A litany of economic woes but in China politics rules

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 savings of several customers. Chinese property developers have defaulted to the tune of hundreds of billions of dollars and homebuyers are threatening to stop paying their mortgages as the likelihood of taking possession declines. Unemployment in China is becoming a serious issue hitting a record high for those in the 16-24 age group. Multiple international agencies have cut their growth forecasts for China owing to the country’s continuing stringent zero-Covid policy.

Meanwhile, climate change has not spared China. Amid a heat wave, electricity demand has increased so much that many Chinese provinces have instituted shutdowns for industries. In Chongqing and Sichuan, for example, affected companies include Chinese, American, and Japanese automakers as well as 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 Chinese Communist Party (CCP) has a better understanding of the role the economy plays in sustaining political power and in promoting influence abroad than many political parties elsewhere. This understanding allowed then-Chinese leader Deng Xiaoping at the end of 1978 to call for economic reforms, a process which led to unprecedented national growth. At the same time, the CCP’s constant insecurity over regime legitimacy and survival have frequently resulted in a disregard for the basic laws of economics — to try and transform the Chinese economy by sheer political will. Thus, it was then-CCP Chairman Mao Zedong’s launch of the Great Leap Forward in 1958 that resulted in the starvation and death of millions over the following few years.

In the run-up to the 20th Party Congress later this year, the CCP under General Secretary Xi can be expected to engage ever more seriously with China’s economic problems.

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. CCP General Secretary Xi Jinping’s crackdown on high-tech enterprises is part of a crusade to achieve two goals. First, to achieve greater compliance with Party and central government diktats and second, to stem the rising tide of income inequality by forcing the rich — individuals, corporations, and local governments — to contribute to the welfare of the less fortunate in China. This is the meaning behind Xi’s slogan of “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.

Centre-local problems

Returning to China’s troubled property market, political pressure is now building within China to ensure stability in the real estate market. A meeting of the CCP 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 per cent 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 centralising political power in China was preceded by the centralisation of economic power starting with the fiscal reforms of 1994. This led to a steep fall in the share of tax revenues for many provinces even as they continued to bear a substantially large part of the expenses for social security. Given their tax revenues were insufficient to support such expenditure, local governments turned to extra-budgetary sources of revenue such as the sale of land-use rights to property developers. The troubles of property developers, therefore, also impact local governments.

Following the economic downturn in the wake of Covid, the central government this year has also announced a record tax cut of RMB 2.64 trillion (approximately USD 386 billion) aimed at encouraging growth, which further undermines local government revenues. To go by what Li is saying, it appears that the provinces are unable 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 are directed to China’s vaunted tech sector under its aegis are actually paid from provincial and other local government coffers. These governments are now increasingly unable to meet their promises.

The central government’s pressure on these local authorities, however, continues unabated. In April, the Chinese central government released a document on “Accelerating the Establishment of a Unified Domestic Market”, targeting local protectionism by offering guidelines to increase market efficiency and reduce transaction costs — highlighting the problems at play in centre-province relations as well as between provinces and localities. Ambitious provincial leaders eyeing promotion to the CCP’s highest echelons of power in Beijing have an incentive to meet central government demands. But squeezing the provinces and further centralisation will erode the very dynamism of the localities that was responsible for China’s economic growth and successes for over four decades.

External implications

Similarly, China’s insistence on 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 the belief that the strategy can eliminate Covid inside China. Rather, it is part of the CCP’s attempts to make amends, in a way, for China’s role in failing to contain Covid at the local level in Wuhan resulting in a global crisis and pandemic. Accordingly, 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 on a global scale appear to be secondary considerations when posited against Xi’s reputation or that of the CCP.

China’s economic woes also have other external implications. It walked into Pakistan with its ambitious Belt and Road Initiative (BRI) aiming to address the 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 USD 1.5 billion and are not producing power from their new plants or have stopped their construction mid-way. Pakistan is back to suffering from frequent power shutdowns not just affecting ordinary folk but also disrupting the economy.

Clearly, this calls into question the long-term viability of the BRI with repercussions potentially even within China. Old questions about the necessity of the BRI abroad will be revisited as China suffers from massive regional inequality at home and its state-owned enterprises — the major players in Pakistan and in the BRI — face mounting losses. In the run-up to the 20th Party Congress later this year, the CCP under General Secretary Xi can be expected to engage ever more seriously with China’s economic problems. With the centralisation of power and regime survival as primary considerations, however, do not expect the solutions to always be the most rational ones.

DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.

Author biography

Jabin T. Jacob is Associate Professor at the Department of International Relations and Governance Studies, Shiv Nadar Institution of Eminence and Adjunct Research Fellow at the National Maritime Foundation, India. You can find additional work from this author here. Image credit: Flickr/David Dennis.