Xi battles slowing economy of China

Yogesh Gupta 
Former Ambassador

At the end of 2015, China’s Communist Party (CPC) fired the Director of the National Bureau of Statistics (NBS), Wang Bao’an, for reporting a series of bad statistics about China’s falling exports, VAT receipts, Purchasing Managers’ Index (PMI) and GDP growth. As new Director Ning Jizhe took over, the PMI immediately shot up and wobbly GDP numbers started improving. 

In a study published by the Federal Reserve Bank of San Francisco in August 2019, the authors compared China's imports figures (difficult to manipulate as these can be verified against the export figures of China’s trade partners) with 13 indicators of China’s economic activities such as electricity consumption, industrial production, rail freight and property construction and others and found that China's official import figures were weakly correlated with other indicators (while other numbers were sharply fluctuating, official GDP numbers were stable). Many China-watchers believe that China’s true GDP growth rate is about half of the official figure, closer to 3 per cent; it is near what another big economy, ie the US has achieved (2 per cent) in recent years.

The economic downturn in China is palpable in numerous ways. In 2018, sales of China’s smartphones were down 15.5 per cent and passenger vehicles down 4.1 per cent. The growth of the manufacturing sector declined from 6.1 per cent in the first quarter (January-March, 2019) to 5.2 per cent in the third quarter (July-September, 2019), according to the NBS. Following the US-China trade war, new investment by the private sector has plummeted. Struggling with high household debts, stagnating incomes and uncertain job prospects, many shoppers have cut spending on cars, housing, consumer items and tourism. 

The impact of the declining growth is being felt across the country, more so in rural areas. According to an analyst from a Beijing-based agribusiness company, the rural per capita income, excluding the proportion from migrant workers, fell to 809 yuans per month (about Rs 8,000) in August 2019 from 1,023 yuans (about Rs 10,225) at the end of 2018. The rural pensions are low and many farmers are struggling to pay for their monthly expenses, including children’s education.

China’s breakneck economic growth from 1979 to 2007 led to the amassing of huge fortunes by thousands of entrepreneurs. In 2017, the ‘communist’ China boasted of more than 1,800 billionaires with a personal wealth of at least $2 billion; about 40 per cent of them failed to make the cut this year as their fortunes were hit by the economic downturn. Similarly, a large number of industrialists, businessmen, professionals, bureaucrats and academics who reaped large benefits from this economic miracle have seen their incomes stagnating or going down in the last two years. These beneficiaries of Deng Xiaoping’s era are unhappy with President Xi Jinping’s policies and asking him to open up the economy further, boost structural reforms and confine the state sector to a few strategic industries. 

They are also critical of Xi’s concentration of power, fearing the example of Mao, whose authoritarian policies led to the disastrous ‘long leap forward’ and ‘cultural revolution’, resulting in death of about 50 million people. Many CPC cadres at the middle and lower rungs are upset with Xi’s policies, including his anti-corruption campaign which has undercut their influence; they have become lukewarm in supporting Xi’s policies. The followers of Mao are angry that the Xi regime has twisted his ideology and is promoting capitalist policies which are benefiting only some sections, marginalising others and have created huge social inequalities. 

The private sector is now commanding about 70 per cent of China’s economy. Xi fears that the private sector has already secured too much influence, which has resulted in the spread of large-scale corruption among the military, civil society and party cadres. He believes that pervading corruption, indiscipline, declining belief in communism and loyalty to party could lead China on the path of disintegration, like the former Soviet Union. Xi has, therefore, undertaken calculated steps to boost the market power of the state-owned enterprises (SOEs) by giving them preferential treatment, such as low interest credit, subsidies, monopoly for government procurement and project implementation; SOEs are being used to implement party policies and priorities, including job creation and Xi’s pet projects such as the Belt and Road Initiative (BRI) and 'Made in China 2025' campaign to bolster China's independence in the emerging technologies. 

Xi has embarked on a vigorous anti-corruption drive, arresting more than 1.5 million people, of which 40 per cent were his political adversaries. A large number of private firms, organisations and neighbourhoods have been forced to accept a CPC branch to enforce party policies and monitor potential discontent. Several non-compliant foreign NGOs and media organisations in China have been closed down after 2017. There is a close monitoring of official misconduct, public discontent, pollution or land disputes before they ignite protests. Xi has revived the Mao era’s personality cult and repressive practices such as ‘re-education camps’, ‘self-criticism’, ‘mass line’ and ‘Xi Jinping thought’ for becoming ‘model’ citizens. The government has installed 200 million cameras to keep a tight surveillance on people and is encouraging elderly residents to report on their recalcitrant neighbours and students on their dissenting professors. China’s expenditure on internal security (read repression) now exceeds that on national defence.

The 19th Central Committee meeting of the CPC held from October 28-31, concluded with a strong endorsement of Xi’s leadership and policies. Xi has ambitious dreams of making China a developed socialist state within the next 30 years. But like Mao and Deng, his first priority is the CPC's continuation in power, even if China has to accept lower levels of economic growth. Though Xi has amassed huge power, he lacks the ‘revolutionary’ credentials and political base of Mao and Deng. He has alienated the beneficiaries of reforms under both these leaders and turned back the clock on the limited political liberalisation achieved earlier. Also, the present time is very different from that of Mao and Deng; the Chinese citizens have now become rich, empowered, aspirational and closely connected with the world. Xi will, therefore, have to tread very carefully in handling his large number of critics as he deals with festering problems like China’s slowing economy, trade, technology and strategic rivalry with the US, civil unrest in Hong Kong and integration of the breakaway Taiwan.