Economic policy with Chinese characteristics
This article is authored by Jabin T Jacob, associate professor, and director, Centre for Himalayan Studies, Shiv Nadar Institution of Eminence, Delhi-NCR.
China’s economy has been a tailspin recently that is the result of politics as much as of objective economic conditions. There is no doubt that politics played a role in the decision to open up China’s economy in the late 1970s. This then led to rapid economic growth over the decades pulling up the greatest number of people out of poverty in history as much a political good as an economic one. What is more, China’s growth has also had plenty of positive effects on other economies – developed and developing. To take just the case of India, the massive telecom revolution in the country would not have been possible without access to cheap Chinese products – and one might add, China’s unscrupulous economic and trade practices of stealing tech, subsidising exports and non-tariff of all kinds against competitors. India’s access to cheap telephony has not just been an economic booster but also a catalyst for social change enabling labour migration across the country and other multiplier effects.
However, politics cannot stay constant either as the economy reforms, changes shape and encounters new challenges. But that is precisely what the Communist Party of China (CPC)-led ruling regime seeks to do. Thus, alongside Chinese growth has also come costs– its manufacturers are heavily dependent on state subsidies and old habits of contravening economic treaty obligations and norms are hard to give up, slowing down the transition from low-end manufacturing to higher end manufacturing as well as from an export-driven economy to a consumption-driven one. Analysts of the Chinese economy also know that its high rates of growth came without accounting for the costs of damage to the environment and public health. Chinese statistics have often been fudged as local governments competed for praise, incentives and more resources from the central government. Beijing has had to find its own means of calculating China’s economic growth separate from figures provincial and local governments provided.
Local government debt continues to be the elephant in the room – the central government’s recentralisation of taxation powers in the mid-1990s led to a situation where local governments were left responsible for local social welfare but without the resources and continuing pressure to compete with other localities or provinces for investments and growth. Their straitened circumstances, led local governments to monetising the one asset in their control – namely land, raising money by leasing it for real estate development and contributing speculative bubbles. These alternative or off-budget sources helped finance local spending but also led to corruption with a nexus developing between local governments, enterprises and banks.
Current CPC general secretary Xi Jinping has tried conduct a clean-up of the Chinese economy not primarily through economic reforms but through political and legal means such as by means of a stringent anti-corruption campaign.
In many instances, however, economic problems have been compounded by these political measures. The anti-corruption campaign has unsurprisingly slowed down decision-making and affected initiative. If this were not enough, the Americans after decades of ignoring China’s mercantilist trade practices decided finally under the Donald Trump administration to counter with a massive and far-reaching trade war which has seen no let-up even under his successor Joe Biden. Already reeling from American sanctions and targeting of Chinese companies and products, three years of the pandemic have further complicated China’s economic progress.
In between, there has been what might be described as ‘strongman economics’ – the belief that political will can bring about far-reaching economic changes. For instance, Xi’s declaration that China would be a carbon-neutral economy by 2060 led to a sudden attempt to shift from coal to renewable energy leading to massive power shortages across China in the winter of 2021 and further undermining economic activity. Earlier, the most dynamic of China’s private sector, namely, its technology companies saw the beginning of a crackdown when Alibaba-founder Jack Ma went out of public view for several months ostensibly for speaking out against the government’s attempts to control the economy by diktat and stifling entrepreneurship. The crackdown has only grown with the anti-corruption campaign targeting the banking and fintech as well as a crackdown on edtech and such things as the screentime children would be allowed.
All along, traditional problems have continued and even blown up. These include the real estate downturn over the past few years with major developers defaulting on debt repayment and homeowners refusing to continue paying mortgages on property they were unlikely to see completed.
Meanwhile, China’s population, long its biggest asset for its abundance, willingness to work long hours and at cheap wages, is in decline after some three decades of a disastrous one-child policy. A Party that once talked about ‘women holding up half the sky’ now no longer sees them primarily as citizens or economic actors but as carrying a supposedly bigger responsibility of simply producing children.
