After the Two Sessions: Where is China Going?

16 April 2024

By Creek Li

Reports from China demonstrate that, despite the facade of unity and flattering language flowing in the National People’s Congress this March, China is facing serious economic problems, both domestically and internationally, which bring the party-state system into a position of stalemate and paralysis.

That can be seen by the inability of the party leadership under Xi Jinping to stick to the established procedures for developing economic policy. Normally, this would first be discussed at the plenary meeting of the Central Committee, normally held in November and then be developed in more detail by the Central Economic Work Conference in December. Finally, it would be presented for agreement by the rubber-stamp “Two Sessions” of the National People’s Congress and the Chinese People’s Political Consultative Council meeting for two weeks in March. Symptomatically, that meeting was cut short after the first week and no major announcements were made – even the traditional premier’s press conference was cancelled.

Although the ruling communist party has successfully overseen the restoration of capitalism under its complete control, an important source of legitimacy of the regime is the maintenance of continual economic growth and constant improvement in the living standards of the population. That has been achieved, more or less, for much of the past three decades. However, by the time of the Sino-U.S. trade war in the late 2010s, signs of ill-health in the economy were already visible. Bottlenecks in infrastructure and a lack of innovation in high-tech industries, due to “friend-shoring” by foreign, especially US, manufacturing business to Southeast Asia and Latin America and the long term impact of U.S. sanctions, were real impediments to further acceleration. 

The inflationary cycle that had accompanied growth in the 1990s and 2000s was giving way to creeping deflation, as a response to weak demand not only in China but also internationally due to a drop in Chinese exports. Those difficulties were exacerbated by the Covid-19 lockdowns from the year 2020 up to 2022, and the pernicious effects of climate change around the world. In the first six months of 2023, for example, China’s exports to the United States fell by 25%. The United States’ largest trading partner now becomes Mexico, while China has dropped to third place. 

Experts at the top were fully aware of the difficulties associated with the country’s production over-capacity, investment bottlenecks in infrastructure, the property price bubble, lopsided income distribution and chronic deflation. In 2021, Beijing worked these concerns into the drafting of the 14th five-year plan, a practice inherited from the time of the planned economy, which provided an outlook for the economic development strategies for the next five years. That plan proposed the expansion of R&D investment, rural education, health and environmental services, social welfare, better distribution of national income and the absorption of youth into the labour market, all combined, with a relative financial stability and a healthy balance of payments. However, some deep-seated structural problems in the Chinese economy, related to the party-state system, have made those targets difficult to achieve.  

The first and foremost problem is of course the bursting of property bubbles and the resulting huge debts. This not only involves the famous corporations like Evergrande and Country Garden but also local and provincial governments and the entities they created, Local Government Financing Vehicles, to fund the sale of land to real estate developers. The bankruptcy of property developers has removed a major source of revenue for local governments – over 25% is reported – at a time when they are already suffering from the huge costs of the lockdowns imposed by Beijing. Secondly, Beijing’s failure to implement rescue plans to compensate small businesses or precarious wage-earners during Covid has resulted in a big drop in consumption as people hold on to their savings. This explains why a consumer boom has not taken place after re-opening as most economists expected. This has left many firms with surplus stocks so they are laying off workers, weakening demand even further.

Technically speaking, although the debts of Evergrande and other corporations are spectacular, they are not an insoluble problem. A combination of debt rescheduling, funding to complete and then sell unfinished projects, amalgamation of potentially viable sections of the bankrupt firms, transfer of debts to a “bad bank”, enforced settlements with creditors and the seizure of the assets of property speculators themselves could all play a role in resolving the financial crisis of the industry. Yet very little has been done to implement such measures, indeed, the boss of Evergrande, Hui Kayan, has been treated quite leniently. This, is a sign of the conflicting pressures and loyalties within the regime. But that is not all, even if such measures were implemented rigorously, that would not solve either the problem of how to restructure the economy away from the longstanding strategy of reliance on infrastructure investment or how to deal with the huge debts of local governments.

