China’s New Economic Era

Dr. Shale Horowitz/University of Wisconsin-Milwaukee

Photos by The Associated Press

S

ince coming to power in 2012, Xi Jinping, the Chinese Communist Party’s (CCP) general secretary, has systematically overturned the “Reform and Opening Up” institutional and policy consensus, which was created by Deng Xiaoping in the late 1970s and sustained by Xi’s two immediate predecessors, Jiang Zemin and Hu Jintao. Since 2020, a flurry of policies has disrupted China’s already slowing economy. These include a many-sided regulatory assault on China’s most advanced high-tech businesses; sudden debt restrictions that plunged the real estate sector into crisis; and a stubborn “zero-COVID” policy that forced ongoing, unpredictable lockdowns. How should these policies be understood, and what do they mean for China’s future?

Xi Defines ‘New Era’

Xi’s official philosophy, enshrined in the CCP constitution in 2017, is called “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.” He derived it from “Socialism with Chinese Characteristics,” coined by Deng for the new, market-oriented economic policies of the Reform and Opening Up era of 1978 through 2012. “New era” means that Xi is breaking with the Deng era, and “Xi Jinping thought” means that Xi will decide why and how this will be done. 

In many high-profile public speeches at party and state meetings, Xi has proclaimed new directions in politics, economics and foreign policy. In politics, he contends the CCP must restore its former internal solidarity, political control and cultural dominance. Behind this party-oriented facade, Xi used a sweeping “anti-corruption” campaign to purge actual and potential political rivals, take direct control over policymaking in all important areas, sweep away Deng’s 10-year term limit for top leaders and restore Mao-style hero worship for himself. In economics, Xi insisted that there would no longer be an overriding emphasis on growth. Going beyond the toothless platitudes of Hu, Xi stated that state ownership and greater state oversight and regulation would be used to impose more reliable party-state control over the economy; and that such control would be used more decisively to serve party ideological goals, such as serving common prosperity (greater equality) and socialist culture (a blend of party loyalty, traditional morality and Chinese nationalism). In foreign policy, Deng’s patient, get-along approach — often summarized as “concealing strength and never being the highlight” — is to be supplanted by “the Chinese dream of national rejuvenation,” in which China uses its rising military, economic and cultural power to “move closer to center stage” in the world.

Xi’s economic policies got off to a slow start. His first term, from 2012-17, focused on consolidating personal power and party-state political control. Economic policies included strengthening the financial and market positions of state-owned enterprises and stopping the potentially destabilizing, state-constraining experiment in liberalizing capital markets. Beginning in 2017, and intensifying from 2020, Xi’s economic policies have become more aggressive, unpredictable and disruptive. What these policies share is that greater party-state control and oversight is either the goal, the dominant method used to achieve another goal, or both.

Showing Jack Ma Who’s Boss

Xi’s crackdown on the high-tech online services sector — including search, social media, payments and finance, gaming, shopping, and food delivery — has subjected China’s most successful, high-profile private companies to public criticism, threatening investigations, and greater regulation and party control. This has been justified as serving the public good, including safeguarding consumer data, limiting big firms’ monopoly power, maintaining financial and economic stability, and protecting public morals. Perhaps more importantly, tech firms have been compelled to show due deference to the party-state and to subordinate their interests and goals to those of the party-state.

The best-known case is that of the Ant Group, the online financial services giant whose initial public offering was blocked in late 2020, reportedly on Xi’s direct order, after its founder, billionaire Jack Ma, criticized state regulators for hindering innovation. Ant’s business model, which opened lending channels to consumers and small businesses, threatened the market dominance of the large state-owned banks, which lend primarily to state-owned enterprises (SOEs) and large, well-connected private companies. Ant and other financial technology firms faced new restrictions on their business models and lending practices as they were brought under the stricter regulatory regime governing traditional banks and financial institutions. 

About the same time, Beijing ramped up efforts to bring big data and its uses under party-state control. Tech companies compiling large customer datasets — including giants such as Alibaba, Tencent and ByteDance — must keep the data in China, conform to new restrictions on data gathering and make data available to the state, which wants to oversee how it’s used. The state wants to not only guard consumer privacy but also to use the data to serve the oversight and propaganda purposes of the CCP’s high-tech surveillance regime. The party-state will also have the leeway to use companies’ data — including that of foreign companies — to promote development of preferred Chinese companies, in much the same way it does by forcing technology transfer or stealing technology via cyber theft. 

