The steps that Chinese Communist Party (CCP) leader Xi Jinping would need to take to save the economy would require him to relinquish control—but he is not prepared to do that.
The general outlook for the Chinese economy is slightly better than it was a few months ago, with gross domestic product (GDP) growth hitting 4.9 percent year-on-year in the third quarter. However, structural issues remain in place, dampening hopes of a full recovery or a return to the years of fast-paced growth.
China’s economy and its leader are sending conflicting signals. There are mixed outcomes despite Xi’s expressed desire to shift the economy away from real estate and export-oriented growth toward increased consumption and support for the private sector. The economy has outperformed expectations this quarter, with a 2023 growth target set at 5 percent, and Union Bank of Switzerland (UBS) projecting 5.4 percent growth. Long-term loan demand is rising, and the savings rate has dipped below 30 percent of disposable income, reflecting increased spending and a rising percentage of consumption in GDP.
Despite a 0.73 percentage point interest rate cut by the central bank to stimulate home purchases, property sales remain sluggish, experiencing a 21-percent decline in floor space sold in September compared to the previous year. Completed buildings constitute nearly 25 percent of sales this year, a notable increase from 13 percent in 2021, signaling a decrease in new construction projects. Persistent deflation poses an ongoing threat to the economy, with consumer prices declining in each of the previous two quarters.
Xi promised to tackle the debt and bring about quality growth. However, local government debt continues to be a significant weak point in China’s economic outlook. To avoid defaults, Beijing is now allowing local governments to issue “refinancing bonds” to cover late payments to suppliers and replace the local government financing vehicles with lower-cost debt. This does not solve the problem. It just increases the debt, which will come due at some point in the future.
Industrial profits increased by 2.7 percent from a year ago, but the growth rate slowed notably in October compared to September, contributing to deflationary pressures on prices. Factory gate prices, a key deflation indicator, fell by 2.6 percent in October. In the initial three quarters of the year, state-owned enterprises witnessed a 9.9-percent profit decline, while private sector firms experienced a 1.9-percent drop. Xi said he would take steps to promote private enterprise. So far, however, he seems to favor state-owned firms, which, judging by their lower profitability, appears to be a mistake.
In an attempt to stimulate the economy, the CCP issued $141 billion of bonds in the fourth quarter to finance infrastructure spending. As a result, the budget deficit rose to 3.8 percent of GDP—a record high.
To attract foreign investment, Beijing has been designated as “the capital city,” where policy measures are being undertaken, which, according to Vice Minister of Commerce Ling Ji, are meant to “align with international high-standard economic and trade rules.”
New measures include raising the cap on foreign investment in critical sectors like telecom, health care, and medical. Beijing aims to foster market-based collaboration among financial institutions, venture capital, and equity investment firms in the financial sector. Under the new rules, qualified overseas individuals can now offer financial consultation services for securities and trade investment.
However, the CCP has given no indication that the new counterespionage law is to be repealed. Under it, several consulting and due diligence firms have been raided. On top of this, employers in China are having trouble attracting foreign employees and experts because the visa process has become challenging for workers from most countries.
In the book “The State and Capitalism in China,” Margaret Pearson, a professor at the University of Maryland, refers to the Chinese economic system under the CCP as “party-state capitalism.” Under Xi’s leadership, the regime has steadily increased its control over the private sector. The social credit score system is one example of governmental intrusion in the private sector. The companies with the highest scores are those with executives serving as high-level CCP officials. Companies also host Party committees, which channel information about the company or its industry to regulators. So, while Xi claims to want to encourage private companies, he is increasing state controls.
One of Xi’s goals is to promote China’s technological development, but his extensive anti-corruption campaign, paired with a stringent approach toward technology companies, has profoundly altered China’s digital economy. Vocal tech entrepreneurs have gone missing, and numerous founders and business leaders in the tech sector have stepped down. Alibaba is currently undergoing a restructuring, splitting into multiple entities, and Tencent has divested substantial assets worth tens of billions of dollars. Beijing’s Golden Share initiative strategically places the CCP on the boards of directors of key Chinese internet companies, providing the regime with enhanced capabilities for surveillance and censorship.
This obvious link between the CCP and private companies challenges the illusion of China being a free market and is discouraging foreign investors. As a result, foreign direct investment in China declined 9.4 percent year-on-year in the first 10 months of the year. The recovery is still slow and uncertain, leading the International Monetary Fund to believe that China’s prices will continue to fall.
Most of China’s economic problems would work themselves out in a free-market economy, but they persist in a Xi-market economy.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Antonio Graceffo, Ph.D., is a China economic analyst who has spent more than 20 years in Asia. Mr. Graceffo is a graduate of the Shanghai University of Sport, holds a China-MBA from Shanghai Jiaotong University, and currently studies national defense at American Military University. He is the author of “Beyond the Belt and Road: China’s Global Economic Expansion” (2019).