Both the bankrupt and obsolete sectors of the economy and the potentially dynamic and profitable sectors are represented within the party-state apparatus. The huge number of interests within the party, rooted in regional, generational, occupational and social differences could be held together as long as everyone was confident of progress through the robust economic growth statistics of the last thirty years. This “growth”, however, included tens of millions of empty apartments and thousands of kilometres of under-used high speed railways and highways. A glaring example is Guizhou province. According to the South China Morning Post, as of the end of 2022, Guizhou has built a total of 8,331 kilometres of highways, surpassing Japan’s total of 7,800 kilometres. But Japan has 82 million cars to drive on those highways, Guizhou has less than 6 million cars. The costs and the lack of returns on such investments are making those separate interests within the party-state apparatus increasingly incompatible.

Internationally, China is also encountering multiple difficulties. On one hand, it has not fulfilled its plan to solve the over-capacity problem through capital exports via the One Belt, One Road programme. It will be more difficult to do so in the context of the Ukraine War and an escalating rivalry with the U.S. The current impasse in WTO reveals that, although China is undermining the “rule-based order” established in the Washington Consensus since the end of Cold War, it is still not in a position to overthrow it. The U.S. is a global hegemon with the strongest military power and it still controls the Breton Woods institutions built under its dominance and designed to maintain that dominance. 

The leadership summits of G20 and the BRICS showed that it is possible for China to build stable economic partnerships via trade links with the countries of the Global South. These not only provide new markets for China’s produce but also increase China’s moral authority in global governance, not least by obtaining these countries’ votes in the UN. All the same, they do not add up to anything approaching a rival to the US. Moreover, as Maynard Keynes noted long ago, “currency competence” is vital to international relations. Despite Beijing’s repeated efforts to internationalise the yuan, it has so far created nothing which is even plausibly comparable with the functions of the US dollar. In its essence, any genuine internationalisation of the yuan would require reforms relaxing banking and capital controls. As the cases of Tencent and Alibaba finance illustrate, such reforms would be incompatible with the party-state system. To make matters worse, the interest rate spread between China and the U.S. is resulting in constant capital flight and withdrawal of foreign investment.

This is where all political problems begin and why there may be a paralysis within the party-state. Having succeeded in the factional battle and reached the pinnacle of his personal power, Xi Jinping is now surrounded by sycophants and has arrived at an existential crossroads that so often in history has driven autocrats to make wrong decisions.   

Recently, fearful of piling up public debt and a public finance crisis, Xi decided to impose austerity on local government spending and infrastructure projects. This coincided with the downturn in the property sector and the combined effect will be the further reduction of incomes and employment, putting millions out of work and bankrupting supplier firms across the economy. It could prove to be a dangerous move at a time of political sensitivity. At the same time, if Xi allows property speculators to continue with business as usual and does not lance the property bubbles, as the light treatment of the boss of Evergrande may indicate, the Chinese economy will deteriorate steadily. The youth unemployment rate reached a historically high level in 2023 and some economists estimate that it is now around 40%, which could be a source of social unrest. This combination of problems, each affecting different sections within the party and the state apparatus,explains both the ever more dictatorial rule of Xi and his inability to find a new economic model that can promote economic growth under the one-party dictatorship.

To conclude, what makes China’s current crisis different from that in other imperialist countries is its governing regime, not a capitalist government but a Stalinist party-state that originated in a planned economy but is now trying to maintain its rule in a capitalist economy.

Inevitably, over time, different factions and wings within the state bureaucracy have emerged and they will develop their own political programmes with differing attitudes towards the Chinese bourgeoisie as well as the strategy to address the current economic issues.

This offers the possibility of an open split in the party in which the pro-capitalist factions could cooperate with the big bourgeoisie to try to establish a bourgeois democracy, possibly even using the  Republic of China as a banner. Understanding the dynamics of such a situation is the precondition for developing a programme for a workers’ party that will be built by mobilising workers to defend their interests independent of, and against the interests of, both bureaucracy and capitalists.

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