On 10 September 2023, the Wall Street Journal reported that “Despite the increasingly grim economic circumstances, China’s top leader appears to be unconcerned by the outlook, and seems uninterested in more economic stimulus measures.” This analysis sounds incredible, but when we look at the Communist Party’s policies in the economic domain after the 20th National Communist Party Congress last year, there is a lot of circumstantial evidence. For example, on the one hand, the Communist Party—including Xi Jinping himself—has repeatedly called out to private enterprises to express the state’s support for them. But on the other hand, in the face of the thorny real estate crisis, the authorities, instead of accepting responsibility themselves, have dumped the blame on representatives of large private enterprise groups such as Hui Ka Yan [aka Xu Jiayin, Chinese billionaire chairman of the board and Communist Party secretary of the Evergrande Group, a Chinese real estate developer], using arrests to try to force the private enterprises to help the government through these difficult times. Today, it is Hui Ka Yan, tomorrow it will be Country Garden [Country Garden is a property development company based in Guangdong, China, owned by Yang Guoqiang’s family. It ranked 206 in the Fortune Global 500 list of 2023. Country Garden has a market capitalization of over US$29.84 billion]. How can such a way of doing things ease the worries of private enterprises so they can focus on economic development?
Another example is that the Chinese government has repeatedly stated that the country’s door to the outside world is still wide open, and has shouted that foreigners are welcome to come to China. But the fact is, so far, the trend of foreign capital fleeing China has not slowed down. According to Chinese official figures, foreign direct investment (FDI) in the second quarter plummeted 87% compared to the same period last year, leaving only US$4.9 billion invested in the vast country. Bloomberg describes it as “virtually cut off.” A new survey by the American Chamber of Commerce in Shanghai also found that United States companies in China are at a multi-decade high in pessimism about their business prospects, and that nearly 20% of U.S. firms are considering moving at least some of their operations out of China in the next few years. Why is this happening? In addition to the pessimism about the economic outlook, the Chinese government’s unchanged practice of using its political power to suppress foreign investment at every turn with raids on United States information technology companies, changes to the counter espionage laws, and news of detained executives of foreign firms continuing to circulate, has caused fear and anxiety among foreign investors, and is one of the most important reasons for the inability to retain foreign investment.
In March 2023, the Beijing office of the United States-based research firm Maxwell Wise was raided by Chinese Public Security officials and several employees were arrested. In May, state security officials raided the Shanghai office of another consulting firm, Kaiser Permanente. In the latest news, a senior executive and two former employees of a British advertising group were arrested in a recent raid on the Shanghai office of a Chinese company owned by Chinese public security officials. An employee of a Japanese pharmaceutical company who was arrested in March has been formally charged with espionage. Even for Apple, which is a well-known brand, the authorities are not letting up. The ban on the use of foreign-branded electronics in public affairs, which has been in place since 2020, was extended to 283 local municipalities and state-owned enterprises in August this year, causing Apple’s stock price to plummet shortly beforehand, with a market capitalization loss of as much as US$190 billion at one point.
On 11 September 2023, Chinese media outlet Observer.com published an interview with Zhang Jun, Dean of the School of Economics at Fudan University, discussing China’s current economic difficulties. In the interview, Zhang Jun raised a good question when he asked: “Since we have the national strength to spend hundreds of billions or even trillions of dollars on public image projects, why don’t we use that money to pay for the expenses of low-and middle-income families?” This is a good question because sluggish consumption has always been a major reason for China’s economic downturn, and reducing the expenditure burden of low- and middle-income families can effectively boost consumption, so why doesn’t Beijing use such a simple means to boost the economy? In fact, Zhang Jun himself gave the answer: “Now in the downward pressure of the economy, there is a very important reason for over-investment, which includes a large number of government-supported investments, many of which do not have a reasonable return, and cases abound in which the money has gone down the drain, a problem that has never been resolved.” In other words, the government has indeed increased investment, but the increased investment has not been distributed into the hands of the people at the bottom, but has instead been spent on infrastructure construction that local government officials can point to as “public image projects.” Local government officials even collaborate to use this as an opportunity to increase their rent seeking. Obviously, the structural factor of China’s economic downturn lies in the fact that the interests of the ruling group continue to outweigh and exploit the interests of the general public, and the problem does not lie in fiscal policy, but in the policy of investment distribution, and the latter, in fact, strictly speaking, is no longer an economic problem but a political problem.
The various contradictory policies and implementation methods confirm the observation of the Wall Street Journal that Xi Jinping is not focused on boosting economic growth. Of course, some may argue that a decline in economic growth is bad for the Chinese Communist Party’s governance. But do not forget that Xi’s way of thinking is different from the average person’s. He has a different way of thinking about it. The recent establishment of People’s Armed Forces department civil militias in various state-owned enterprises is a noteworthy move. Some people say that this is a preparation for a war in the Taiwan Strait, but this does not seem to be the case. The reason is that the organisations that have set up the largest number of People’s Armed Forces Departments are mostly the so-called urban investment and construction units, such as Shanghai Urban Investment, Guangdong Huizhou Water Group, Wuhan Agricultural Group, etc. These are the organisations that owe the most to their respective localities. They are all state-owned enterprises that owe the most to various places. Will these work units go to war? It does not look like they are preparing for war. Then what are they preparing for? Obviously, it is for social stabilisation. In the next serious economic downturn, how will the massive debt owed by local urban investment platforms be handled? There is a high probability that they will not be able to pay back the money, and what if they encounter a large-scale run in the firm debt repayment demand by creditors? The People’s Armed Forces department are prepared to deal with this. In other words, Xi Jinping is well aware of the economic downturn, but he is not prioritizing addressing it.
The question then arises: why is Xi Jinping not very interested in economic growth when it is so important?
Daron Acemoglu and James Robinson, in their book, “Why Nations Fail”, have an answer in the following passage. In their analysis of “Why Extractive Systems Fail to Support Stable Long-Term Economic Development,” they point out that “controllers of political power eventually find it more profitable to use their power to limit competition, to expand the pie they enjoy, and even to steal and plunder from others, than to support economic progress. The ability to distribute and exercise power will ultimately destroy the foundations of economic affluence unless the political system also changes from extractive to inclusive.” Considering that this book was published in 2013, these two authors are prophets in that their descriptions and analyses from a decade ago are perfectly in line with where China is today and where it is headed. In particular, their analysis of “why those in political power don’t care about economic growth” reveals the nature of Xi Jinping’s regime and hits the nail on the head. That is to say, for the ruling group represented by Xi Jinping, after more than a decade of expansion of state power, redistributing property through political means can increase their interests much more than economic growth itself, and the cost is much lower as well. Under such circumstances, the impetus to boost economic growth is no longer as strong as it used to be.
This is the reason, or at least one of the reasons, why Xi Jinping and the ruling group of the Communist Party of China (CPC) represented by him are not very interested in boosting economic growth. This is a structural problem, not a matter of Xi Jinping’s personal will, but a necessary consequence of the development of the authoritarian system to its present extreme. The title of the Wall Street Journal article is wrong. It is not that Xi Jinping is not interested in economic growth, but that the authoritarian system of the Chinese Communist Party has reached a stage where it is no longer interested in economic growth. If you understand this, you will know that the outlook for China’s economy can only be pessimistic.
Wang Dan is a well-known Chinese dissident and leader of the Chinese democracy movement. He is director of the Dialogue China think tank.
Translated from Chinese by Scott Savitt.