The regime opted for inflexible policies and displaced the traditional pragmatism that has made the country grow in the last two decades. Now, for the first time since 1990, it could struggle to grow faster than the United States
A giant screen showing Chinese President Xi Jinping at a ceremony celebrating the centenary of the founding of the Chinese Communist Youth League, in Beijing, China, on May 10, 2022 (REUTERS/Tingshu Wang)
“The Chinese economy is in danger”, sentence < i>The Economistin its cover story in its new issue. In its analysis, the prestigious media recalls that in the last 20 years, China has been the largest and most reliable source of growth in the world economy: it has contributed to a quarter of the increase in world GDP during that period and has grown by 79 of the 80 quarters. However, he warns, Xi Jinping is abandoning the pragmatic approach that became a Chinese classic after the death of Mao, which mixed market reforms with state control
The central problem is its draconian “Covid Zero” policy that has caused an economic collapse. “That is compounding a larger problem: President Xi Jinping’s ideological struggle to remake state capitalism. If it continues down this path, China will grow more slowly and be less predictable, with great consequences for it and for the world”, warns The Economist.
The consequences of the closure of Shanghai are undeniable and, furthermore, ineffective as COVID continues to grow in other cities such as Beijing and Tianjin. “More than 200 million people live under restrictions and the economy is reeling. Retail sales in April were 11% lower than the previous year. Furthermore, although some workers live in the factories, industrial production and export volumes have decreased. Because of Xi’s decisions, for the first time since 1990, China could find it difficult to grow faster than the United States.
For Xi, the moment is dire. He wants the 20th Communist Party congress to be held later this year to confirm him for a third term as president, breaking the recent rule that leaders retire after two, but his wishes may run into reality: that is the main responsible for the blows that the Chinese economy has suffered.
The Economist, in fact, lists the errors: the first and most serious is its “Covid zero” policy, applied for 28 months. Xi insists that an opening could lead to a new wave that kills millions of people but with the draconian restrictions he is not managing to stop it. In addition, 100 million people over the age of 60 have not yet received a third dose of the vaccine because it refuses to import Western vaccines… Reckless and ineffective, but as the “Covid Zero” policy ” identifies with Xi, any criticism of it is considered sabotage.
That same ideological zeal, warns the media in its “Leaders” section, is behind the second shock, a series of economic initiatives that make up what Xi calls his “new concept of development”, with which he intends to address “great changes not seen in a century,” like the Sino-American split. The goals are rational: tackle inequality, monopolies and debt, and ensure that China masters new technologies and fortifies itself against Western sanctions. However, the article warns, in all cases Xi believes the party should take the lead, and enforcement has been punitive and erratic. “A wave of fines, new regulations and purges has caused the stagnation of the dynamics of the technology industry, which contributes 8% of GDP. And a savage but incomplete crackdown on real estate, responsible for more than a fifth of GDP, has led to a funding shortage, one reason home sales fell 47% in April compared with a year ago. previous”, reveals.
The regime hopes that the ongoing stimulus program will help it meet the official growth target of 5.5% by 2022 and calm nerves ahead of the Communist Party Congress. On May 19, Li Keqiang, the prime minister, urged officials to “act decisively” to restore growth, and the central bank cut mortgage rates. The party has tried to reassure terrified tech tycoons. The next step is likely to be a large government bond-financed infrastructure program, reckons The Economist.
“But more piles of debt and acres of concrete will not obviate the need for draconian lockdowns or reduce the risks of Xi’s economic model. It is about expanding the scope of the least productive part of the economy: that managed by the government”, warns the media and recalls: “We must not forget all the resounding failures, from the rust belt industries to microchips”.
Meanwhile, he lists, the incentives of the most productive part of the economy, the private sector, have been harmed: the cost of capital has increased and Chinese shares are trading at a 45% discount compared to US ones, a difference almost record.
The calculations of investors and entrepreneurs are changing. Some fear that the financial advantages of any undertaking will be limited by a party that mistrusts private wealth and power. Venture capitalists say they have switched to betting on the biggest grants, not the best ideas. For the first time in 40 years, no major sector of the economy is undergoing liberalizing reforms. Without them, growth will suffer, states the article.
Xi’s ideological economy has great implications for the world. Although the stimulus could boost demand, further lockdowns are likely, jeopardizing a global economy flirting with recession. In business, China’s size and sophistication make it impossible for multinationals to ignore it. But many of them will rebalance their supply chains outside of China, as Apple appears to be doing, warns The Economist.
And predicts that The West is likely to become a more cautious importer of Chinese goods.
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