David Demos
In a recently published speech in Qiushi, the Communist Party’s leading journal, Chinese President Xi Jinping voiced his opposition to Western-style stimulus measures, which Former Premier Li Keqiang and other party members share.
Why it matters: This decision and its subsequent publication come amidst new data revealing the ongoing weakening of China’s economy and seem to be a strategic response to increasing calls, both domestically and internationally, for Beijing to bolster its economy, mainly through a fiscal package aimed at households rather than government projects.
The big picture: Though the speech was initially made in February, it was deliberately publicized after the release of recent economic data, according to sources familiar with Beijing’s decision-making process. This move reinforces the narrative that Beijing is resisting pressure to adopt Western economic recovery models despite its economic challenges.
China’s economy is under significant stress, with recessionary and deflationary pressures mounting. Early August data showed a 14.5% decrease in exports and a 12.4% decrease in imports in July, marking the steepest decline since February 2020. This decline severely affects China’s growth prospects and overall economy, as exports are a crucial growth driver.
- Deflation Despite Denial: The CCP’s efforts to downplay the situation have been overshadowed by deflationary trends. In July, the Consumer Price Index decreased by 0.3% and the Producer Price Index fell by 4.4%. New Renminbi loans declined by 89% from June 2023, and total social financing was only 528.2 billion yuan, the lowest since July 2016.
- Debt Crisis Deepens: In August, the debt crisis worsened in the shadow banking and real estate sectors. China’s Evergrande Group has filed for bankruptcy protection in a US court and was found in 2021 to be struggling with more than $300bn in liabilities. Leading property developer Country Garden defaulted on two dollar bonds totalling $22.5 million due on August 6. The company faces over $2 billion in payments this year. This raised concerns about the $3 trillion shadow banking sector’s exposure to real estate.
- Out of Stock of People: China’s Population Collapse means that Xi doesn’t have a supply of cheap labour that other leaders have in the past. Rising youth unemployment, disillusionment with China, and the cost of raising a child aged 6-14 is 210,000 yuan ($31,021), which the younger generation can not afford, means Xi will not have the population growth needed for economic expansion.
China’s Experts Have Solutions
Beijing must take bolder steps to boost output, including promoting consumer spending and supporting China’s families with cash handouts. Experts like Cai Fang and Liang Jianzhang advocate shifting to a more consumer-led economy to promote sustainable growth and address population decline.
- Cai Fang: A prominent member of the monetary policy assembly at the People’s Bank of China urges decisive action to boost citizens’ income amid post-pandemic unemployment. They suggest a 4tn yuan ($551bn) injection into households to counter wage stagnation and reforms to enhance the purchasing power of migrant workers.
- Liang Jianzhang: a tenured professor from Peking University, recommends increasing China’s ferlity rate, that China should allocate 10% of its GDP in direct stimulus to families.
Old Guard’s Grip
Even if he wanted to take their advice (he doesn’t), Xi Jinping faces systemic challenges in addressing the crises in China due to the influence of princelings and the authoritarian nature of the Communist Party. This obstructs the effectiveness of economic recovery measures, and officials prioritize self-preservation over adopting more effective solutions.
- Internal Party Pushback: China’s economic challenges are just the beginning. The removal of high-ranking officials aligned with Xi, such as PRC foreign minister Qin Gang and two leading generals of the PLARF, suggests internal Party opposition to Xi’s leadership. The officials’ sidelining may involve national security threats, possibly orchestrated by anti-Xi factions within the Party.
- Conflict Unlikely: Xi Jinping risking conflict over Taiwan to distract from domestic issues is unlikely due to political opposition and military incompetence. However, taking this dovish stance could limit his options and cost him political capital with hawkish factions of the CCP.
- Purges and Propaganda: Xi is intensifying purges under the guise of anti-corruption efforts. One of Xi’s favourite casus belli is often austerity and focus on excess spending, which often targets other factions than his own.
- The Youth “Rot”: Xi is doubling down on propaganda targeting the youth to “Eat Bitterness,” especially after cracking down on the “Let it Rot” movement. With youth unemployment becoming so dire that they no longer release government figures
- Local Governments are being pressure-cooked: They are shouldering the weight with minimal financial support from the CCP, compelled to implement social policies they cannot fulfil (pensions and family policy) while dealing with a vast debt burden from infrastructure projects over the years, resulting in the quiet insolvency of local administrations.
Our Prediction:
As the economy worsens and China’s population collapses, the power of propaganda weakens, and fears of purges might spur the anti-Xi faction to launch bolder attacks. Xi’s early refusal will become an inability to spend political capital on a much-needed massive direct stimulus and family policy.
This doesn’t necessarily mean that China or the CCP will fall apart, but both will rot like China’s youth. Akin to other victims of austerity like Italy, Greece, and the U.K., but at a quicker and more brutal pace.
