Chinese President Xi Jinping has endured and survived many challenges in life. As a teenager, he toiled for years in the countryside after his father was persecuted. He worked his way to the top of power and carried out a massive anti-corruption campaign that earned him many enemies.
But now on the cusp of an unprecedented third term, Xi faces what may be his most difficult challenge: solving the serious problems that have spread to China after four decades of rapid, rampant and wasteful economic growth, and the second largest and soon-to-be-largest economy in order.
Experts say it won’t be easy, and Xi himself may be his biggest obstacle.
“China has essentially reached the peak of its growth period, fueled largely by debt. As a result, they will have a hard time unless he wants to reform the economy and he has no intention of doing that,” said Andrew Collier, a Hong Kong-based expert on China’s macroeconomics.
In the past four decades since China opened, its economy has expanded 18 times – from a GDP of $149.5 billion in 1978 to $17.7 trillion last year, accounting for about 18.5% of the global economy. Since Xi came to power in 2012, it has doubled in size, surpassing the European Union last year.
But much of that growth has been unhealthy, especially in the manufacturing and construction sectors, where excessive growth has created ‘ghost towns’ and unnecessary infrastructure. This has not only caused damage to the environment, but has also led to a lot of internal debt.
Real Estate Developers
A symptom of the problem has exploded recently when overambitious property developers funded by state banks defaulted, apartment buildings left unfinished and angry homebuyers boycotted their mortgages and amassed in rare protests.
Xi seems unable to curb these excesses. While he has famously made the statement that “homes are for living in, not for speculating,” the real estate bubble has continued to rise over the past decade that he has been in power.
“It used to be a bubble, but it’s gotten much bigger, so obviously the conversation hasn’t followed action,” said Shanghai-based independent economist Andy Xie.
He estimated that Chinese property developers owe at least $10 trillion in debt and says this is a “very conservative estimate”.
While some businesses can be saved, China just can’t keep growing like this and Xi knows that.
In his speech at the opening of the 20th Party Congress on Sunday, he said: “Development was unbalanced, uncoordinated and unsustainable, and the traditional development model could no longer move us forward.”
He said the next five years will be “crucial” for building a “modern socialist country” through “quality” development.
Analysts say that instead of continuing to focus on state-owned companies, which are less efficient and less profitable, Xi should support the private sector. But they say he does the opposite.
“He has essentially doubled down on his existing policies to promote the state business system and… the crackdown on the tech sector that has taken place in recent years is a big part of his worldview,” said Collier, director of Orient Capital Research. .
Collier proposes increasing bank lending to the private sector, shifting the focus to stimulating domestic consumption and allowing more free market decision-making.
But Collier notes, “That’s not part of his DNA.”
In a recent report, the World Bank also advised China to remove remaining barriers to market competition, boost innovation and productivity, and focus on the service and consumption sectors by increasing spending on health care and education so that Chinese do not feel so much to save.
But Xie claims that Xi wants to control the market economy.
“The Chinese Communist Party is all about controlling the party, but the market isn’t about that, it’s about power decentralization; the market makes its own decisions,” says Xie. “Living together was uncomfortable. Now the market has been brought under control.”
Examples: The planned IPO of a technology company (initial public offering) was stopped. Major tech companies have been pressured to make large charitable donations, and government intervention has caused the share prices of some companies, such as Alibaba, to plummet. Even the video game and private tutoring industries have been ordered to stop putting profit above the welfare of children.
Observers believe it would be better if China reformed and updated its tax system to adequately tax the growing number of ultra-wealthy in the country, including real estate speculators, and narrow the wealth gap.
But contrary to Xi’s image as a strongman, he may not have as much control over economic affairs.
While political power is centralized in the party, China is very decentralized economically, Collier said.
“He can control state-owned companies, but ultimately it’s up to the provinces to try to generate growth,” Collier said.
In the real estate sector, for example, land sales and taxes from transactions contribute to 10% of the country’s annual GDP and more than half of the revenues of many local governments, so Xi’s hands may be tied.
So far, Xi seems to favor a soft landing — slowing growth to prevent China’s economic bubble from bursting completely, avoiding mass discontent and social unrest, which could threaten the survival of his party.
In his speech, Xi pledged to deepen the reforms of state-owned enterprises and help them grow bigger and more competitive, while also promising to encourage entrepreneurship and help private Chinese companies “become excellent.”
He also pledged to accelerate China’s transition to green, low-carbon development — meaning the world’s factory will ostensibly produce higher-quality goods and in less polluting ways.
At the same time, he promised to improve the income tax system, increase income for low-paid workers and expand the middle class.
With millions still living in poverty and youth unemployment very high, that is a major challenge, especially as economic growth is expected to fall from 8.1% last year to just 3.2% this year, the second lowest percentage in nearly five decades.
If Xi fails to implement the necessary reforms during his third term in office, China’s economy — although it is predicted to surpass the US’s by 2030 due to its much larger population and manufacturing sector — could reach a crisis point. Moreover, given that China is the largest market and trading partner, and also increasingly the main investor for many countries, this could have huge implications for the rest of the world.
“The world revolves around China,” said economist Xie.