- The Washington Times - Tuesday, February 8, 2022

Chinese President Xi Jinping, even after a decade in power, is finding it difficult to shape China’s economy to his liking.

The president and general secretary of the ruling Chinese Communist Party spoke frankly to party leaders in an address last month. He revealed that a problem persists despite a massive internal battle he launched against corruption and purges of leading figures in the government and the private sector.

“We should be aware that the fight against corruption is still raging,” Mr. Xi told a meeting of the party’s anti-corruption commission.

A case in point for Mr. Xi’s frustration: the arrest in early November of Sun Lijun, the vice minister of public security, who had access to the regime’s innermost secrets.

Mr. Sun was arrested on suspicion of accepting bribes. U.S. analysts said a more likely explanation was his role in mishandling the COVID-19 outbreak in Wuhan and China’s failed lobbying effort to scuttle the prosecution of Malaysia’s 1MDB bank. He also has had no success in repatriating most-wanted exiled billionaire dissident Guo Wengui.

Mr. Xi has positioned himself this year to assume an unprecedented third five-year term in office in the world’s most populous state. In his January speech, he extolled progress in reining in systemic corruption within the ruling Chinese Communist Party and its 95-plus million members.

Still, government officials and China experts widely view Mr. Xi’s signature anti-corruption drive as less an effort to produce clean governance than as a cover for efforts to consolidate his power by purging hundreds, maybe thousands, of perceived political rivals.

Since he took power in 2012, critics say, Mr. Xi’s steady reversal of economic reforms imposed since the 1980s is killing off the golden goose of pro-market and modernization innovations that catapulted China to economic superpower status, rivaling the U.S. by some key measures.

Now, as the result of a systematic program of “re-communization,” the Chinese economy is facing widespread dislocation and decline that analysts say could threaten Mr. Xi’s rule and ultimately the Communist Party, according to interviews with government and private-sector specialists on China. Even with the pandemic clouding global forecasts, the World Bank in December downgraded its 2022 forecast for Chinese gross domestic product growth from 5.4% to 5.1%, which would be the third-lowest rate since economic reforms took off in the early 1980s.

“The Chinese economy is rapidly worsening and seems headed towards recession,” said Larry Ong, a senior analyst with SinoInsider, a New York-based risk consultancy that focuses on Chinese elite politics. “Financial contagion is spreading from a debt crisis in the real estate sector.”

The emerging crisis has even led some China analysts to question whether Mr. Xi and the Communist Party can survive the economic troubles.

A senior U.S. official who has spent decades studying China affairs said its economy is slowly disintegrating.

China passed its peak about five years ago and in 2015 suffered a stock market crash that caused a $1 trillion run on currency. For the first time since the 1980s, Beijing was confronted with the fact that the tightly controlled system is fallible.

“They’ve been shaky since, and I think they are on the downslope now,” the official said.

Pragmatists vs. ideologues

The decades-long struggle between party pragmatists and ideologues escalated rapidly after the death of regime founder Mao Zedong in 1976. The internal differences, never fully resolved, appear to be resurfacing behind the scenes.

Mr. Xi appears intent on canceling many of the reforms and the opening of the economy initiated in the 1980s by Deng Xiaoping. His approach set China on a course of wealth and prosperity and helped underwrite a major military buildup.

An example of the split can be seen in Mr. Xi’s declaration last year of “complete victory” in eradicating poverty. His own premier, Li Keqiang, contradicted that claim a year earlier. Mr. Li said in a speech that 600 million Chinese were earning about 1,000 yuan a month, or about $157 — not enough to rent an apartment.

Analysts interviewed by The Washington Times say there are clear signs that opposition to Mr. Xi is increasing but is focused heavily, for now, on disputes over economics.

Ten years of political purges have left Mr. Xi firmly in control over the so-called power ministries, the internal security forces and the military. But that near total control over all aspects of Chinese society and economy by one leader poses risks for the president if he steers the economy into the rocks.

Mr. Xi, some analysts say, faces a dilemma. If he gives a free hand to the private business sector, which has fueled the country’s enormous economic success, he will weaken the Communist Party’s iron grip on power. If he expands and intensifies a campaign targeting the billionaires behind companies such as Alibaba and Tencent, the economy as a whole could suffer.

