The relentless cascade of bad economic news in China has not only cast doubt on the governance ability of the Xi Jinping leadership, but has also called into question the long-term viability of the Chinese economic model, which stresses maintaining party-state control of the market and limiting international access to sensitive sectors such as finance. Given supreme leader Xi’s Maoist-style and statist approach to the economy as well as his insistence on a “zero-tolerance” pandemic policy, confidence in China’s future among its neighbors and trading partners is tipped to drop even further, especially if Xi realizes his long-held ambition and gains an unprecedented third or even fourth five-year term as “core of the Chinese Communist Party (CCP) leadership” at the upcoming 20th Party Congress. Xi has undoubtedly been forced to allow Premier Li Keqiang – a political foe and leader of the opposition Communist Youth League (CYL) faction – and technocrats in the central-government apparatus to assume day-to-day management of the economy. Due to his dented authority – and the threats to stability posed by the growing rebelliousness of China’s 400 million-strong middle class who have grown increasingly frustrated with Beijing’s problematic governance record since the early 2010s – the 69-year-old Xi may be forced to make pledges to adopt a more pro-market stance after the Party Congress. The supreme leader might also be obliged to appoint more members of the “anti-Xi faction” to the Central Committee and the all-powerful Politburo to be endorsed at the Party Congress this fall (China Brief, May 27).
Reeling Retail, Real Estate Sectors
The Chinese economy grew by barely 0.4 percent in the second quarter of this year, which is the second worst figure recorded in the past 30 years. President and commander-in-chief Xi has asked officials to do whatever is necessary to ensure that the 5.5 percent GDP expansion target announced early this year is reached, but most Western banks and think tanks have lowered their annual growth forecasts for China to only around 3 percent (SCMP, July 15; BBC Chinese, July 15).
Almost all economic sectors are under-performing. At least 460,000 companies – mostly small and medium enterprises, which are major job providers – closed their doors in the first quarter of the year. Unemployment among the crucial sixteen to twenty-four year-old age group surged to an unprecedented 19.3 percent last month (National Bureau of Statistics (NBS), July 15). Despite the apparent decrease in new COVID-19 cases, lockdowns are still affecting more than 30 cities. This has disrupted the work schedules of some 248 million citizens, as well as 17.5 percent of the nation’s aggregate economic activities (Ming Pao, July 17; Thebl.com, July 16; BBC Chinese, July 8). These atrocious business conditions have also been a drag on retail sales, a major growth impetus, which went up by a mere 3.1 percent year-on-year last month (NBS, July 15; Global Times, July 15).
The real estate sector, which used to make up 30 percent of GDP, is in dire straits. In May, new home prices in 70 cities fell for the ninth straight month. In the wake of multi-billion yuan developers such as Evergrande and Shimao declaring insolvency, more and more buyers of unfinished apartment buildings have refused to pay their mortgages. The amount of mortgage loans that would-be homebuyers refuse to pay their banks has now mushroomed to an estimated 2 trillion yuan ($297 billion). Officials estimate that developers lack funds to finish work on approximately 500 million square meters of near-empty sites. Although the first known outbreak of large-scale non-payments of housing loans began only last month, this trend has spread to more than 1,000 buildings in at least 18 provinces and 40 cities (Radio Free Asia, July 15; Ming Pao, July 15). The official Security Times warned that “although financial institutions have real estate as collateral, the undelivered projects can only become bad debt.” Security Times and other state-run financial outlets have also warned that when bad debt increases, horrendous systemic financial risks could multiply (CNN, July 14; Jycf360.com, July 12).
