World

What President Xi Knows about China’s Economy

People in Nanjing watch a broadcast of President Jinping’s address at the Communist Party Congress, October 18, 2017. (Reuters photo)
Too many people are chasing too few opportunities, with 1 percent of the population holding a third of the country’s wealth.

The 19th Congress of the Chinese Communist Party opened in Beijing on October 18. The weeklong event marks the start of President Xi Jinping’s second five-year term. In his first term, Xi amassed greater authority than any predecessor since Deng Xiaoping. In covering the Congress and President Xi, the Western media focus has been on President Xi’s opening comments on the progress China made in his first five years. Much of his speech covered China and the world and her emergence as a power that has earned a position in the first rank of countries.

It is true that Xi begins his second term with his country in a very different position from what it was when he assumed office in 2012. But despite the reporting out of Beijing about China’s progress, much of the change since 2012 is for the worse. There is enough in Xi’s speech to conclude that, even if the rest of the world seems to want to ignore those challenges, he does not.

When President Xi assumed office, the official economy was believed to be growing at an annual rate of 8 percent or better. The IMF in 2012 projected China’s annual growth to be 8 percent for each of the following five years. But that has slowed to 6 percent or less, if government data can be believed, and it is probably much lower. More important, China’s is an economy in serious imbalance, on a scale not seen since the global economy became so integrated. While the world focuses on and benefits from the China of relative affluence and modernity in Beijing and the coastal provinces, on tech billionaires, high-speed trains, and the global supply chain, Xi knows that more than 500 million Chinese are living in poverty and rural destitution. The World Bank estimates that more than 400 million subsist on $4 a day.

While rising inequality is a hallmark of developing economies, by some measures China’s income inequality is among the highest in the world. In the context of deteriorating economic growth, it is hard to calculate with precision just how large the inequality gap is. But in his nearly four-hour speech to the party faithful, Xi acknowledged this “principal contradiction facing Chinese society” when he pledged to address “unbalanced and inadequate development and the people’s ever-growing needs for a better life.”

President Xi has set a target of 2020 to lift “all rural residents living below the current poverty line” out of poverty. That’s a significant aspiration given that, in China, large numbers lead to large challenges. In addition to the hardened poverty and destitution of at least one-third of the total population of 1.4 billion, more than 200 million people — nearly a third of China’s work force — are forced to migrate to the cities for work. They form a poorly trained permanent urban underclass. By 2025, that number is projected to more than double. President Xi certainly understands that the combustible mix of declining growth, rising income inequality, an aging population, and internal migration in numbers that exceed the entire U.S. population.

In an attempt to account for this and smooth over the obvious challenges, some Western analysts promote the emerging thesis that China today is what Japan was in the late 1980s, with the conditions in place for an extended period of stagflation. Similarities abound: an export-driven economy, internal overinvestment leading to asset bubbles, inflated stock-market valuations, rising wages, and a nouveau riche elite seeking headline-grabbing investments abroad.

Many Western analysts tend to ignore the truth-telling we hear from China’s leaders about their economic challenges, choosing to believe that the Communist Party has created something unique in its grand mix of socialism and capitalism.

The sheer scale of China’s challenge will dictate a different outcome from that relatively hopeful scenario. In the first instance, China’s per capita income today is barely greater than half of Japan’s in the late 1980s. Add to that the rigid income disparity that cleaves the country in half. “Poor Rural China” itself would be one of the largest countries in the world. The scale of suffering experienced by China’s poor during Mao’s Great Leap Forward took place in a country that was largely isolated from the rest of the world. In today’s highly integrated global economy, as China’s growth continues to wind down, we could be forced to confront human suffering on a catastrophic scale: an unparalleled test for Beijing and the international community.

Many Western analysts tend to ignore the truth-telling we hear from China’s leaders about their own economic challenges, choosing to believe that the Chinese Communist Party has created something unique in its grand mix of socialism and capitalism. These observers quietly applaud Xi’s power grabs, believing he is creating the conditions for arresting and containing China’s obvious socioeconomic inconsistencies.

But Xi knows that Beijing has not repealed the basic economic theory: There are too many people chasing too few opportunities, with 1 percent of China’s population holding a third of the country’s wealth, by the government’s own estimates. And with an aging population, whose problems are exacerbated by decades of the one-child policy, the country has too few entrants into the labor market to keep wages low. This is made worse by an education rate inadequate to the task of creating a middle-class work force that can help China escape its globally assigned role as low-cost producer and arrest its decline in economic growth. According to some estimates, more than three-quarters of the labor force did not complete high school.

Seen through that lens, Beijing’s nascent crackdown on the unchecked expansion and consequent wealth of Alibaba, Tencent, and other high-tech darlings of Western bankers and investors may be a signal of the government’s recognition that flagrant wealth cannot coexist with abject poverty. This also explains why Xi has dedicated much of his first term to wringing out the official corruption that feeds off the conspicuous wealth of the urban elite. His party purges, while certainly tools of old-fashioned political consolidation, also are drastic measures to maintain control over forces he knows will contribute to national entropy if left unchecked.

There was speculation leading up to the 19th Party Congress that President Xi would use the meeting to lay the groundwork for an unprecedented third term. The true hallmark of his first term, though, isn’t that he consolidated his power and placed himself in a position of unquestioned authority. He did. But he also presided over the further structural decline of a system whose inherent contradictions, he acknowledges, are his country’s greatest challenge. The forces at play in China’s vast interior may be beyond his ability to influence, and how he manages their impact will define his next five years, and China’s future beyond that.

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Therese Shaheen is a businesswoman and CEO of US Asia International. She was the chairman of the State Department’s American Institute in Taiwan from 2002 to 2004.

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