Looking Like the Old USSR?Even though China is technologically more advanced than the former Soviet Union, its growing state control and economic stagnancy are reminiscent of the old USSR in the late 1980s.
Recall that after 70 or more years in power, the effects of state control and the corruption that comes with it led to an extended period of economic stagnation for the USSR. Inefficient, unprofitable, and costly state-owned companies and economies led to an irreversible economic decline for the Eastern European economies in the former Soviet Union and the abdication of the Soviet Communist Party.
Will the Chinese Communist Party (CCP) face a similar moment?
What’s more, youth unemployment is above 20 percent.
Structural Challenges IntensifyIn any case, several structural challenges are contributing to this negative long-term outlook.
For example, the CCP is expanding state-owned enterprises (SOE) to maintain control over the floundering economy. But adding more state-controlled firms means confiscating successful, privately owned enterprises and turning them into costly and less-efficient SOEs. As a result, the CCP’s SOE policy won’t result in growing the economy. In fact, it'll lead to a further slowdown.
Given his failure, civil dissatisfaction, and unrest, Chinese leader Xi Jinping can’t risk loosening his grip on the Chinese people.
The Evergrande Fallout ContinuesThe impact of the collapse of the real estate development sector, which makes up about 30 percent of the Chinese economy, is the poster child for the risk of unbridled borrowing to stimulate growth. Evergrande’s crash meant a loss of $81 billion over the past two years, and it still owes tens of billions of dollar-denominated debt to investors. At the same time, Evergrande’s total assets are only about $256 billion, which means that the brightest star in China’s real estate development industry could actually be bankrupt.
Perhaps even worse, the fallout from Evergrande and other development company failures continues to drag the economy downward.
Declining Infrastructure InvestmentActivity on the infrastructure investment front is also down as local government financing vehicles (LGFV) face declining revenues from falling land prices and lower sales.
Local governments are under fiscal pressure due to sinking land prices and fewer sales. LGFVs—the primary mechanisms for implementing infrastructure projects—are in the midst of a credit crunch and are at risk of defaulting in 2023.
“After a sugar injection in the opening months of 2023, the pandemic hangover is plaguing China’s recovery,” he said.
Managing Banking Risks—for NowIf such defaults can’t be averted, China’s banking sector would also be at risk. In fact, some banks have already seen significant devaluations.
Foreign Demand Won’t Be Back SoonAnother challenge that can’t be easily fixed or whitewashed by Chinese state media is the declining foreign demand for China’s goods and services. Beijing’s support for Moscow’s invasion of Ukraine has dampened the European taste and demand for Chinese goods even further than before.
The war and other trade bellicosities have only worsened China’s already poor reputation as a business partner. It has long been known for stealing intellectual property, bribing its way into markets, and other ways of undercutting its erstwhile Western business partners. Plus, as recession remains on the horizon, external demand is more likely to fall rather than rise.
The CCP’s Cure: Killing the EconomyApparently, Mr. Xi and the CCP plan to gain an even tighter grip on the economy, mandate economic activity, and hire workers through more stimulus.
But from where will new domestic demand come?
How will the CCP add confidence to the consumers who have been burned by the collapses in real estate investments and the COVID-19 lockdowns, have parents to take care of, and are increasingly deciding to have only one child, if any?
China isn’t at the Glasnost/Perestroika point yet, but that moment may arrive sooner than later, regardless of what the CCP does.
If or when it does, don’t expect the Party’s response to be to surrender power.
A more likely event would be to divert attention to an external event, such as making a move against Taiwan.