Developing a complex issue
China is a country full of contradictions. It is a one-party state that classifies itself as a “people’s democracy.” It boasts of 5,000 years of historical continuity and yet has had two revolutions in the last 100 years alone. It is also the world’s second richest nation that still self-identifies as “under-developed.” Only last week, Chinese Premier Li Qiang spoke at the World Economic Forum to insist that China be seen as “the world’s largest developing country.”
This is an odd boast you might think, given that one of President Xi’s key targets was to ensure that, by 2049 (the centenary of the founding of the People’s Republic), it would be a “fully developed, rich, and powerful” nation. In fact, there is no official definition of a developing economy, and it is often left to the state itself to decide. But surely it is better to achieve riches and development sooner rather than later?
In reality, China is keen to retain its label of false modesty precisely because it comes with special and differential treatment under World Trade Organisation rules, by which it benefits from reduced tariffs and improved trading opportunities. It is no coincidence that while China was insisting how very ‘umble it is, America was launching a Department of State Bill known as the “Ending China’s Developing Nation Status Act” seeking to end China’s receipt of development loans from the World Bank, for example. This name-calling is all part and parcel of the rising tensions between the two countries; tensions that surely bode ill for geo-political relations in the future.
China’s GDP is still growing at 5% per annum – an indicator of developed status – and according to the World Bank that figure is set to grow to 5.6% this year, in line with that of the United States economy. The growth figures mask the fact that China’s per capita income is a mere $12,500 per annum (admittedly 40 times greater than it was 30 years ago), compared to America’s $70,250. In terms of average income, today China is where America was in 1980. A remarkable rise even though its purchasing power is currently only one-third that of the US.
But with the Chinese Communist Party’s draconian lockdown only ending in late December 2022, China is a little less blasé about it economic rise than it used to be. While its GDP is bouncing back slowly, youth unemployment is at a startling 22%, as businesses battle with soaring costs and demands for higher wages. On top of this, America is pressurising international businesses not to collude with China, and foreign investors have become more wary. Consequently, China is pushing for greater self-reliance but that cuts both ways. While the state promotes self-sufficiency, there is a potential for the people to take it too literally.
Migrant workers returning to labour-intensive, industrial heartlands like Shenzhen or Guangzhou on the south-eastern seaboard are finding that jobs are in short supply, wages have declined, and the hours have increased. As a result, there are many reports of workers deciding that it is no longer worth the hassle. After Covid, it seems that the concept of a quality of life, is permeating down even to the lowliest of worker, even if that means entering the uncertain gig economy. Many people are being forced out, but others are opting out. The effect on the economy, especially within the low-skilled factory and manufacturing sector has been significant. For the Party, the potential threat to social stability is equally worrying.
The knock-on effects of a generalised productive slowdown in the country are undermining President Xi’s rallying call that the rejuvenation of the Chinese economy should come from domestic household expenditure. Unsurprisingly, having seen that the state can literally lock people in their homes at a moment’s notice, many ordinary Chinese are saving, not spending, especially on big ticket items and certainly not in the parlous property market. Reports suggest that household cash savings were 27% up on this time last year.
The Chinese economic miracle of the last 15 years or so has relied on major infrastructure spending to massage its GDP figures. But nowadays, as the demand for steel and concrete lessens (due to the housing crisis, the industrial slowdown, and the pressures of international environmental agreements) China is having to backtrack a little. That said, the state is still firing up some of its old coal-fired power stations and building new to provide energy security and reduce prices in the post-Covid/Ukraine war era in order to quell fears of unemployment, while at the same time encouraging high-tech industry in some of those left-behind, rustbelt provinces of the north-east.
Underlying these economic difficulties is the tension between the private and state sector in China. After years of capitalist experimentation, in the immediate pre-Covid period the pro-state old guard were back in the ascendant. These apparatchiks were happy to let the private sector experiment but made sure to rein them back in so that the Party could benefit from their efforts. At that point, private companies (from after-school education providers to global fintech corporates like Alibaba) were closed down, disciplined or absorbed by the state. Famously, Alibaba’s founder Jack Ma was censured and ‘disappeared’ for a while because he criticised the state’s lack of entrepreneurial acumen.
Now, President Xi realises that in these new economic conditions – and with reports of a £23 trillion nationwide debt crisis looming, there is a need to roll out the innovators once more. His latest State-Owned Enterprise (SOE) Reform package aims to strike a balance between supporting the state-sector – even to the point of propping up zombie industries – while allowing privately-owned outliers to flourish. The fact that private investors now know that they are not really free, that is, now that they know that they can be disciplined if they fly too high, liberalisation might not inspire the kind of ground-breaking growth in the economy that Xi hopes for.
This is the ultimate contradiction in Chinese economic practice. However, if China teaches us anything it is that it always seems to resolve the irresolvable. But for how much longer?
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This article was originally published in Unherd
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