at the opening of the 20th Party Congress on Sunday, he said: “Development was unbalanced, uncoordinated and unsustainable, and the traditional model of development could no longer keep us moving forward.”
He said the next five years will be “crucial” for building a “modern socialist country”, engaging in “high quality” development.
Analysts say that rather than continuing to emphasize state-owned enterprises, which are less efficient and less profitable, Xi should support the private sector. But they say he’s doing the opposite.
“He’s basically doubled down on his existing policies to promote the state system and…the crackdown on the tech sector that has taken place over the past two years is part of his worldview,” said Collier, managing director of Orient Capital. Search.
Collier suggests allocating more bank lending to the private sector, shifting the focus to increasing domestic consumption and allowing more free market decision-making.
But Collier notes, “That’s not part of your DNA.”
In a recent report, the World Bank also advised China to remove remaining barriers to market competition, stimulate innovation and productivity, and focus on the service and consumption sector, increasing spending on health and education, so that the people Chinese don’t feel the need to save so much.
But Xie says Xi wants to control the market economy.
“The Chinese Communist Party is about keeping the party in charge, but that’s not what the market is about, it’s about decentralizing power; the market makes decisions on its own,” Xie said. “Coexistence has been uncomfortable. Now the market is under control.”
Examples: The planned IPO (initial public offering) of a technology company was stopped. Big tech companies were pressured to make large donations to charities, and government intervention caused the share prices of some companies, such as Alibaba, to plummet. Even the video game and tutoring industries have been ordered to stop putting profits above children’s well-being.
Observers believe it would be better if China reformed and updated its tax system to properly tax the country’s growing number of ultra-rich people, including real estate speculators, and close the wealth gap.
But contrary to Xi’s image as a strong man, he may not have as much control over economic issues.
While political power is party-centric, economically, China is very decentralized, Collier said.
“He can control state-owned companies, but at the end of the day, it’s up to the provinces to try to generate growth,” Collier said.
With real estate, for example, land sales and transaction taxes contribute 10% of the country’s annual GDP and more than half of many local governments’ revenue, so Xi’s hands may be tied.
So far, Xi seems to prefer a soft landing – slowing growth to prevent China’s economic bubble from bursting completely, preventing massive discontent and social unrest that could threaten his party’s survival.
In his speech, Xi pledged to deepen reforms of state-owned enterprises and help them become bigger and more competitive, while also promising to encourage entrepreneurship and help Chinese private enterprises “become world-class equipment.”
He also pledged to accelerate China’s transition to green, low-carbon development – meaning the world’s factory will ostensibly manufacture high-quality products and in less polluting ways.
At the same time, he promised to improve the income tax system, increase the earnings of low-income workers and expand the middle class.
With millions still living in poverty and youth unemployment very high, this is a major challenge, especially as economic growth is expected to drop from 8.1% last year to just 3.2% this year, the second lowest rate in nearly five decades.
If Xi fails to carry out the necessary reforms in his third term, China’s economy – though still forecast to outperform the US by 2030 because of its much larger population and manufacturing sector – could reach a crisis point. Furthermore, as China is the biggest market, trading partner and increasingly also the top investor for many countries, this could have huge implications for the rest of the world.
“The world revolves around China,” said economist Xie.