If, as is likely, he follows the path of previous communist dictators and reins in the free market, Mr. Xi can expect to set a stifled semiprivate economic sector.

Personal and regional power rivalries against re-communization are complicating Mr. Xi’s agenda and could result in a full-blown economic meltdown.

Analysts say a Chinese economic collapse would be much slower than the 2008 U.S. financial crisis, which was set off by the collapse of investments in risky, poorly regulated real estate loans. In Beijing, government control means loan defaults can be rolled over and payments delayed as long as government overseers allow. As one observer put it, “A rolling loan gathers no loss.”

Still, a slower crash is a crash nonetheless.

Targeting billionaires

The economic warning signs for investors include the regime’s campaign of sidelining wealthy Chinese who led some of the country’s best-known and most successful enterprises and international conglomerates.

Jack Ma, China’s outspoken billionaire founder of the tech giant Alibaba and the financial partner Ant Group is a case in point. Mr. Ma was rated as China’s richest man and a source of national pride until he spoke out against government financial regulators and said Chinese banks operated with a “pawnshop” mentality.

China’s regulators quickly turned on Mr. Ma and effectively ordered the dismantling of his financial empire. State-controlled media outlets, which once celebrated his accomplishments, began referring to him as an “evil capitalist” and “bloodsucking ghost.”

Alibaba was fined nearly $3 billion, and Mr. Xi blocked an initial public stock offering of Ant that was expected to raise $37 billion.

Other Chinese business giants also have been punished, sidelined or disappeared, with consequences for the companies they created. Since the crackdown, neither Alibaba nor the social media giant Tencent is even in the 10 most valuable tech companies in China.

Mr. Xi has justified the economic crackdown as part of efforts to promote “common prosperity” and rein in soaring wealth inequality rates in what is still nominally a communist country. Others see it as ideologically driven revenge against successful businesses that cannot be kept reliably under government control.

China’s economic challenges were on display again with nationwide power outages that began in September. The government abruptly turned off the electricity in at least 20 and as many as 33 provinces, leaving millions without lights, elevator service, traffic signals and other services.

The power shortages were the result of a combination of rising coal prices and government-mandated energy cuts to reduce carbon emissions. The shortages led Beijing to increase the use of coal for electricity-producing plants.

In the politically sensitive real estate sector, a professor at the Central University of Finance and Economics wrote online last month that more than 200,000 people stopped making mortgage payments at the beginning of the year and were sued by four major Chinese banks, as reported by Radio Free Asia on Jan. 21. The professor, Han Fuling, quoted one bank lawyer as saying “so many people have stopped their mortgage payments. We were exhausted after sending [that many] attorney letters.”

The payment stoppage was the result of a drop in real estate prices and growing unemployment.

China’s commercial real estate sector is perhaps the most worrisome sign of China’s economic fragility. Regulators and officials are confronting an estimated $5 trillion debt bubble run up by property developers and real estate speculators. Many fear the bubble will pop.

More signs of economic distress: Salaries of government workers throughout China are being slashed or in some cases remaining unpaid. Several provincial governments reduced civil service employees’ salaries by 25% to 30% and cut lucrative government subsidies. Mr. Xi reduced salaries for party cadres by 33% as part of the general belt-tightening.

The warning signs are multiplying despite rosy official statistics that appear to show a robust economy and economic growth. China’s continuing success as a global exporter is giving Mr. Xi a financial cushion in the face of new challenges.

John Tkacik, a former China specialist at the State Department, said Beijing logged GDP growth of more than 8% in the last quarter of 2021 and produced a large trade surplus in November.

“The fact that China continues to have a vicelike grip on global commodities, from agriculture to minerals and fossils, tells me that the real estate troubles are manageable — indeed, that big losers will be foreign creditors,” Mr. Tkacik said.

China’s strong industrial and defense manufacturing base is overshadowing the hollowed-out U.S. goods production sector that is struggling to supply and equip American defenses with 21st-century arms.

“China Inc. remains the most robust major economy in the world by far, and state- and party-controlled entities are prospering,” Mr. Tkacik said.

