The Chinese economy is definitely in trouble. The important question now is whether this will become a crisis or not.
In 1978, China opened its doors to the world and started its miracle economic growth. Under Deng Xiaoping, economic and farm reforms led to a nation that lifted nearly 800 million people out of extreme poverty. A market economy was reintroduced to China and the Chinese entrepreneurial spirit was unleashed. The Chinese private sector produced business leaders like Jack Ma and its private sector became China’s engine of growth.
This was the era when China’s technocrats were considered the wise men of economic growth as they presided over what was then considered an economic miracle. During the global financial crisis of 2007 to 2009, China was the only major economy to respond immediately. In fact, some economists even said that China was the savior of the world economy. At that time, its officials were able to maintain economic growth by cheapening credit, building massive infrastructure and stimulating the property market.
Even then, there were already warnings that private and public debts were increasing too fast. There were already doubts of the sustainability of the housing boom and many of the new infrastructure was not really needed.
Then a decade ago, the era of Deng Xiaoping ended and the new age of Xi Jinping began. Today, Xi has started on an unprecedented third five-year term and seems to be headed to be the next Mao Zedong. The country’s economy has slowed down considerably. After the most spectacular growth in history, the economy now grew at an annualized rate of just 3.2 percent this year.
The United States, on the other hand, is growing at almost a 6 percent annualized rate. Towards the end of 2022, China also embarked on an economically disastrous zero-Covid policy. For example, Shanghai, its main major business city, had to go through a two-month “lockdown.”
According to Lee Yuan, who writes for the New World publication, “when their government abruptly ended its harsh Covid measures in December, many Chinese expected a robust demand from pent-up demand. Eight months later, China is instead facing an accumulation of bad news: record youth unemployment, a deep housing slump, stagnant spending, even deflation.”
In a period reminiscent of the Mao Zedong days, the Communist Party is sending a message to the young people that they should stop thinking they are above doing manual work or moving to the countryside. According to Xi, they should learn to “eat bitterness,” which is a colloquial expression which means to endure hardships. In the official newspaper People’s Daily, Xi was quoted in a front-page article: “The countless instances of success in life demonstrate that in one’s youth, choosing to eat bitterness is choosing to reap rewards.”
Xi has urged young people to “seek self-inflicted hardships” and has talked of his own experience of working in the countryside during the Cultural Revolution.
One in five young people is unemployed and a record 11.6 million college graduates are entering the workforce this year. This phenomena comes at a time when the Chinese population have gotten used to looking forward to an increasingly more prosperous future.
One departure of the Xi government from the Deng Xiaoping era is that state enterprises have again been prioritized over the private sector. The Chinese Communist Party has also exercised more control over the private sector. Technology companies that were seen as having grown too big and powerful have been forced to split up into smaller units. The Ant Group, the fintech firm founded by billionaire Jack Ma, was fined nearly $1 billion for supposedly breaking rules related to consumer protection and corporate governance. It was fined by the China Securities Regulatory Commission.
The Ant Group is an affiliate of the e-commerce giant Alibaba founded by Jack Ma. In November 2020, the Ant Group was forced to suspend its IPO just days before its launch. This was supposed to raise $37 billion and was to become the biggest IPO in history. This was seen as the start of a campaign by the Chinese government to curb the country’s private enterprises which had become too powerful in the eyes of the ruling Chinese Communist Party.
According to a recent New York Times article, a new crisis is emerging in China. This is a crisis of confidence wherein consumers are holding back on spending, businesses are reluctant to invest and create jobs and would-be entrepreneurs are not starting new businesses. This has become a vicious cycle as Chinese consumers are not spending because they are worried about job prospects and companies are cutting costs and holding back on hiring because consumers are not spending.
China has stopped announcing troubling economic data like youth unemployment figures which has caused even more pessimism about the economy.
The new test in China is whether increasing authoritarianism will improve or damage the economy.
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Email: elfrencruz@gmail.com