Xi’s ambition hits economic roadblock
During a visit to the Sichuan province on June 8-9, Chinese President Xi Jinping ordered all central and local government departments to strive for “social and economic stability” ahead of the Chinese Communist Party’s (CCP) 20th Congress later this year. In a subtle shift, he asked them to seek a “balance between containing the pandemic and economic development”, departing from his singular emphasis earlier on the zero-Covid policy.
What has worried Xi and other Chinese leaders is the accelerating economic slowdown due to resurgent Covid infections and new global challenges such as the Ukraine war, sanctions imposed on Russia and strengthening US dollar, which have aggravated capital outflows from China. Though China achieved a decent economic growth of 4.8 per cent in Quarter 1 (January-March) of 2022 — better than 4 per cent in 2021 — major economic indicators, such as power generation, freight volume, bank loans, industrial production and urban employment, are faltering after widespread Covid lockdowns hit the factories and disrupted trade.
The IMF has cut China’s growth forecast for 2022 to 4 per cent while other economists think that it may not achieve even 2.3 per cent growth, like in 2020, as Covid has affected more than 320 million people (about one-fourth of the population) this year as against 13 million in 2020. Most worrisome for Xi is the spectre of increasing unemployment due to the closure of many businesses, including service industries, decline in export orders as some buyers have shifted purchases to other countries and declining domestic demand due to the quarantining of populations and drying up of tourist arrivals.
Some academics at Peking University have warned that the unemployment levels could escalate to those of 2020 when about 12 per cent of the working population was out of a job. The most vulnerable are migrant workers, labourers, urban residents working in low-paid jobs and fresh students. This year, more than 10 million college graduates would be seeking jobs — a rise of more than 1.67 million from 2021. If the unemployment situation is not controlled quickly, it could cause wider discontentment and social instability.
Another concern relates to the resurgence of Covid infections in bigger cities. Three days after reopening, Beijing ordered clubs, bars and other establishments to close in the business district of Chaoyang on June 9 after a single resident was found infected. Similarly, Shanghai locked down millions of people after June 9 when it found a handful of cases.
While China has some vulnerabilities — like 38 per cent of its population of age 62 and above has not been vaccinated and its health infrastructure is weak — people feel that Beijing has overreacted, often unscientifically, in containing the Covid infection. The residents are bitterly complaining about excessive testing, compliance with different codes to enter public transport, malls and supermarkets and blatant invasion of their privacy by local officials.
While other countries are now allowing the few Covid patients to test and recover at home, China is forcing large numbers of even mildly infected persons into the government-run quarantine camps. A few Chinese academics and businessmen have complained that some CCP leaders are making money in cohorts with the pharma industry and testing companies and have a vested interest in prolonging the zero-Covid policy.
Chinese Premier Le Keqiang has come up with a 33-point package of policy items to put the economy back on track, including tax reliefs and fee reductions for industries, reduction of taxes on the purchase of passenger cars, city-specific policies to boost housing, issuance of bonds to encourage railway construction, civil aviation and road construction and revival of other sectors. But the impact of these measures will be limited if the country continues to implement the extended Covid lockdowns.
The economic slowdown has given a big blow to Xi’s heft about China’s superior model of Covid control and governance and its ability to achieve better economic performance than the USA. Many foreign investors now feel disillusioned with China’s zero-Covid policy and arbitrary politicisation of business decisions (reference to high-handed actions against tech and education companies) and are gradually shifting new investments out of China.
The escalating US-China rivalry which has been joined now by several countries in Europe and Asia, increased regulations on investments in China and diversion of supply chains in high-end technology and pharmaceutical products have further vitiated the climate for foreign investments in China.
The economic slowdown has halved the allocation for Belt and Road projects this year, with the new focus mostly on trade, investment and pandemic control and less on loans. Premier Li has made it clear that China’s priority now is to jumpstart its ailing economy.
The Ukraine war has added new concerns about China’s large dollar holdings and private investments made by senior CCP leaders in Western countries, the possibility of these being frozen in a conflict with the USA, like those of Russia now, and China’s participation in the SWIFT inter-bank clearing system.
The CCP has asked its senior officials to withdraw these investments and is trying to use the yuan more often in its trade dealings with Russia, Iran, ASEAN and others but there are limits as the yuan is not freely convertible and does not enjoy the same global acceptability as the US dollar.
The economic slowdown has come at a bad time for Xi as he seeks an unprecedented third term as President. China’s global profile has ebbed, as was evidenced by the low-key participation of its delegation at the recent Shangri-La Dialogue in Singapore.
Though Xi maintains full control over the Chinese armed forces and security agencies, some of his decisions have attracted considerable flak from former and serving leaders in the CCP. If the economic situation continues to deteriorate, he would be forced to make more compromises in accepting protégés from rival groups in the Politburo and its standing committee at the forthcoming party congress to get his third term.
