What does Xi’s third term hold for China’s economy?

China’s GDP growth will likely fall below the rest of Asia for the first time in more than thirty years. President Xi’s quest for absolute authority has only worsened the challenges for the Chinese economy as regulatory crackdowns have become widespread in the world’s second-largest economy.

xi jinping
Xi Jinping has given 2049 as the year when the PLA and its wings must emerge as the most powerful military on earth with the aim of world domination. (Photo: Reuters)

By Priyanka Pandit

The recently concluded 20th National Congress of China has been etched in history as President Xi Jinping secured a precedent-breaking third term as China’s national leader. President Xi’s spirited address and “self-congratulatory” messages may have enthused the Communist Party elites about their nation’s future as they affirmed Xi’s leadership for the next five years. However, the reality of China’s economic turnaround has been far more worrisome than his political report would have dared to put out.

China’s GDP growth will likely fall below the rest of Asia for the first time in more than thirty years. President Xi’s quest for absolute authority has only worsened the challenges for the Chinese economy as regulatory crackdowns have become widespread in the world’s second-largest economy. After witnessing record growth in the initial stages of the Covid outbreak, a severe downturn has gripped China, which is unlikely to go away soon. Rooted in President Xi’s unsustainable zero-Covid “strategies” and strict regulatory measures across a range of sectors, the current slowdown is exacerbating uncertainty and sapping any potential rebound in demand.

Coupled with Beijing’s ongoing structural transformation and growing unfavourable conditions in the global economy, the challenges before the Chinese economy are cumulatively enormous. But there seems to be no sign of relief anytime soon. In his address to the 20th National Congress, President Xi declared his unswerving commitment to zero-Covid policy “to stop the spread of the virus” and to protect “people’s health and safety to the greatest extent possible.”

As part of the strategy, the Chinese government shuts down cities and all its activities, locking down millions of people at a time, with minimal access to necessities such as food, supplies and medical care. Xi’s refusal to acknowledge the economic and social costs of the lockdowns underline the policy’s growing domestic political stakes and, more importantly, the leader’s bid to maintain an iron grip over every aspect of life in China.

However, what becomes a matter of concern is Xi’s utopian belief that a zero-tolerance approach to combating infections is the only way to squash every new outbreak before it can spread widely. This expectation, in turn, dashes any hope of restoring consumer confidence, at least in the short and medium run, as the Chinese nation grapples with frequent lockdowns, mass testing, travel restrictions, and costly quarantine-related rules.

Youth unemployment is at a record high, and Chinese graduates suffer diminished recruitment demand in the manufacturing and service sectors. While the Chinese leader, in his report, talks about “removing institutional and policy barriers” to employment, the insistence on the zero-Covid strategy indicates otherwise.

The Chinese population’s shift to “new frugality” also attests to the rising unemployment conditions and slowing businesses in the country. Consumer spending, which accounts for more than half of China’s GDP, has taken a significant hit following the government’s repeated lockdown of cities. Worrying are the social media trends in China, touting low-cost lifestyles and sharing money-saving tips, which pose severe threats to the country’s shift to a consumer-led, demand-based economic model.

In recent years, China’s debt problems too have gone from bad to worse partly due to Xi’s increasing consolidation of the state-owned sector. The state-owned enterprises (SOEs) rank highest in China’s national debt share, and failure to carry out meaningful reforms in the sector has led to continued misallocation of capital and unproductive investments within the enterprises. China’s real estate sector presents a burning example of such reckless speculation and excessive debt buildup.

The crisis before China’s real estate industry, which accounts for a quarter of its economic output, is huge as many real estate giants have become loan defaulters, leaving behind scores of incomplete projects. Consequently, China is witnessing serious mortgage boycotts, with homeowners refusing to pay their mortgage prices for stalled or undelivered projects.

The situation seems unlikely to improve for real-estate developers and homebuyers, as the zero-Covid policy is not going anywhere. The adverse effects of the strategy are also felt in China’s inbound capital flow across sectors as foreign firms are shifting current or planned investments out of China owing to virus control measures.

Although Beijing has launched a significant outreach to charm overseas investors, it is unlikely that cajoling the western business community will mitigate the deep-seated uncertainty about Beijing’s changing regulatory landscape and slowing economy.

Xi Jinping’s regulatory crackdown on China’s tech companies, private tutoring, gaming, and the cosmetics industry, too, has shaken investors’ confidence, making would-be investors more reluctant to move assets into China or keep them there. Also, tensions across the Taiwan Strait and the continuing US-China trade and technology dispute since 2018 have added significant complexity to stock picking.

Now with the noose of U.S. technological export controls tightening around China, Beijing’s access to cutting edge technologies and equipment will be badly constrained. Amidst the increasing government control and sweeping crackdowns on big private tech companies, China will find it more difficult to replicate technology leapfrogging and grow along the innovation ladder.

Although Xi has bolstered state-led initiatives to achieve self-reliance in critical technologies, challenges to China’s carving a new technological path remain. The external technological balancing is likely to increase pressures on China’s innovation and trade potential and expedite Beijing’s decoupling from the global economy.

While Xi, in his 102-minute speech, has outlined the challenges facing the Chinese economy, the text points to a new narrative that places a higher premium on security and stability than reform and development. The new appointments to China’s highest national decision-making body, the Politburo Standing Committee, make President Xi’s emphasis on ‘national security’ evident. The 69-year-old Xi has carefully sidelined the reform-minded leaders, including Premier Li Keqiang and former Vice-Premier, Wang Yang, who favoured a decentralized and market-friendly approach to development. Their replacement with hardliners and inexperienced policymakers is likely to cost the economic policymaking in China.

Although a coterie of ‘yes-men’ may help Xi Jinping endorse his leadership over a decade, it may not help shift the economy back on track. The gap between Xi’s beliefs and reality will only grow wider if Beijing goes too far in this direction. It would also pose irreversible damages to the Chinese economy and, in turn, the world economy.

The author is an Assistant Professor at the Department of International Relations and Governance Studies, Shiv Nadar University.

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First published on: 28-10-2022 at 18:04 IST
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