As Chinese Communist Party (CCP) General Secretary Xi Jinping moves towards his third term, the world’s second-largest economy that he leads is facing its toughest economic situation in a decade. Export growth has slowed, recovery in domestic demand is lethargic, and the property market remains stone cold. Under multiple pressures, only the last quarter of the year remains for China’s economy to pick up.
Already, analysts are lowering forecasts for annual growth. The 5.5% growth target the authorities set early this year is no longer within reach, and more than one institute forecasts that China’s whole-year economic growth may only be 3%.
In contrast, when Xi became CCP general secretary in 2012, the market was talking about how the GDP for that year might fall below 8% — that was already the lowest increase in the preceding 13 years.
During Xi’s term, China’s GDP growth rate has slowed significantly, because China’s economy has entered a transition period of slower growth, and also because of the economic adjustments made over the past decade, during which political intervention in economics has become more significant. From “houses are for living in, not for speculation” to “common prosperity”; from opposing the “disorderly expansion of capital” to insisting on zero-Covid, many effects of policies have pushed China’s economy to a crossroads.
From growth to greater attention to fairness
In the decade under previous CCP General Secretary Hu Jintao, China’s economy was taking off, jumping from sixth to second in the world. However, there were growing problems such as a large rich-poor gap and low social mobility.
The report of the 19th Party Congress in 2017 said China’s “principal contradiction” has evolved to be one of “the contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life”. That was the first time in 36 years since 1981 that the CCP had changed its assessment of China’s principal contradiction, marking a shift in economic policy from “making the pie larger” to going for growth while also focusing on fairness.
When the CCP celebrated its centenary in 2021, it announced that absolute poverty was eradicated, and put common prosperity on the agenda. The authorities hit out hard at sectors that were showing “unruly growth”. From opposing monopoly by tech companies and clamping down on the disorderly expansion of capital, to “exterminating” the tutoring sector, to cleaning up the entertainment industry and online gaming industry, the rapid growth of many sectors was curtailed and the private economy was damaged in just a few years.
“Western countries come up with laws to regulate, while the CCP intervenes directly in the operations of private companies.” — Adjunct Professor Pei Sai Fan, NUS
Besides the scale of action, the method of action also took the market by surprise. For instance, fintech giant the Ant Group had its dual listing in Hong Kong and Shanghai cancelled just one day before, stunning the market – the scuttled plans have yet to be revived.
National University of Singapore (NUS) Adjunct Professor Pei Sai Fan told Zaobao that even though various countries have been pushing strongly against monopoly, China and the West have very different approaches. “Western countries come up with laws to regulate, while the CCP intervenes directly in the operations of private companies.”
Pei added that the fundamental difference between China’s market economy and the West is that the CCP is the political basis of economic operations, a state of affairs that has been especially evident under Xi. “The CCP is almost everywhere.”
In September 2020, the CCP’s Central Office published views on strengthening the united work front of the private economy in the new era, which mentioned bringing those in the private sector economy closer to the CCP, so that they would “always be politically sensible”, and to “promptly recruit into the party” suitable candidates.
Public sector stepping forward while the private sector steps back
However, the wave of adjustments to the private sector economy after the document was released stunned entrepreneurs into silence. Following the setback to Ant Group’s listing, its previously high-profile founder Jack Ma has been “invisible”, while Pinduoduo founder Colin Huang stepped down as chairman within a year; ByteDance founder Zhang Yiming announced that he was stepping down as CEO in May 2021, while property tycoon Pan Shiyi and his wife Zhang Xin have recently stepped down as chairman of the board and CEO of SOHO China.
... the trend in the Chinese economy of the public sector stepping forward while the private sector steps back has become more obvious during Xi’s term, and the side effects might be seeing some reaction within the party. — Professor of Economics Tan Kong Yam, NTU
The fact that these heads of prominent private enterprises are taking a step back is seen as a signal that China’s market environment is changing. Nanyang Technological University (NTU) Professor of Economics Tan Kong Yam said the trend in the Chinese economy of the public sector stepping forward while the private sector steps back has become more obvious during Xi’s term, and the side effects might be seeing some reaction within the party.
Property market and pandemic worsening economic crosswinds
On a visit to Shenzhen in August this year, Chinese Premier Li Keqiang said: “China’s opening will continue. The Yellow river and the Yangtze river will not flow backwards.” Tan’s reading is that Li made the comments after the CCP leaders’ Beidaihe session, and “it is likely that at the Beidaihe meeting, there was feedback within the party that regulations over the private sector economy are too tight and should be eased”.