At present, both central and regional government coffers are running low on funds. In the first quarter of this year, China’s total social debt (including borrowings by administrations, enterprises and households) increased by $2.5 trillion year-on-year (Reuters, May 18; China Macroeconomy Forum, February 9). Runs on both gigantic state-owned banks as well as county-level rural banks (which function like “financial co-ops” that theoretically restrict customers to local inhabitants) have taken place in Henan, Anhui and Liaoning provinces. Runs on state-owned banks have even occurred in prosperous cities such as Shenzhen and Shanghai. On July 12, several hundred depositors in four county-level banks in Henan protested outside government offices in the provincial capital, Zhengzhou. They demanded that the four delinquent banks reimburse their clients’ deposits of approximately 39 billion yuan ($5.77 billion). The authorities sent police and apparently triad members to disperse the crowd and beat up the angriest protestors. A few days later, the China Securities and Banks Regulatory Commission said depositors with up to 50,000 yuan ($7,400) in funds would be reimbursed within several days; but no promises were made to those with larger sums in the banks. A similar scenario occurred in several individual counties in Anhui Province (HK01.com, July 15; Indianexpress.com, July 12; BBC Chinese, July 12).
State-owned banks such as the huge Agriculture Bank of China have adopted dubious measures to discourage depositors from withdrawing cash. In cities, including metropolises such as Shanghai, Shenzhen and Tianjin, large numbers of ATMs have stopped working. Many bank branches have either set a “quota” limiting the maximum number of clients they will serve each day or have placed forced limits on customers barring them from withdrawing more than 1,000 yuan ($148) in cash per day (Finance.sina.com, June 21). In a reflection of the entire country’s shortage of foreign exchange- especially U.S. dollars, most banks have failed to deliver on the long-standing practice of allowing each household to withdraw U.S. $50,000 a year. Immigration and police authorities have even gone so far as to formally advise citizens not to leave China unless they have valid reasons to do so. This has been interpreted as yet another attempt at preventing foreign exchange from leaving the country (BBC Chinese, May 17; Jz.gov.cn, May 5).
Exports, perhaps the only sector to achieve a significant recovery, grew by 17.9 percent year-on-year to $331.3 billion in June, beating market forecasts of 12 percent and outperforming the May figure of 16.9 percent. However, these statistics could have been massaged as the upsurge of different types of exports is partly due to the record high inflation rates in major markets such as the U.S. and the EU (Eastmoney.com, July 14; Gov.cn, July 13). Moreover, the future prospects of exports depend in no small measure on whether the administration of U.S. President Joseph Biden would lift tariffs on a wide range of Chinese imports so as to tamp down inflationary pressures in America.
No Easy Way Out
The various economic task forces run by Premier Li, who has been sidelined by Xi for the past nine years, have convened marathon nation-wide meetings to address the country’s mounting financial issues. However, the magic bullet they have come up with is nothing new: augmenting state fiscal injections into infrastructure development in order to jack up the GDP growth rate. In April, the State Council announced that Beijing would roll out an investment stimulus worth 14.8 trillion yuan ($2.2 trillion) to boost infrastructure building (Gov.cn, July 6; qq.com, April 8). Despite the multiplier effects of individual state stimulus injections, the immediate result seems to be regional governments accumulating more debt rather than a palpable reinvigoration of overall business activities. These measures do not address the issues of greatest concern to countries and multinationals with major commercial stakes in China, who are increasingly apprehensive over the long-term fiscal health of the entire country as well as over-leveraged enterprises. In order to save money, Beijing has cut down on social-welfare benefits, extended the age of retirement and obliged managers and workers to contribute more to pension funds (Qiushi, July 12; Nikkei Asia, February 25).
Due to the ongoing economic slowdown, the financial standing of numerous provinces and big cities has also declined dramatically. Per official statistics, in the first four months of this year, the revenue of erstwhile prosperous provinces and cities dropped precipitously. For example, Guangdong, Zhejiang, Jiangsu, Shanghai and Beijing respectively earned 10.20 percent, 5.10 percent, 14.00 percent, 6.63 percent and 3.48 percent less in revenue than they had during the same period in 2021. At the same time, partly in view of the increasing discrepancy with much-higher American interest rates, overseas buyers of bonds issued by Chinese government agencies and state-owned enterprises (SOEs) sold an estimated $5.5 billion worth of their PRC portfolios last February (163.com, May 26; new.qq.com, May 26).
