China stutters and stumbles

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Updated: Sep 07, 2015 6:46 PM

There’s a long road ahead for Xi Jinping, who has concentrated power within himself in an unprecedented manner

As China gears up to mark the end of World War II with a spectacular display of its prowess—almost 12,000 soldiers parading down the grand Tiananmen Square in perfect step and 200 aircraft on show with distinguished foreign dignitaries—from UN Secretary General Ban Ki-moon to Russian President Vladimir Putin, Sudanese President Omar Hasan al-Bashir to Venezuelan President Nicolas Maduro in tow, the aftertaste of implied Japanese defeat is not one easily palatable, and wisely, India chose to be absent.

In fact, this could not have been more ill-timed given China’s economic slowdown and domestic political mess, which indeed threaten President Xi Jinping’s credibility and standing.

China’s economic slowdown is big news. First came China’s devaluation of the yuan (which some call undervaluation) on 11th August, which skeptics interpreted as a ploy to sell the massive backlog of Chinese goods.

Then came “Bloody Monday” on 24th August when the stock market crashed. All this in a year when the IMF will vote whether to add the yuan to the Special Drawing Rights basket (to the US dollar, British pound, European euro and Japanese yen).

As the blood has coagulated, observers are asking which of the two, makes for the lesser of evils—and it turns out, it is the slowdown that is the main concern. Of course, this is not to say that China’s cheaper goods with the devaluation won’t give domestic producers in Asia Pacific and Africa a run for their money.

The slowdown has been coming though, starting in the 1990s when the economy began to stutter gradually with the fallout of the one-child policy, a small service sector, low domestic consumption (40 percent of the GDP) and controversial tax-sharing reforms.

Of these, the 1994 tax-sharing reforms squeezed the local government, leaving the local government control over urban land using tax, house property tax and business tax as sources of revenue.

Local governments took to the property market to raise revenue acquiring land from farmers, re-selling the land to developers and making wide profits.

This was feted as local state corporatism—but it began to sour turning predatory and rent seeking. Today, local debt is a cause of concern. Local debt stands at 35 percent of the GDP—however, this is short term as investments are in infrastructure and housing.

The slowdown is causing hiccups not in America (8 per cent of America’s exports worth 0.7 percent of GDP go to China) but in commodity markets (which India may gain from).  It is well known that the “factory of the world” was fuelled by iron-ore, coal, oil and copper coming from commodity markets Malaysia, Indonesia, Australia and particularly, Africa.

China is Africa’s largest bilateral trading partner. A report by IMF economists found that 1 percentage point decline in investment growth in China caused a 0.6 percentage decline in export growth in sub-Saharan Africa.

China cannot shrug off slowing exports, over-capacity and the shrinking workforce at the Lewisian turning point either. China’s “second generation” of workers (born in the 1980s) are shrinking and wages have risen. Despite high literacy (92 percent literacy) and officially, a low unemployment rate, jobs are getting scarce.

China churns out an estimated 7 million graduates a year (in 2014) who are underemployed and there is an aging population (above 65) set to increase to 430 million in 2050.

Economic woes aside, there are reports of the political mess that China is in. An illustrious array of observers from Roderick MacFarquhar to David Shambaugh to Joseph Fewsmith have likened the current political mess to the “Cultural Revolution”, the “beginning of the endgame” to putting “Lenin back in the Leninist Party”.

The mess is partly because of Xi’s campaign to net “tigers” (ministerial level) and “flies” (bureau level), which has gone haywire, or so it is said.

The high profile purge of Party Secretary of Chongqing, Bo Xilai led to the purge of ex-security car, Zhou Yongkang, a former member of the Standing Committee of the Politburo, that which breached the immunity granted to a senior leader. Soon the anti-tigers & flies campaign went beyond the petroleum industry, power and coal industry in Sichuan and Shanxi province, the power bases of Bo and Zhou spreading to Renmin University (Beijing) to the Three Gorges Corporation, from high-profile lawyers who have been done “in” to recently detaining prosecutor Shen Liangqing for re-tweeting an unconfirmed story that 1,400 people died in the explosion at Tianjin at Hui Rai International Logistics that stored chemicals on 12th August 2015 (the official toll is 115).

Wang Qishan, one of the members of the Standing Committee of the Politburo was brought in to head the Central Discipline Inspection Committee (CDIC). In 2014, Wang spearheaded the effort to bring 71,000 cadre in line for violating the “Eight Directives” and successfully repatriated 500 fugitive officials. Earlier, in 2013, 17 ministerial level cadre were investigated and 20,000 others punished.

And then the injunctions have come. The Central Committee’s Document No.9 of 2013 has lectured the populace to discard Western ideals of democracy—constitutional democracy, civil society and Western-style journalism. “Eight Directives” and the  “Six Injunctions” (2012-13) have brought an end to travel, gifts, lavish banquets, receptions and tours. Leading luxury prestige brands, popular in China have suffered in the recent years.

So much so, that unlike other Chinese leaders in the immediate past—who were primus inter pares (first among equals) Xi is seen simply as the primus (first). Certainly, Xi is accomplishing more “firsts” than normal.

In recent times, the state security, police and other security apparatus was amalgamated under the newly established Central National Security Commission (NSC) headed not by a Politburo member (as has been the norm) but uncharacteristically by Xi, who in addition is the Chairman of the Central Military Commission (CMC) and the General Secretary of the Communist Party.

He also heads the Central Leading Group on Comprehensively Deepening Reforms—which places him in charge of the economy (the bastion of the Prime Minister Li Keqiang). Besides Xi heads the Leading Groups on information technology, foreign affairs and even Internet Security.

This extreme concentration of power is unprecedented.

Earlier, Xi committed to let market forces decide. But intervention—freeing up money by increased lending, lower interest rates, lowering bank-reserve ratio and mortgage loans—is seen as necessary. The government had to throw in $156 billion for buying shares.

The silver lining is that the health of the China’s economy is more dependent on property and real estate, rather than equity. The former is in fact in better shape and seems to be rebounding.

Xi’s lowered economic targets referred to as the “new normal” has become the catchphrase for the transition and re-adjustment from exports, manufacturing and investment-driven growth to consumption and innovation-driven growth. Indeed, to boost consumption, “Double 11” (November 11) took off last year as a big shopping bonanza. But, 7 percent growth in 2015 may be increasingly difficult to achieve.

In a country of “red capitalists” where the only thing that talks is money, the question that hangs in the air is will Xi be able to restore the economic sheen and clear the political mess? With all power in his hands, only he alone is accountable.

The author is a Singapore-based Sinologist and is currently visiting fellow, Institute of Chinese Studies, New Delhi

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