For the past 20 years, China has been the largest and most reliable source of growth for the world's economy. It has contributed to a quarter of the increase in world GDP and has grown in 79 of those 80 quarters. For much of the period since the opening up after Mao's death, the Communist Party has adopted a practical approach aimed at enriching the country, combining market reforms and state control. However, the Chinese economy is today in danger. The immediate problem is his zero-tolerance campaign against covid, which has caused a depression and may condemn the economy to a stop-start pattern. In reality, this circumstance aggravates a larger problem: President Xi Jinping's ideological struggle to reform state capitalism. If it continues down this path, China will grow more slowly and be less predictable, with great consequences for the country itself and for the world.
After nearly two months, Shanghai's lockdown is easing, but China is far from Covid-free as new outbreaks have emerged in Beijing and Tianjin. More than 200 million people live under restrictions and the economy is reeling. In April, retail sales were 11% lower than the previous year, and purchases of KFC, cars and Cartier are weak. Although some workers live in the factories themselves, industrial production and export volumes have decreased. Counting all this year, China could struggle to grow faster than the United States for the first time since 1990, after the Tiananmen Square massacre. For Xi, the timetable is not at all favourable: after the 20th party congress at the end of this year, his intention is to see himself confirmed for a third presidential term, thereby breaking the recent norm according to which leaders withdraw after of two exercises.
However, Xi is largely responsible for the two blows that the economy has received. The first is its "zero covid" policy, applied for 28 months. The party fears that the opening will lead to an exit wave that will kill millions of people. That may be true, but it is also true that valuable time has been wasted: 100 million people over the age of 60 have not yet received all three doses of the vaccine. In addition, it refuses to import more effective Western messenger RNA vaccines. Instead, perhaps the plan is to extend the zero-tolerance policy into next year. China has given up on hosting the Asian Soccer Cup in June 2023. There is talk of permanent testing centers and a stable army of nostril inspectors. Since the omicron variant is highly transmissible, more outbreaks and more lockdowns are inevitable. Now, since the covid-zero policy is identified with Xi, any criticism of it is considered sabotage.
That same ideological zeal is behind the second shock, a series of economic initiatives that constitute what Xi calls his "new concept of development", with which he intends to tackle "major changes unseen in a century", such as the Sino- American. The goals are rational: curb inequality, monopolies and debt, and ensure that China masters new technologies and fortifies itself against Western sanctions. However, Xi believes that the party must take the lead in all these areas, and implementation has been punitive and erratic. A barrage of fines, new regulations and purges has led to the stagnation of the dynamic technology sector, which contributes 8% of GDP. And a savage but incomplete crackdown on real estate, responsible for more than a fifth of GDP, has led to reduced funding, one reason home sales fell 47% in April compared with a year earlier. previous.
The government hopes that the extensive stimulus program that is underway will help it meet the official growth target of 5.5% in 2022 and calm nerves ahead of Congress. On May 19, Premier Li Keqiang urged officials to "act decisively" to restore growth, and the central bank has cut mortgage interest rates. The party has tried to reassure the terrified tech barons. The next step is likely to be a large public bond-financed infrastructure program.
Still, the new mountains of debt and acres of concrete will not prevent the need for draconian lockdowns or reduce the risks of Xi's economic model. This model aims to expand the scope of the least productive part of the economy: that managed by the State. China's industrial policy has achieved formidable successes, including achieving a dominant global position in advanced batteries. Xi hopes technology and a new series of public investment funds will speed up decision-making. Now, let's not forget all the woeful failures, from the rust belt industries to microchips.
At the same time, incentives to the most productive part of the economy, the private sector, have been hurt. You can see it in the financial markets, which have seen big outflows. The cost of capital has risen: Chinese stocks are trading at a 45% discount to US stocks, an almost record difference. Investors and entrepreneurs are changing their calculations. Some fear that the financial advantages of business will be limited by a party that mistrusts private wealth and power. Venture capitalists say they have switched to the biggest grants, not the best ideas. For the first time in 40 years, no major sector of the economy is subject to liberalizing reforms. Without them, growth will suffer.
Xi's ideological economics has big repercussions for the world. While the stimulus could boost demand, further lockdowns are likely, putting at risk a global economy that is flirting with recession. In business, China's size and sophistication make it impossible for multinationals to ignore it. However, many will rebalance their supply chains outside of China, as Apple appears to be doing. The Chinese giants may dominate some sectors in the 2030s, but the West is likely to be more cautious about importing products from that country. In relation to diplomacy, a less ambitious and independent private sector means that China's presence abroad will be more state and politically driven. It may become more vicious, but also less effective.
And what will become of life in a less open China? As much as people criticize the lockdowns and job losses online, the protests are unlikely to turn into riots due to surveillance, propaganda and widespread support for party goals. Some technocrats disagree with the country's shift to the left, but lack the power and courage to oppose it. And, insofar as it is possible to discern something in that black box that is the politics of the Chinese elite, Xi, who is 68 years old, has no rival today. However, on the eve of a party congress that could secure him power until at least 2027, the shortcomings of a one-man government in the world's second largest economy are more than obvious.
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Translation: Juan Gabriel López Guix