And yet both Chinese women and its younger generations more generally are rebelling by refusing to marry and by abandoning both the hyper-competitiveness and submissiveness of previous generations. This is not only a political reaction, however, but also an economic response to rising costs of living – the inability afford housing, to get into or afford university education, or to find jobs appropriate to their qualifications. Chinese in the 16-24 age group currently face unprecedented levels of unemployment.
Xi has attempted to solve these problems by a return to some of the tools of the Maoist era – not only is there heightened political rhetoric at play but a constant reiteration that it is only by following the Party diktat that China’s problems can be resolved. The stress is on individual effort and sacrifice to achieve larger national goals. China’s workers and peasants had already been sidelined in the over four decades since the economic reforms and opening up process began in the late 1970s and its intellectuals muted with the crackdown on the Tiananmen protests in 1989. With the anti-corruption campaign, Xi is trying now to control China’s ‘red capitalists’ and problem of crony capitalism. And yet, it is not as if he wants to return to a pristine form of socialism. Rather, Xi sees the CPC as a ruling party in perpetuity and has sought to make up for its lack of adherence to ideological foundations by switching to a cocktail of ‘socialism with Chinese characteristics’ and Chinese hyper-nationalism.
In this effort, the economy is merely a tool to sustain Party rule in perpetuity. Thus, when Xi Jinping talks about common prosperity, he is talking less about a radical redistribution of wealth among citizens as much as a privileging and strengthening of the Party-state’s means to direct this wealth as it wishes. The private sector has been suborned by the Party and the state-sector privileged once more both as a means of controlling the national economy as well as better organising and directing national resources for China’s international goals, which include competition with the United States and other liberal democracies. The Chinese citizen or consumer is merely incidental in this process – someone who is expected to save up and devote surplus to the cause of so-called ‘national rejuvenation’.
This is not to say that economics has completely lost command in China or that economic logic has completely taken the backseat. Beijing continues to employ a host of fiscal and monetary measures as well as industrial policy in order to get the economy back on track.
But the sudden passing away last week of former premier Li Keqiang – at the relatively young age of 68 by Chinese standards – is perhaps emblematic of the challenges for China’s economic policymaking, if not also for its politics. Li was seen as a political moderate in comparison to Xi but the more crucial differences between them lay in the realm of their views of the economy. In 2013, a year after having taken over the mantle of leadership of China, Xi and Li appeared to be on the same page as the 3rd Plenum of the 18th Central Committee with the call to let the markets play a ‘decisive role’. However, China’s structural infirmities – its skewed regional economic balance, massive income inequality and pressures on Party legitimacy after decades of unfettered capitalist growth and accompanying corruption meant that still greater privileging of market forces created risks for Party rule itself. In such a situation, economic reforms of the kind that Li advocated that were structural in nature and appeared to reduce Party control over the economy still further, were anathema to Xi who viewed Party control as non-negotiable. Li was quickly sidelined and his office essentially lost power to a series of committees and Party organs dominated by Xi and his acolytes.
In his last official press conference as premier in March 2022, Li declared that reform and opening were irreversible like “the Yellow river and Yangtze river which will not flow backward.” Coming on the back of a brutal zero-Covid programme in which economic activity was stymied and state surveillance and political coercion increased manifold, the comments were interpreted as some kind of pushback to Xi’s politics and economic policymaking that was dominated by political objectives. However, Li had just exited the CPC Politburo Standing Committee a few months ago and no longer held any meaningful power. Nor had he been an exceptional economic manager in the opportunities he got through his career. So the statement was really a case of too little, too late. It remains to be seen if it is also too late to alter the course of the Chinese economy from being run by diktat for the perpetuation of a political party in power instead of on sound principles dedicated to the welfare of the Chinese citizen. Either way, the impact will extend beyond China’s borders.
This article is authored by Jabin T Jacob, associate professor, Department of International Relations and Governance Studies, and director, Centre for Himalayan Studies, Shiv Nadar Institution of Eminence, Delhi-NCR.