Other new regulations target perceived threats to public morals or quality of life. Tencent and other online gaming companies have seen fewer game approvals and more limits on content, including restricting minors to three hours of gaming a week. Limits were placed on mass and social media popularization of celebrities and their often extravagant, dissolute lifestyles. In 2021, state regulators directed companies to “strictly control the selection of program actors and guests, and uphold political literacy, moral conduct, artistic level and social evaluation as selection standards.” Perhaps most surprisingly, also in 2021, Beijing launched a frontal attack on China’s culture of educational overachievement. The large, fast-growing private education business, which provided after-school tutoring to millions of children, threatened to “form another education system outside the national education system,” the education ministry warned.

Education companies or divisions serving students through ninth grade were banned from operating as for-profit businesses. Prices and tutoring time also came under regulatory control. Market values collapsed, and large-scale layoffs followed. Suddenly fearing the worst, wealthy tech entrepreneurs rushed to donate to party-approved charitable purposes.

Leaving aside mandatory fines for violating regulations — such as U.S. $530 million for Meituan, U.S. $1.2 billion for Didi and U.S. $2.8 billion for Alibaba (all in 2021-22) — “contributions” from company bosses include U.S. $1.5 billion from Pinduoduo, U.S. $2.2 billion from Xiaomi, U.S. $2.3 billion from Meituan, U.S. $15 billion from Tencent and U.S. $15.5 billion from Alibaba. At the company management level, there are also stronger oversight roles for party committees and sales of significant shareholder stakes to SOEs.

All of these increases in party-state control and oversight tend to reduce growth prospects in mutually reinforcing ways. These include limitations on product and service development; antitrust restrictions on market share and on leveraging businesses to promote related ones; restrictions on possessing and using customer data; stricter content restrictions related to public morals and political fealty; greater oversight and second-guessing of management decisions, both large and small; capricious, politicized enforcement of regulations; and uncertainty about retaining future profit streams. Stock market prices are one immediate sign of the damage. From February to August 2021, China’s six biggest tech companies lost 40% of their value. The two largest, Alibaba and Tencent, lost more than half their value since peaks in 2020 and 2021. Predictably, harsher regulatory environments are even more difficult for startups and smaller companies, tending to increase market concentration and reduce innovation over the longer run.

Showing Chinese Savers Who’s Boss

The Chinese are famously thrifty. Because the state manages domestic stock markets and limits foreign investment outflows, Chinese urban households hold 78% of their life savings in residential real estate, compared to 35% of United States households. As China’s fast economic growth coincided with rapid urbanization, apartment prices have exploded — in recent years, reaching what economists consider to be unsustainable “bubble” levels, with potentially destabilizing levels of consumer and developer debt. In 2019, home prices in China were roughly twice as expensive as in the U.S. relative to income levels. As of June 2021, house prices relative to disposable income were four to five times higher in Shanghai, Beijing and Shenzhen, as compared to San Francisco and New York. At the same time, vacancy rates are high among owners of two or more homes, and rental returns are low. 

Economists argue that there is no safe way to prick a bubble. Yet Xi, who warned in 2017 that housing “is for living in, not for speculation,” showed little caution. In August 2020, he implemented three “red lines,” measures that abruptly restricted real estate development companies’ debt levels. With large developers long emphasizing rapid growth, debt had reached high levels, while tapping unorthodox sources such as advanced sales to buyers and supplier IOUs. With many large developers such as Evergrande suddenly unable to borrow, property prices fell and construction faltered, followed by a wave of international debt defaults. Many buyers watched construction stop on already-financed or paid-for apartments. Some responded by withholding mortgage payments. 

Xi has offloaded the problem onto provincial and local governments, which are expected to make sure that advance buyers receive their apartments and to limit the damage to the property sector. Selective bailouts and government takeovers of troubled projects are underway, along with ad hoc local efforts to stimulate residential construction. SOEs focused on infrastructure projects are backstopping the land sales market to keep revenues flowing to local governments. But there is little sign of reconsidering the original failed policy and broadly substituting more moderate debt regulations. Overbuilding and slowing urbanization meant that China’s property market was destined to slow. However, the sudden, rigid approach has badly damaged developer and local government finances and shaken consumer confidence. The real estate sector, which is estimated to account for over 20% of China’s economy, seems likely to remain depressed.