Many of the economic predicaments currently facing China have been worsened by Xi’s refusal to downgrade the “no limits” partnership with Vladimir Putin’s Russia. The possibility of Washington imposing secondary sanctions on Russia-friendly China-based enterprises – particularly financial and logistics companies, many of which are listed on the New York Stock Exchange – is one factor driving multinationals to continue to move their production bases to China’s neighbors such as Vietnam and Bangladesh, where land and labor costs are also much lower (Ceweekly.cn, May 30; Finance.sina.com, May 23). For example, if more Chinese financial institutions and SOEs are expelled from the SWIFT currency-swap system, foreign businesses may find it more difficult to operate in China.
As more cases of the B5 Omicron variant emerge, President Xi will likely continue his zero-tolerance COVID-19 policy, which seeks to stem the spread of the virus through mass testing and lockdowns. Last month, Xi told cadres that they must give equal attention to “efficiently coordinating COVID-19 prevention and control” on the one hand, and fulfilling “economic and social development” on the other (RTHK.hk, June 10; Gov.cn, June 9). However, in his speeches on how to more efficiently resuscitate the economy and achieve a tolerable employment rate, Premier Li has never accorded top priority to Xi’s pandemic-related strictures. On a few occasions, Li did not even mention either Xi’s pandemic strategies – or the supreme leader’s name – for example, during his recent meetings with provincial administrators (Hong Kong Free Press, June 10, Radio French International, May 15).
Over the past month, as though to help Xi shirk responsibility for mishandling the economy, official media has focused on his July 1 visit to Hong Kong and subsequent week-long visit to the Xinjiang Uighur Autonomous Region. On both occasions, the supreme leader stoked the flames of nationalism apparently in the belief that the public’s attention can be shifted away from deprivations and declining livelihood by focusing on matters of national pride (China Daily, July 17; People’s Daily, July 15). However, as Xi still heads the nation’s two highest economic decision-making organs– the party’s Central Finance and Economic Commission and the Central Commission on Comprehensively Deepening Reforms – the fact that he has to delegate authority to Premier Li and his State Council bureaucrats to tackle pressing financial threats could indicate that the “Chairman of Everything” has indirectly admitted his incompetency on economic matters. Moreover, the widening schism between the Xi camarilla and anti-Xi forces militates against the CCP’s traditional emphasis on party unity ahead of the once every five-year party congress.
Over the long term, whether Xi can extend his tenure matters less than the sustainability of the Chinese way of running the economy and the country. If fiscal indicators continue to deteriorate, it is possible that the supreme leader could double down on Beijing’s policy of “brandishing the sword” over sovereignty disputes in the South China Sea and the East China Sea. An invasion of Taiwan would allow the CCP not only to divert the attention of a disgruntled public, but would also enable Beijing to declare martial law in order to tamp down the increasingly frequent – and daring – acts of rebellion by Chinese from all backgrounds. A China that is even more bellicose in its projection of hard and soft power would also tend to enhance the status and potency of a Beijing-originated “axis” of likeminded authoritarian states such as Russia, North Korea, Thailand and Myanmar.
The headwinds buffeting the economy are expected to grow stronger, particularly given the clear U.S. readiness to slap sanctions on more Chinese firms as well as to deny Chinese IT firms access to key high technology components (Cn.nytimes.com, July 6; Carnegie Endowment, April 25). Moreover, political stability – another top priority of the party – may be further jeopardized by angry citizens who have lost money due to mismanagement in the financial and real-estate sectors. Despite the relative likelihood that Xi will be able to rule for five or even ten more years, the supreme leader might be presiding over the inexorable decline of the authoritarian China model, which has now fully exposed the cracks in its armor.
Dr. Willy Wo-Lap Lam is a Senior Fellow at The Jamestown Foundation and a regular contributor to China Brief. He is an Adjunct Professor in the History Department and Master’s Program in Global Political Economy at the Chinese University of Hong Kong. He is the author of six books on China, including Chinese Politics in the Era of Xi Jinping (2015). His latest book, The Fight for China’s Future, was released by Routledge Publishing in 2020.