Commentary: Xi Jinping has pursued national security and stability over growth – and it shows

SINGAPORE: In the run-up to the 20th Party Congress of the Communist Party of China (CPC), the mood on China’s economy is less than festive. The most recent World Bank projections put China’s GDP growth for the year at 2.8 per cent, down from its initial forecast of 5 per cent. Some investment banks project even lower growth.

China’s growth so far is a far cry from the 5.5 per cent indicative target policymakers set last December, and well below the 8 per cent growth of 2021 when the country recovered after its first wave of COVID-19.

The causes of the slowdown are four-fold.

First, the property boom that once defined China’s growing middle class is unwinding. Sales of new property are now down 23 per cent compared to last year. Land sales have followed apace, squeezing local government revenues, resulting in slashed spending.

Property prices have now been sliding for more than a year, and are undermining consumer confidence, which is at its lowest level since the central bank started recording it in 1991. A further slide in prices will affect consumption, in part because more than 70 per cent of the wealth of Chinese citizens is tied up in property.

Second, Beijing’s “dynamic zero-COVID” policy has disrupted economic activity, particularly in services, and has further dampened consumer confidence. While China’s approach to the pandemic was initially very successful, the Omicron variants are much more infectious, if less lethal.

While nearly 90 per cent of China’s population has received two doses of a COVID-19 vaccine, many seniors remain unvaccinated, and the country is estimated to only finish vaccinating the elderly by autumn in 2023.

Third, Russia’s invasion of Ukraine, while not harming China’s economy directly, has hit exports to Western economies and contributed to an energy price shock. Central banks are recalibrating their monetary policies to prevent high inflation taking hold.

This will strain countries heavily indebted from the COVID-19 pandemic, with Sri Lanka, Pakistan and Argentina already sliding into distress.

Fourth, China’s ideological objective of “common prosperity” has dampened the investment climate. The abrupt regulatory crackdown on Internet-based enterprises – from finance to gaming and education – signals a shift towards more government intervention in the private sector.

Though authorities have repeatedly assured otherwise, it has nevertheless slowed investments in industries beyond tech.

STRUCTURAL CHALLENGES AHEAD

A short-term rebound in growth can be expected once China’s COVID-19 policies ease and the property sector stabilises. For the latter, government support has enabled some developers to restart work on unfinished properties, which could gradually restore confidence and property sales.

Beyond the short term though, structural challenges remain.

China will face a declining and ageing population in the decades ahead, which will turn the demographic dividend of the past into a tax on growth in the future. Productivity growth, which was supposed to become the main driver, has been disappointingly low in the past decade as well.

Growth in potential GDP has continued to rely on capital. That cannot go on forever because returns on capital have been declining, when funds have mainly been funnelled into infrastructure and housing, and less in the private sector. So more and more investment would be needed to get the same growth.

Moreover, the debt with which those investments were partially financed has grown faster than GDP. China’s debt now stands at 300 per cent of GDP, which is very high for its level of development.

On the demand side, investment and exports have been relied on too heavily as growth drivers. Consumer demand only contributes less than 40 per cent of GDP, barely 3 percentage points more than decade ago.

ECONOMIC PRIORITIES HAVE SHIFTED

These issues have been well known for some time. In 2013, the 18th Central Committee of the CPC laid out ambitious reforms in fiscal, industrial and social policies to catalyse innovation, productivity, and domestic demand.  It also said the market would be a “decisive” force in allocating resources.

But since then, priorities have shifted. President Xi Jinping has placed more emphasis on the leading role of the state, national security and stability rather than growth.

Under the banner of common prosperity, authorities have made a xiaokang society – (moderately prosperous society) their social goal, which justifies scrutiny of China’s lucrative tech giants.

Meanwhile, party reforms have centralised decision power in Beijing and reinvigorated party discipline. Enforcer of anti-corruption rules, the Central Disciplinary Inspection, reduced incentives for local officials to make deals with businesses, for instance on land allocation and subsidies, thereby limiting officials’ entrepreneurial activities and policy innovation.

All these can be encapsulated by Xi’s “New Development Philosophy”, which he first presented in an October 2021 speech. It brings together “dual circulation” – a strategy to pursue domestic consumption over trade – common prosperity and national security in one overarching framework.

This philosophy is likely to be incorporated in the Communist Party Constitution at the forthcoming Party Congress.

The question is whether the New Development Philosophy can deliver a return to moderately high growth. It will take 4.7 per cent average annual growth for the next 15 years to meet Xi Jinping’s goal of doubling 2020 GDP by 2035.

Much of China’s future economic success will depend on who is in charge of implementing it. The forthcoming 20th Party Congress will not only solidify Xi Jinping for a next term as general secretary, but also provide indications as to who will replace key positions.

Premier Li Keqiang, formally in charge of the economy, has already announced he will not serve beyond his term that ends next March. Vice Premier Liu He, China’s economic tsar, is now 70, well beyond the usual retirement age.  And Yi Gang, the governor of the central bank, will hit retirement age by March next year.

Regardless of who becomes economic chief, for Xi to meet his lofty goals, much of the reforms proposed in 2013 will have to be dusted off.