According to Chinese figures, the GDP reached $18 trillion in 2021, an increase of about $2 trillion — equal to the GDP of major countries such as Italy and Canada. Exports grew enormously in 2021 as companies such as Amazon and Costco sold vast amounts of Chinese goods.

U.S. GDP grew by about 5.7%, though much of that was fueled by record government stimulus spending and subsidies to counter the COVID-19 economic downturn.

Not all outside experts accept China’s official figures. Some say Beijing’s numbers may be inflated by as much as 4 percentage points.

Ominous trends

Some of the middle-term trends are likely to be another source of anxiety for Mr. Xi and his advisers.

The crushing debt crisis in China coupled with a demographic crisis — trends show the population is declining sharply — could be compounded by a sharp drop in foreign direct investment as Western corporations seek alternatives with less political risk.

“We’ve seen reports of how Xi’s mismanagement has destroyed trillions in wealth as he went after tech and network industries, entertainment, home-schooling and, of course, real estate,” the senior U.S. official said. “Those staggering losses should be counted against their GDP, but it seems as if they were not. In 2022, [Chinese leaders] will be able to add ‘COVID overreaction’ to their list of GDP losses they’ll never get back.”

Michael Wessel, a member of the 12-member congressionally chartered U.S.-China Economic and Security Review Commission, sees rigid Communist Party controls preventing a total collapse of the party-state system that has been in place since 1949.

“History has shown that you can’t trust China’s economic statistics,” Mr. Wessel said. “While their economy is facing stresses from burgeoning debt, demographic changes, misguided economic policies and other challenges, the iron hand of the leadership has stifled public debate and Xi and the CCP appear to only be tightening their grip on the economy and companies.”

Mr. Wessel called the problems in China “an increasingly precarious situation” for foreign companies that for decades flocked to do business and set up operations in the country as it modernized. Hopes that China would develop into a “normal” market economy playing by the rules of the international liberal order have been dashed under Mr. Xi.

“The CCP is not going to be changing direction, and we have to deal with that reality rather than hoping that China’s economic problems will lead to reform.”

Inflection point

Longtime China analyst Gordon Chang sees Beijing facing a critical inflection point, dramatized by the headline-generating debt problems of real estate development giant Evergrande Group in 2021.

“There is, most critically, a debt crisis. Evergrande Group, the failing developer, and more than a dozen other property companies have missed bond and other payment obligations since September,” he said.

Since 2008, Beijing has accumulated too much debt to finance its supercharged growth rates, and Chinese businesses and the consumers now “face a reckoning,” Mr. Chang said.

“Although Beijing can drag out the process of unwinding loans and payment obligations for a while, the regime cannot avoid a crisis because China has accumulated indebtedness approaching, by some estimates, a staggering 350% of gross domestic product,” he said.

Mr. Xi’s critics say the best strategy for the United States is to avoid another Western bailout of the communist system in China, as has happened several times in the past. The Biden administration has made competing with China a pillar of its foreign policy, recognizing that Chinese economic expansionism poses political and ideological dangers to the global democratic free market system.

Miles Yu, a former State Department official who played a key role in tougher U.S. policies toward China during the Trump administration, said China’s communist system flourished because it was allowed to participate freely in a global capitalist system.

“The paradox of a communist nation fully participating in a largely capitalist system has enriched and strengthened the Chinese Communist Party to the point where Beijing poses the mortal threat to the United States and to the very international free market economic system that has enabled the rise of the communist state,” he told a congressional China commission last year.

Mr. Yu said the United States should adopt a reciprocal “negative list” similar to the one China used to block or allow foreign investment.

“A reciprocal response would prohibit Chinese investments in the United States in areas such as high-quality agricultural seeds, social surveys, humanities and social science research institutions, critical minerals mining, news organizations, radio and television productions, film studios, cinemas and theater chains, and cultural performance troupes,” he said.

“We don’t need to defeat [China],” the senior U.S. official said. “We just need to defend what is most precious to us until they defeat themselves. It’s how we killed the USSR.”

• Bill Gertz can be reached at bgertz@washingtontimes.com.

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