He added that after years of development, several flaws in sectors like technology and education have appeared, and it was time to make adjustments. But if there was too much regulatory control and private sector confidence was hit hard, China’s long-term competitive edge would suffer and there would be a negative impact on employment and consumer spending. “The private sector is the main driver of China’s economy,” he said. “If employment opportunities dwindle and the standard of living stagnates, that would weaken the CCP’s legitimacy to govern.”
Even before the private sector had shaken off the effects of the cleanup, the weak property market and the on-off pandemic lockdowns added to the woes of China’s economy. After “houses are for living in, not for speculation” was first mentioned in 2016, the Chinese government clamped down on property speculation, but the cooling property market coincided with a downturn in the economy, putting many property companies in a cash flow crisis. Since this year, many major cities such as Shanghai and Beijing have undergone lockdowns due to the zero-Covid policy, further keeping homebuyer appetite low.
Assistant Professor Lu Xi at the NUS Lee Kuan Yew School of Public Policy said that over the past ten years, most of China’s economic policies have accelerated the central aggregation of power, which has to do with the CCP’s gathering of authority and the toughening of China’s political system during that period.
Lu said: “China’s public administration is still unsophisticated and uninformed. There is no wide discussion before policies are made and there is no testing or scientific assessment. From anti-monopolism to zero-Covid, the effects of policy implementation run contrary to expected aims, which damages the domestic economy and shakes the confidence of overseas investors.”
... even if the CCP relaxes pandemic controls after the 20th Party Congress, it will be difficult to reverse the damage. — Assistant Professor Lu Xi, NUS Lee Kuan Yew School of Public Policy
Over the past couple of months, surveys by the US-China Business Council, the European Union Chamber of Commerce in China, and the Swedish Chamber of Commerce in China of their members have shown that the strict pandemic controls have become the biggest challenge to foreign companies in China, and many European and US companies are considering suspending or cancelling their investment plans in China, and looking to other parts of Asia.
Lu pessimistically forecast that even if the CCP relaxes pandemic controls after the 20th Party Congress, it will be difficult to reverse the damage. He noted that in the three years of the pandemic, many manufacturing companies have moved their factories to Southeast Asia, and the foundations of the manufacturing sector have been shaken. The information blackout to maintain zero-Covid has also led to major ideological differences between China and the world. All this would be difficult to change in the short term.
Prof Pei of NUS, however, said that while China has been inward-looking over the past few years, in public reports, policymakers have clearly expressed the resolve to stick to opening up. “If hitting the private sector economy before was to prevent capital from expanding too fast and threatening the authority of the central government, with Xi having another five years in office and removing lingering concerns, there is a possibility that the economy will gradually be returned to the market.”
But how do we reconcile the “decisive role” of market forces with the fact that the party leads everything?
Will politics or the economy take precedence?
As such, Pei felt it would take another six months to a year after the 20th Party Congress to gauge whether politics would rule or if the country would start releasing market-friendly signals. He hoped that in the next five years, decision makers would delineate government-market boundaries and “make clear what the government should control and what should be left to the market to do”.
The constitution of the CCP adopted at the 19th Party Congress states that the CCP “shall give play to the decisive role of market forces in resource allocation”. But how do we reconcile the “decisive role” of market forces with the fact that the party leads everything (党领导一切)? This is a major issue for China in the post-Covid-19 era because the country not only needs to revive its economy but also maximise its growth potential so that it can significantly improve its comprehensive national power and basically achieve socialist modernisation by 2035.
In Prof Tan of NTU’s view, the current Chinese economy is like a long-distance runner who fell down. Some believe that with a broken leg, he can now only limp into the future. Others believe he’s only suffering from a muscle cramp and will quickly bounce back after making some adjustments. He explained, “China tripped because it cracked down on the private sector and implemented the zero-Covid policy. If regulations are quickly relaxed, market confidence could still be restored. However, if current policies are maintained, the economy could limp for good in the long term, and even be paralysed in severe cases.”
Internal and external challenges
Amid escalating internal risks, the Chinese economy also faces great external challenges, particularly with regard to US containment.
Over the past five years, China and the US have been at daggers drawn over China-US trade and tech wars. Whereas a phase one trade deal has been signed in the case of the trade war, ongoing US tech sanctions on China are having a debilitating effect on the Chinese economy.
