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Tensions and contradictions underpin the Chinese economy of the 21st century

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Born in Cape Town, Natale Labia lives in Milan, Italy, and writes on the economy and finance. Partner of private equity firm Lionhead Capital Partners. MBA from Università Bocconi. Supports Juventus.

‘What is good for the Party is good for China’. Such is the view of senior government official Wang Binglin on the Chinese Communist Party, which turned 100 years old this week. China’s meteoric economic and geopolitical ascendancy, a trend which has been accelerated by its rapid recovery from the Covid-19 pandemic, means that of any organisation in the world it is this party that is likely to have most influence on the 21st century.

South Africans will be familiar with historically complex, (rhetorically) Marxist political movements rooted in struggles, and they will also know just how dangerous, corrupt and sclerotic they can be. So can the Chinese Communist Party (CCP) continue to evolve and drive the development of the world’s second-largest economy? 

According to Cao Siyuan, one of the key architects of the economic reforms of the 1980s and 1990s, there is a critical tension which has been evident throughout the post-Tiananmen Square era of Chinese political and economic progress enacted by the Communist Party. “If the reforms are too fast, there is chaos. If the reforms are too slow, there is stagnation.”  

Essentially, if the Party does not slowly and gradually relinquish control of the economy, liberalising the free market, growth will be hindered. But likewise, open up too quickly and China risks going the way of the Soviet Union post-perestroika and glasnost, disintegrating amid calls for democracy. The authoritarian President Xi Jinping will remember the lessons of Gorbachev only too well. The future of the world’s second-largest and most powerful country therefore depends on negotiating this perilous political and economic course between Scylla and Charybdis. This essential tension will underpin how the 21st century plays out for China.

The fruits of the economic reforms which began in the 1980s under President Deng Xiaoping are inarguable. In 1980, Chinese GDP was a mere $191-billion, or $195 per capita, making it one of the poorest countries in the world. Today, 40 years later it has increased 75 times to $14.5-trillion and is on track to overtake the US as the biggest economy in the world in roughly a decade or so.

What are perhaps not as well known are the more recent political reactions to these seismic economic transformations. As the Chinese economy has transformed into a modern powerhouse of manufacturing and innovation, the Communist Party has reacted by increasingly concentrating power at the centre, paranoid of what might transpire should it lose control. 

Almost 70 and in power for nine years, President Xi is the strongman who has overseen this fundamental shift in the way that the Chinese state operates. He has put the Communist Party back where he believes it should be: right at the very centre of how everything in the world’s most populous party is run. Having abolished term limits on the presidency three years ago he is likely to remain in power until the mid-2030s.   

Along with the tightening of political control, there has been an axiomatic shift in the way that the domestic economy is managed. Now, the overarching economic strategy of the CCP has moved from the Belt and Road Initiative — the infamous trillion-dollar programme of debt-funded foreign infrastructure investments — to the “Dual Circulation Economy”, a construct which, as with all Party slogans, is typically nebulous but seems to represent the need to increase exports (one circulation) with increased domestic consumption.  

In principle this makes sense. Chinese domestic consumption is extraordinarily low, at just 39% of GDP — 38.718-trillion yuan, or US$5.96-trillion — in 2020. This compares with 55% and above for other large economies, according to S&P Global. Economic growth, which in other similar economies has a large component of consumer demand, has therefore had to be funded with rapidly accelerating levels of government and corporate debt which has soared to one of the highest in the world.

Wages remain extremely low and savings continue to be among the highest in the world, resulting in a glut of investments in extremely low-return projects. Bridges to nowhere and newly constructed cities empty of residents are anecdotal evidence of this imbalance. Debt to GDP rose an astonishing 20% in 2020 alone, to 66%.

This is clearly unsustainable, which is why increasing domestic demand is so critical. And yet this is easier to say in vague Communist Party jingles than to do. China’s low consumption rate is a result of households retaining one of the lowest shares of GDP in the world. What is needed is therefore a massive shift from the state retaining consumer savings and deploying them in large-scale white elephant fixed investments to allowing higher wages and higher consumption, in effect giving more economic freedom and power to consumers. 

As the Communist Party turns 100, China once again faces an uncertain trade-off. Xi is gambling that he will be able to balance a fast-growing consumer class with a stronger, more centralised political system ensuring that any dissent is immediately crushed. In exchange for less restricted capitalist consumption, middle-class Chinese will have to relinquish any desire for political liberty.

It would seem, however, that for “dual” circulation to work, wealth — and with it power — will have to be shifted from today’s elites to ordinary Chinese households. History has shown that as societies become economically better off they demand more political influence and control. Not even President Xi Jinping can pretend to know what effects this experiment will have. BM/DM

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