A Few Weeks Before the 20th CCP Congress, Xi Jinping Is Facing the Challenge of a Fractured Chinese Economy.
This is not the scenario Xi Jinping dreamed of for 2022.
For a man obsessed with control and stability, 2022 is not going according to plan for Chinese President Xi Jinping. A year ago, nothing seemed likely to disturb him on his way to the 20th Congress of the Chinese Communist Party (CCP) which, in the fall of 2022, will give him a third term as head of the country and confirm him as the most powerful Chinese leader since Mao.
After having orchestrated with pomp the 100th anniversary of the CCP in July 2021, the strong man of Beijing had made adopted the Party a “historical” resolution, raising again his stature among the icons of the country, and could congratulate himself on the holding of the Winter Olympic Games of Beijing without a major hitch in February 2022.
But the invasion in the wake of Ukraine by the bulky Russian “friend”, the arrival of the variant Omicron in China pushing to lock Shanghai for two months, the rise of tensions around Taiwan during the visit of the American Nancy Pelosi in early August 2022, a clear deterioration of the economic situation and even an unprecedented drought, come to throw a shadow on the expected coronation.
Headwinds
The world's second-largest economy is facing headwinds of unprecedented magnitude since Covid-19 emerged in Wuhan at the very end of 2019. Xi Jinping's much-vaunted zero-COVID policy places cities under a bell imposing severe restrictions on mobility and weighing on domestic consumption. Accounting (broadly speaking) for up to 30% of GDP, the real estate sector is sinking further into crisis every month, exacerbated by mortgage repayment boycotts by off-plan buyers faced with the stoppage of construction.
Even with low rates, businesses and consumers are reluctant to borrow and are concerned about the economic situation.
On the employment front, one of the pillars of the Party's legitimacy, one in five young Chinese are officially unemployed, a record level (and probably underestimated) that is out of all proportion to the US and the European average. In the end, only the rest of the world's appetite for “Made in China” allows Beijing to save face and post record trade surpluses. But for how much longer while a recession threatens Europe and the United States?
Xi Jinping remains adamant about the zero-COVID policy
Faced with a fractured economy, China has been forced to postpone its grand plan to rebalance through more dynamic domestic consumption and less external dependence. Instead, stimulus measures are being implemented through public investment and support for production.
At the same time, the objectives of reducing financial risks and decarbonization are relegated to the background.
But while growth is stalling, Beijing is refusing to pull out the big guns, unlike during the 2008 crisis. At the end of July 2022, Politburo buried the annual growth target of 5.5%, which is now out of reach, and insisted on the fight against the coronavirus, for which “there must be no slackening or fatigue”.
To the great surprise of observers, this summit meeting did not produce any new stimulus measures. And since then, monetary and fiscal easing has remained limited. Flexible on growth, Beijing remains adamant about its zero-COVID policy.
A growth model that has its limits
But could it be otherwise? The Chinese president has made zero CO2 a personal matter and cannot run for Congress without a victory on this front. On the economic side, the authorities are betting on major works to stabilize the ship but are aware that the growth model based on public investment is reaching its limits. The most relevant high-speed train lines, highways, airports, etc., have all been built in the last 20 years.
And China no longer has the same room for maneuver as it did during the crisis of 2008 when it avoided the worst of the situation with an investment plan financed by debt.
Covid has further increased China's debt, which has reached 273% of GDP, according to Natixis. Local governments are heavily indebted to finance public investments of sometimes dubious profitability, have to bear the cost of Xi Jinping's zero-Covid policy, and are seeing their revenues from land sales melt away.
At the same time, private companies are struggling to limit the damage caused by zero COVID, watching the growing influence of the Communist Party in business life and the takeover of the tech giants. The CCP wants to leave nothing to chance at all levels, and Chinese students will now even be equipped with smart pens to better observe in real time what they do daily. The mass surveillance society in China is delivering its share of bad surprises every day.
Encouraged by Deng Xiaoping's policy of reform and opening up, China's tech giants have played a decisive role in China's growth, employment, and innovation in recent decades. What will their role be in the years to come?
Preparing his political future beyond three terms, Xi Jinping has set a goal of doubling GDP by 2035 compared to 2020. A major political event, the 20th Party Congress must also specify economic choices that will be just as decisive for China's future. The question of Taiwan will also be addressed again and Xi Jinping, whom some ultranationalists of the CCP qualify as too soft, will have to show firmness to meet the growing expectations that he has raised among the Chinese population in recent years.
Some reading
Climate Change Is Not Sparing China, Whose Growth Is Facing a New Threat: An Unprecedented Drought. Xi Jinping's blue sky battle is forgotten, and coal production is revived.
Social Discontent Grows in China – Many Homeowners Stop Paying Their Home Loans. A way to put pressure on real estate developers, but it risks aggravating the real estate crisis in China.
Don’t Be Fooled, Nobody Has an Interest in a War in Taiwan, Neither China nor America. The reasons are different, but both giants will do everything to preserve the current status quo.
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