Since the US Commerce Department imposed export controls on Huawei and other Chinese enterprises in 2019, the onslaught has not stopped. In July this year, the US Senate passed a bill supporting the domestic semiconductor industry and tightening restrictions on China’s access to chipmaking equipment. In September, US President Joe Biden signed an executive order aimed at blocking Chinese investments in US technologies. On 7 October, Washington again announced new export controls that restrict China from purchasing and manufacturing high-end chips with military applications, including export restrictions on some chips used in supercomputing. It also further toughened the requirements for the sale of semiconductor equipment to any Chinese enterprise.
... seven years have passed and China has yet to achieve a major breakthrough in the semiconductor industry or escape from the US’s clutches.
In the wake of its sanctions woes, Huawei’s latest phone models were launched without 5G chips. Supply chain disruptions have also made it difficult for mainland Chinese semiconductor giant Semiconductor Manufacturing International Corporation (SMIC) to achieve breakthroughs in high-performance chip technology.
Actually, the Chinese government laid down the framework of “Made in China 2025” back in 2015, which set the target of raising the domestic content of core components and materials to 70% by 2025 in a bid to reduce reliance on foreign supplies. But seven years have passed and China has yet to achieve a major breakthrough in the semiconductor industry or escape from the US’s clutches.
Tan told Zaobao that semiconductor technologies will be the main driver of the next productivity revolution. Thus, the tech war will be crucial to future China-US competition and also a key challenge in the next phase of China’s economy. Presently, Chinese chipmakers rely on the US and its allies for chipmaking equipment, while the chip design industry is also dominated by US enterprises.
“However, China’s massive chip consumer market gives it some bargaining power, while the whole-of-nation push for the development of key industries also helps to rapidly improve the technology standards and innovative capability of the sector,” he noted.
Apart from technological bottlenecks, the deglobalisation movement and increasingly complex geopolitical situation have warned China about the need to be self-reliant.
Over the past decade, the CCP’s decision makers have repeatedly proposed a “new whole-nation system” to drive technological development and achieve breakthroughs. After the US’s CHIPS and Science Act of 2022 took effect in August, Xi stressed the new whole-nation mechanism, and renewed calls to “give full play to the advantages of China’s socialist system” and greatly improve the systematic capabilities in making breakthroughs in science and technology research.
Apart from technological bottlenecks, the deglobalisation movement and increasingly complex geopolitical situation have warned China about the need to be self-reliant. In May 2020, CCP higher-ups proposed a new dual circulation strategy in which domestic and foreign markets would reinforce each other, with the domestic market as the mainstay. The proposal launched a year later to build a “unified national market” was widely seen as a policy aimed at boosting “internal circulation”, by unleashing the potential of the domestic market to counteract economic risks arising from increased external uncertainties.
Unified national market: ideal but risky?
Lu told Zaobao that such an outcome might be ideal but implementing it would be risky. Apart from needing to solve structural unemployment and industrial policy failure issues arising from broken local economic structures, the central government would need to set up more departments to coordinate the distribution of benefits across regions, in turn adding economic and political uncertainty.
Meanwhile, even as the success of internal circulation remains to be seen, the prospect is bringing about another risk for the Chinese economy. Despite assurances that China is not closing its doors and turning inward, and the government’s efforts to promote the Regional Comprehensive Economic Partnership (RCEP) and seek membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), many foreign investors worry that China is decoupling from the outside world. With such sentiments clouding China’s economic outlook, foreign enterprises in China are divesting and looking to go elsewhere.
In fact, people may soon question predictions of China’s rise the way they did those of Japan or Russia surpassing the US in the past.
Before this year, economists from around the world generally estimated that China’s GDP would overtake the US by 2030 to become the world’s largest economy. But amid China’s slowing growth, UK-based think tank the Centre for Economics and Business Research recently pushed back its previous anticipated year of China catching up to the US from 2028 to 2030, while the Japan Center for Economic Research did a similar revision from 2029 to 2033.
Former US Treasury Secretary Larry Summers even expressed his doubts about China ever overtaking the US. He said that factors such as China’s ageing population and “growing Communist Party involvement in a wider range of enterprises” have led him to significantly lower estimates for Chinese growth. In fact, people may soon question predictions of China’s rise the way they did those of Japan or Russia surpassing the US in the past.
On the other hand, Prof Tan of NTU likened the China-US competition to a dragon boat race. He said, “The US boasts of the best talents and entrepreneurs from around the world, each one muscular and strong. But their conflicts of interest may offset some benefits gained. In the case of China, while each athlete on its dragon boat team may not be the strongest, they have the same goal. China’s strong national consciousness which unites the people, along with the government’s centralised management, have become China’s most important competitive edge.”
For Lianhe Zaobao's special reports on the 20th Party Congress, click here.
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