China is no stranger to one-man rule leading to economic misfortune. Anyone doubting this needs only think back to the disastrous economic consequences of Chairman Mao’s Great Leap Forward and subsequent Cultural Revolution.
This history has to raise deep concerns about the Chinese Communist Party’s latest Congress, which granted President Xi a third five-year term as president and a total stranglehold on the Party’s Politburo. This is particularly troubling considering that China is faced with a host of deep-seated economic-policy challenges.
Among the more immediate of these challenges is that posed by the Covid pandemic. This year, under President Xi’s zero-Covid policy, which involved locking down major Chinese economic cities like Shanghai and Beijing, the country’s economic growth was virtually snuffed out. With President Xi now fully in charge of the economy, there is every prospect that he will continue with his costly zero-tolerance policy.
Even if President Xi were to change course on Covid, he would still have to deal with the bursting of the major property and credit-market bubbles that have formed under his watch. This will be no easy task, considering that this bubble is larger than that which preceded the U.S. housing-market bust that began in 2006. The importance of this task cannot be overstated; the property sector now constitutes almost 30 percent of the Chinese economy and represents around 70 percent of household wealth.
Following their dramatic rise over the past year, home prices in China have been steadily falling. Meanwhile, Evergrande, China’s largest property developer, and 20 other Chinese property developers have defaulted on their debts.
Another long-term economic problem confronting President Xi is the country’s very poor demographics. As a result of China’s previous one-child policy, its labor force is now shrinking, and its population is growing old before the country has become rich. No longer able to draw on an unlimited labor force, the country will have to find a way to boost productivity if it wants to propel rapid economic growth.
Adding to China’s economic woes is an increasingly unaccommodating U.S. trade policy. Far from lifting President Trump’s tariffs on Chinese imports, President Biden has introduced strict controls on U.S. high-tech exports to China. At the same time, U.S. companies are in the process of reducing their reliance on the Chinese supply chain and of cutting back on their Chinese investment.
In the face of all these economic challenges, it doesn’t bode well for growth that President Xi is undermining the country’s economic institutions and sidelining people who might disagree with his approach. More troubling still is President Xi’s seeming willingness to kill the goose that laid the golden egg. Indeed, in his bid to consolidate economic power, Xi has declared war on China’s tech sector and even reversed some of Deng Xiaoping’s economic reforms that underpinned China’s economic miracle.
While these challenges do not bode well for the Chinese economy, they also threaten the rest of the world at a time when the global economy is particularly weak.
Until recently, China was the world’s main engine of economic growth and its largest consumer of international commodities. But with Xi at the helm, and these challenges ahead, the rest of the world can no longer count on China as it did in 2008 to help it emerge from an economic recession. Likewise, emerging market economies can no longer count on China to maintain a strong bid for their commodity exports.
If there is a positive side to the downgrading of China’s long-term growth prospects, it is that China, like Russia and Japan before it, will have been proved to have clay economic feet. As such, contrary to what we might have feared, it will pose no serious challenge to the United States as the world’s dominant economy. ✪