In the past few weeks, the world has discovered that the Chinese economy has serious problems and might already be in a crisis. The impending collapse of a real estate behemoth is causing analysts to ask if China’s Lehman moment is at hand. One-fifth of the stock of apartments is unoccupied. There are worries about how China will manage the nearly $9 trillion in off-budget domestic debt that its local governments have accumulated by building bridges and airports to nowhere. One in five young people are unemployed in a country where it takes just over two working adults to support one senior citizen. Economic growth might already be in the vicinity of 3% and might fall to 2% by the end of this decade. Over the past few years, Beijing lent developing countries nearly $1 trillion to gain global political influence. Most of that money is not coming back.
So, several economic indicators are orange and many are now flashing red. The clearest signals come from looking at what Chinese citizens and private firms have been doing. Households have put their savings in bank deposits and say that they intend to save more. They are neither spending their money nor investing it. Private investment is down to a third of what it was in 2015. As Adam Posen points out in a recent essay in Foreign Affairs, these “trends reflect people’s long-term economic decisions in the aggregate, and they strongly suggest that in China, people and companies are increasingly fearful of losing access to their assets and are prioritizing short-term liquidity over investment."
Reading Paul Krugman’s commentary last week, I learnt that “the point at which everyone suddenly realizes that unsustainable debt is, in fact, unsustainable" is called a Minsky moment. Even if China avoids a full-blown crisis, I think we are at a point where it is reasonable to say that China’s rise has ended.
Why did it happen, and why now? In March 2018, soon after Xi Jinping changed the rules to allow him to remain president for as long as he likes, I argued that it was the beginning of the end of China’s rise. That “China’s phenomenal economic and geopolitical ascendency will now begin to slow down and possible even decline is because, in a nutshell, Xi is reversing all the successful elements of the Deng formula and going back to many of Mao’s failed ones." And what were Deng’s policy markers? Institutionalized party rule, high economic growth and an openness to the outside world.
Xi has wrecked all three. China went from institutionalized to personalized rule. Beijing conducted witch hunts against private entrepreneurs, entertainment industry icons, technology industry leaders and foreign executives before strangling the entire economy with a mindless zero-covid policy. Xi’s regime picked fights with every one of its important neighbours, got into a trade war with the US and contributed to the rollback of global multilateral trade that powered China’s rise.
China’s misfortune is to be ruled by a leader who considers himself infallible, admits no mistakes and hence rarely engages in course correction. Unlike his immediate predecessors, he has surrounded himself with yes-men (and they are almost entirely men) who are unlikely to offer any negative feedback. The mistakes become very costly. It took massive public protests before zero-covid was reversed. Hundreds of billions of dollars were spent on otherwise unbankable infrastructure projects as part of the Belt and Road Initiative (BRI) before Beijing realized that most of it is bad debt. So, the BRI has been replaced with the Global Development Initiative (GDI), Security Initiative (GSI) and Civilization Initiative (GCI), but without any political reckoning. Having beaten down its technology industry, Beijing is back to promoting it after Washington imposed high-technology export controls.
Greater economic freedom can ameliorate China’s woes. When individuals and firms find ways out of their problems, the economy does so too. Yet, the Xi regime’s predilection for state control and the imposition of its preferences on the whole country is taking China in the opposite direction. The Wall Street Journal reports that “The leadership also worries that empowering individuals to make more decisions over how they spend their money could undermine state authority, without generating the kind of growth Beijing desires." Xi wants people to spend money on ‘good’ things like sports, cultural events and convenience stores in rural areas. Canny Chinese are putting money in their bank accounts instead. I will not put it beyond Xi to go after bank deposits in some form.
Posen captures the Chinese economic tragedy well when he writes that “the only reliable cure—credibly assuring ordinary Chinese people and companies that there are limits on the government’s intrusion into economic life—cannot be delivered."
Tailpiece: China’s haughty and supercilious official statement on the meeting between Xi and Indian Prime Minister Narendra Modi during the BRICS summit in Johannesburg is a reminder that we are dealing with an arrogant regime capable of erratic behaviour. Instead of being eager to strike a compromise, New Delhi should be unrelenting on all fronts. Why ease the pressure?