China’s new reality is rife with danger

The president will be defined by his campaign against his country’s capitalist excesses

Xi Jinping’s campaign-Oct 2nd 2021 

Xi jinping is waging a campaign to purge China of capitalist excesses. China’s president sees surging debt as the poisonous fruit of financial speculation and billionaires as a mockery of Marxism. Businesses must heed state guidance. The party must permeate every area of national life. Whether Mr Xi can impose his new reality will shape China’s future, as well as the ideological battle between democracy and dictatorship.

His campaign is remarkable for its scope and ambition. It started to rumble in 2020, when officials blocked the initial public offering of Ant Group, an affiliate of Alibaba, a tech giant. It is thundering onward, having so far destroyed perhaps $2trn of wealth. Didi, a ride-hailing outfit, has been punished for listing its shares in America. Evergrande, an indebted property developer, is being driven towards default. Trading on cryptocurrency exchanges has been banned as, more or less, has for-profit tutoring. Gaming is bad for children, so it must be strictly rationed. China needs larger families, so abortion must become rarer. Male role models should be manly and celebrities patriotic. Underpinning it all is Xi Jinping Thought, which is being drummed into the craniums of six-year-olds.

This comes on top of an already brutal authoritarianism. As president, Mr Xi has purged his rivals and locked up over 1m Uyghurs. He polices debate and will not tolerate dissent. The latest campaign will show whether he is an ideologue bent on grabbing power for himself, even if growth slows and people suffer, or whether he is a strongman willing to temper dogma with pragmatism. His vision, in which party control ensures that business is aligned to the state and citizens dutifully serve the nation, will determine the fate of 1.4bn people.

Mr Xi is tackling real problems—indeed, many of them have parallels in the West. One is inequality. The slogan of the moment is “common prosperity”, reflecting how Communist China remains as unequal as some capitalist countries. The top 20% of China’s households take home over 45% of the country’s disposable income; the top 1% own over 30% of household wealth (see Free exchange). Another concern is the clout of tech giants accused of unfair competition, corrupting society and having unfettered access to personal data (only the state has that privilege). A third is strategic vulnerability, particularly the threat that adversaries will obstruct access to commodities and vital technologies.

Yet Mr Xi’s campaign poses a threat to China’s economy. Pain from unravelling the debt of firms like Evergrande could spread unpredictably. Property developers are sitting on $2.8trn of borrowing. Property development and the industries that cater to it underpin about 30% of China’s gdp. Households have parked their savings in real estate partly because other assets offer a poor return. Households’ spending on unfinished property accounts for half of developers’ funding. Local governments, especially outside the big cities, depend on land sales and property development to generate revenue.

The crackdowns are also making business harder and less rewarding. The party had been creating a regulatory and legal framework, but Mr Xi is imposing big top-down changes so fast that regulation has started to seem arbitrary. Consider, for example, “tertiary redistribution”, in which shamed tech companies hand over cash to the state in an attempt to redeem themselves.

Because conspicuous success is dangerous, private companies will be more cautious. State-owned firms and strategic industries—including “hard-tech” such as semiconductors—may benefit, but not the entrepreneurs who have been the true source of China’s dynamism. One measure of anxiety is that foreigners, who are not bottled in by capital controls, pay 31% less than mainland investors for identical Chinese stocks. The gap has grown sharply since early 2020.

All this threatens to puncture China’s economy. It was already facing a squeeze from declining returns to infrastructure investment and the effects of a shrinking workforce and growing numbers of aged dependents. After 40 years of breakneck expansion, most Chinese are completely unfamiliar with the hard choices that a sharp, sustained slowdown will impose.

In politics the danger is that Mr Xi’s campaign degenerates into a cult of personality. To bring about change, he has grabbed more power than any leader since Mao Zedong. As he prepares to break with protocol at the Communist Party’s 20th congress next year by claiming a third five-year presidential term, he is using the campaign to organise a huge turnover in personnel, as the basis for an ideological crackdown and as the reason why he should remain at the helm. Each of these contains dangers.

One is that the bureaucracy fails him. Mr Xi wants it to be responsive to market signals, but with promotions and purges in the air, China’s officials are jumpy. One cause of the power cuts in 20 or so provinces in recent weeks was the panic of bureaucrats who suddenly realised that they were likely to miss their carbon-reduction targets. Equally, however, officials fearful of being accused of corruption or ideological deviance by their rivals tend to sit on their hands. Failure is dangerous for a bureaucrat who takes the initiative; so is success.

Another danger stems from the ideological crackdown. “Moral review councils” and “moral clinics” are enforcing orthodox behaviour using public shaming. Although there is as yet no prospect of anything as awful as the Cultural Revolution, Chinese people are becoming less free to think and talk. As well as promoting his own doctrines, Mr Xi has played up Red nostalgia and cast Maoism as a vital stage in building a New China, broadening his support before the party congress.

Last come the politics of Mr Xi himself. In the long run, if he clings to power the succession could prove highly unstable. In the short run, if his attempt to impose a new reality does not go to plan, he will face a fateful choice to double down or step back. Up to this point, repression looks more likely than compromise.

Western governments are also struggling with tech firms, inequality and national security. In America Congress has risen to the occasion by contemplating a default on the national debt. Some may envy Mr Xi’s scope to get things done fast. But to imagine he has the right answers would be a big mistake. ■

This article appeared in the Leaders section of the print edition under the headline "China’s new reality"