Showing the Virus Who’s Boss

Following its catastrophic neglect and mismanagement of COVID-19 when it first emerged in Wuhan, China, the CCP’s intense testing, tracking and lockdown regime initially proved effective. 

That success, however, carried the seeds of later problems. Xi pursued vaccine nationalism — relying on less-effective, homegrown vaccines to show that the PRC could solve its problems alone. Meanwhile, millions of elderly Chinese worried about the safety of those vaccines and decided that lockdowns rendered vaccination unnecessary. Then came more transmissible variants, which led to recurring, often long-lasting lockdowns of major Chinese cities and districts — including a two-month lockdown of Shanghai, China’s biggest city and economic capital. 

In spite of ongoing, unpredictable disruptions to supply chains and to investment and consumer confidence, Xi persisted with the zero-Covid policy until late 2022—when he abruptly dropped all efforts to limit the virus’ spread. Why did the CCP not transition sooner to opening up and living with the virus? First, Xi does not easily back down and was loath to admit a problem with one of his signature successes. Second, millions of elderly Chinese remained unvaccinated and Chinese vaccines have uncertain effectiveness. Third, zero-COVID policies have installed another useful layer of surveillance and control. COVID travel restriction technology has already been used, for example, to limit protests in Zhengzhou against banks failing to make cash available to depositors.

If Xi was so committed to the zero-Covid policy, why was the turn to opening up so sudden and unconditional? It seems that Xi was determined to persist until the virus simply defeated the CCP’s best efforts. Constant lockdowns and intrusive mandatory testing regimes were becoming necessary more and more frequently, across larger and larger segments of China’s economy. This badly disrupted China’s supply chains and business activity, savaging employment and undermining finances. Protests erupted in China’s cities on a scale and breadth unseen since 1989. Local government finances were in crisis. 

Xi saw little choice but to retreat, but the consequences are dire because over-confidence had led to little preparation. There had been no effort to bring in apparently more effective foreign vaccines and anti-viral treatments at scale. There had been little effort to prepare China’s medical system by stockpiling basic medicines and building up the hospital and clinical infrastructure. As the economic crisis culminated, the decision was made to rush toward herd immunity to revive the economy. Hundreds of millions of cases duly erupted in the cities. The party-state made no effort to stop the traditional lunar new year migration back home — inevitably spreading the carnage to the countryside, with its older population and more primitive medical care. It’s doubtful that there will ever be transparency about how many died, including how many died unnecessarily because of the party-state’s overconfidence, poor preparation and economically driven rush to open.

Showing the Economy Who’s Boss

Xi inherited two major sources of slowing economic growth. First, growth rates naturally decline as poor countries become richer. Second, CCP policy legacies further constrain growth. The former one-child policy has yielded rapid workforce declines. A conglomeration of other regulatory policies — the urban residential permit system, restrictions on rural land use and a relatively narrow path to economic success that’s concentrated in a few major cities — limits access to economic opportunities and slows productivity gains. 

Xi’s goals and methods, meanwhile, have produced a further raft of growth-slowing policies. These are driven partly by Xi’s desire to de-emphasize growth relative to “common prosperity” or by ad hoc efforts to raise living standards of China’s lower and middle classes. However, Xi’s overriding goal — trumping all economic goals — is reinforcing the party-state’s power and control. His preferred method of achieving that is by imposing grandiose, largely unrelated and often contradictory top-down policies to gain particular outcomes. As Xi’s policies further slow growth, he is likely to try solving the resulting problems with more of the same.

Xi’s Slower-Growing China is More Dangerous

Slower growth weakens what, in the Reform and Opening Up era, had been the CCP’s major source of legitimacy and political power. As substitutes, Xi relies on repression, propaganda and Chinese nationalism. But he is doing so out of ideological conviction, not because it makes sense as political strategy. In the new era, Xi is bent on achieving results, for the glory of China and for his own glory as China’s history-making leader. 

If those results don’t materialize in the economic arena, Xi will look elsewhere. That includes foreign policy, where the greatest risk is a war over self-governed Taiwan, which Beijing claims as its territory. Nor is slowing economic growth likely to constrain China’s military buildup. China’s central government has plenty of fiscal discretion, yet no priority other than internal security is likely to come before military spending. 

It is not a shrinking window of economic opportunity that is making China more dangerous abroad. Xi is largely the author of that narrowing. The same goals and methods that drive Xi to weaken China’s growth make him far more dangerous on the foreign policy front.