Ideology versus prosperity

How Xi Jinping is damaging China’s

economy

Over the past 20 years China has been the

biggest and most reliable source of growth
in the world economy. It contributed a
quarter of the rise in global gdp over that
period and expanded in 79 of 80 quarters.
For most of the period since China opened
up after Mao’s death, the Communist Party
has taken a practical approach to making
the country richer, mixing market reforms
with state control. Now, however, China’s
economy is in danger. The immediate issue
is its zero-covid campaign, which has
caused a slump and may condemn the
economy to a stop-start pattern. That is
compounding a bigger problem: President
Xi Jinping’s ideological struggle to remake
state capitalism. If it stays on this path
China will grow more slowly and be less
predictable, with big consequences for it
and the world.

After nearly two months the lockdown of

Shanghai is easing, but China is far from
being covid-free, with fresh outbreaks in
Beijing and Tianjin. More than 200m people
have been living under restrictions and the
economy is reeling. Retail sales in April were
11% lower than a year earlier and purchases
of kfc, cars and Cartier are weak. Although
some workers are living on factory floors,
industrial output and export volumes have
dipped. For the full year China may struggle
to grow much faster than America for the
first time since 1990, in the aftermath of the
massacre near Tiananmen Square. For Mr
Xi the timing is awful: after the 20th party
congress later this year, he intends to be
confirmed for a third term as president,
breaking the recent norm that leaders bow
out after two.

It is, however, Mr Xi who bears much

responsibility for the twin blows to the
economy. The first is his zero-covid policy,
which has been enforced for 28 months.
The party fears that opening up would lead
to an exit wave that could kill millions. That
may be true, but it has wasted precious
time: 100m people over 60 are not triple-
jabbed. It refuses to import more effective
Western mrna vaccines. Instead the plan
may be to push zero-covid into next year.
China has backed out of hosting the Asian
Cup, a football contest, in June 2023. There
is talk of permanent testing stations and a
standing army to swab nostrils for ever.
Since Omicron is highly transmissible, more
outbreaks and lockdowns are inevitable. But
since the zero-covid policy is identified with
Mr Xi, any criticism of it is viewed as
sabotage.

That same ideological zeal is behind the

second shock, a series of economic
initiatives that form what Mr Xi calls his
“new development concept”, which is meant
to address “great changes unseen in a
century”, such as the Sino-American split.
The goals are rational: to tackle inequality,
monopolies and debt, and to ensure that
China dominates new technologies and is
fortified against Western sanctions. Yet in
all cases Mr Xi believes the party must take
the lead, and implementation has been
punitive and erratic. A blizzard of fines, new
regulations and purges has caused the
dynamic tech industry, which contributes
8% of gdp, to stagnate. And a savage but
incomplete crackdown on the property
sector, responsible for over a fifth of gdp,
has led to a funding crunch—one reason
why housing sales fell by 47% in April
compared with a year earlier.

The government hopes a vast stimulus

programme that is in the works will help it
meet the official growth target of 5.5% for
2022 and calm nerves ahead of the
congress. On May 19th Li Keqiang, the
prime minister, urged officials to “act
decisively” to restore growth, and the
central bank cut mortgage rates. The party
has tried to reassure terrified tech tycoons.
A likely next step is a big bond-financed
government infrastructure programme.

But more piles of debt and acres of

concrete won’t obviate the need for
draconian lockdowns or reduce the risks
from Mr Xi’s economic model. It involves
expanding the scope of the least productive
part of the economy: the government-run
one. China’s industrial policy has had
formidable successes, for example building
a dominant global position in advanced
batteries. Mr Xi hopes that technology and
a new cohort of state investment funds will
make decision-making more agile. But don’t
forget all the dismal failures, from rust-belt
industries to microchips.

Meanwhile the incentives in the most

productive part of the economy, the private
sector, have been damaged. You can see
that in the financial markets, which have
seen large outflows. The cost of capital has
risen: Chinese shares trade at a 45%
discount to American ones, a near-record
gap. The calculations of investors and
entrepreneurs are changing. Some fear that
the financial upside for any business will be
capped by a party that is suspicious of
private wealth and power. Venture
capitalists say they have switched to betting
on the biggest subsidies, not the best ideas.
For the first time in 40 years no major
sector of the economy is undergoing
liberalising reforms. Without them, growth
will suffer.

Mr Xi’s ideological economy has big

implications for the world. Though stimulus
could gin up demand, more lockdowns are
likely, imperilling a global economy flirting
with recession. In business, China’s size and
sophistication make it impossible for
multinationals to ignore. But more will
rebalance supply chains away from China,
as Apple is reportedly doing. Chinese
champions may dominate some industries
of the 2030s, but the West is likely to
become a warier importer of Chinese
products. In diplomacy, a less ambitious and
independent private sector means China’s
presence abroad will be more state-led and
political. It may become more malign, but
also less effective, as our special report on
China and Africa explains.

The perils of one-man rule

And what of life inside a more insular China?

While people vent online about lockdowns
and lost jobs, this is unlikely to translate into
unrest thanks to surveillance, propaganda
and broad support for the party’s goals.
Some technocrats disagree with the
country’s leftward shift but lack the power
and courage required to object to it. And to
the extent it can be discerned from the
black box of elite politics, there is no rival to
Mr Xi, who is 68. Yet in the run-up to a party
congress that may see him secure power
until at least 2027, the shortcomings of
one-man rule in the world’s second-largest
economy are glaring.

From the May 28th 2022 edition. Discover

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