Originally published at 9DashLine, 24 August 2022.
The list of problems the Chinese economy faces is long. A rural banking collapse in Henan province has affected deposits worth billions of dollars, including the life’s savings of several customers. Chinese property developers have defaulted to the tune of hundreds of billions of dollars as a result of which homebuyers are threatening to stop paying their mortgages as the likelihood of taking possession recedes. Unemployment in China is becoming serious hitting a record high for those in 16-24 age group. Growth forecasts for China have been cut by multiple international agencies owing to the country’s continuing stringent zero-covid policy.
Meanwhile, climate change has also not spared China. Amidst a heat wave, the demand for power has shot up to such an extent that many Chinese provinces have instituted shutdowns for industries. In Chongqing and Sichuan, for example, affected companies include Chinese, American and Japanese automakers and Taiwanese electronics manufacturers. Not only will these shutdowns have knock-on effects on supply chains within China but also internationally.
The Party’s Economy
The ruling Communist Party of China (CPC) has a better understanding than many political parties elsewhere of the role the economy plays in sustaining political power and in promoting influence abroad. It was this understanding that allowed then Chinese leader Deng Xiaoping at the end of 1978 to call for economic reforms, a process which led to national growth unprecedented in human history. At the same time, the CPC’s constant insecurity over regime legitimacy and survival have also driven it frequently in history to overcome, as it were, the basic laws of economics – to try and transform the Chinese economy by sheer political will. Thus, it was that then CPC Chairman Mao Zedong launched the Great Leap Forward in 1958 that resulted in the starvation to death of millions over the next few years.
Thus, the workings of the Chinese economy cannot be understood using the same standards or metrics used to assess the economies of freer, more open and democratic societies.
And today, the ideological rudder to the Chinese economy – never completely absent – and the impact of greater centralisation are once again becoming apparent. CPC General Secretary Xi Jinping’s crackdown on hi-tech enterprises is part of a crusade to achieve two goals. One, to achieve greater compliance with central government diktat and the other, to stem the rising tide of income inequality and to force the rich – individuals, corporations, local governments – to contribute to the welfare of the less fortunate in China. This is the meaning behind Xi’s slogan ‘common prosperity’. For corporations this means greater contributions to what might be understood elsewhere as corporate social responsibility, while for China’s richer provinces and regions it is yet another reminder to invest in their poorer counterparts financially as well as in terms of human resources.
To return to China’s troubled property market, political pressure is now building within China to ensure the real estate market returns to stability. A meeting of the CPC Politburo at the end of July also called for ‘city-specific policies’ holding local governments responsible for ensuring the ‘timely delivery’ of homes already paid for but still under construction. Elsewhere, Premier Li Keqiang called on six powerful provincial governments – Jiangsu, Zhejiang, Shandong, Henan, Sichuan and Guangdong – that account for over 40 percent of China’s economic output and market enterprises, to take the lead in ‘strengthen[ing] the foundations of an economic recovery’. Among other things, the provinces were enjoined to ‘complete the task of handing over fiscal revenues to the central government, tightening their belts, ensuring a balance of revenue and expenditure’.
What is interesting here is the unbalanced dynamic in centre-local relations. The current round of centralization of power politically in China was preceded by the centralization of economic power starting with the fiscal reforms of 1994. While provinces retained a slight advantage in terms of the collections, they also had to bear a substantially large part of the expenses for social security which they met through extra-budgetary means such as land-use rights sales to property developers. The troubles of property developers, therefore, also impacts local governments.
Following Covid, the central government has also this year announced a record tax cut of RMB2.64 trillion (approx. US$386 billion) aimed at encouraging growth which further undermines local government revenues. So to go by what Li is saying, it appears that the provinces are unable to or reluctant to hand over their share of the revenue to the central government as economic difficulties bite. While ‘Made in China 2025’ has the sound of a national industrial programme, a large part of the subsidies that directed to China’s vaunted tech sector under its aegis goes from provincial and other local government coffers which are increasingly unable to meet their promises.
The central government’s pressure on these governments, however, continues without let-up. In April, the Chinese central government released a document on ‘Accelerating the Establishment of a Unified Domestic Market’, targeting local protectionism and offering guidelines to increase market efficiency and reduce transaction costs – highlighting actually the problems at play in centre-local relations.
Ambitious provincial leaders eying promotion to the CPC’s highest echelons of power in Beijing have an incentive to meet central government demands. But squeezing the provinces and further centralization will erode the very dynamism of the localities that was responsible for China’s economic growth and successes for over four decades.
Similarly, China’s persistence with a zero-Covid strategy – or now, a modified dynamic zero-Covid strategy – even as other countries are easing out of their lockdowns and learning to live with the virus has less to do with any adherence to scientific principles or even faith that the strategy can eliminate Covid inside China. Rather, it is part of the CPC’s attempts to make up, in a way, for China’s role in allowing what should have been contained at the local level in Wuhan to grow into a global crisis and pandemic. As a result, zero-Covid has become a showcase for the apparent efficiency of the Chinese model of politics vis-à-vis competing political systems or ideologies. The damage being done to the Chinese economy or to the global one appear to be secondary considerations when posited against Xi’s reputation or that of the CPC.
China’s economic woes also have other external implications. It walked in to Pakistan with its ambitious Belt and Road Initiative (BRI) aiming to address that country’s chronic power shortages. However, China ignored the fact that Pakistan’s problem was not a lack of power capacity but the failure of its users to pay their bills. Today, Chinese power suppliers in Pakistan are saddled with dues of US$1.5 billion and are not producing power from their new plants or have stopped construction mid-way of others. Pakistan is back to suffering from frequent power shutdowns not just affecting ordinary folk but also disrupting its economy.
Clearly, this calls into question the long term viability of the BRI with blowback potentially also within China. Old questions will be revived about the necessity of the BRI abroad even as China itself suffers from massive regional inequality at home and its state-owned enterprises – the major players in Pakistan and in the BRI, generally – stare at mounting losses.
In the run-up to the 20th Party Congress later this year, the CPC under General Secretary Xi can be expected to engage ever more seriously with China’s economic problems. With centralisation of power and regime survival as primary considerations, however, just do not expect the solutions to always be the most rational ones.