The True Reason China’s Economy Is In Crisis
Summary
TLDRThe video discusses China's looming economic collapse, attributing the crisis to President Xi Jinping's top-down control approach. Despite reported growth, underlying issues like heavy investment masking true economic performance, a struggling property market, and declining manufacturing sector are highlighted. Xi's policies, including stringent anti-espionage laws and consolidation of power, have alienated foreign investors and destabilized local finances. The narrative questions whether Xi has a master plan or if his authoritarian rule is leading China into deeper turmoil, inviting viewers to share their thoughts.
Takeaways
- 📉 China faces potential economic collapse under President Xi Jinping.
- 📊 Despite official data showing 5.2% growth in 2023, underlying issues persist.
- 🔍 Heavy investment by Beijing inflates economic figures, masking true performance.
- 🔒 Xi’s top-down control stifles traditional collective decision-making.
- 🏢 Xi’s policies, like consolidating economic power, disrupt market stability.
- 🏠 Crackdowns on the property sector lead to unfinished homes and financial chaos.
- 💼 The manufacturing sector's decline since 2013 further weakens China’s economy.
- 💰 Anti-espionage laws deter foreign investment, causing economic isolation.
- 🌍 Global impact as weakened Chinese consumer market affects multinational companies.
- ❓ Uncertainty remains about China's economic future and Xi's long-term plans.
Q & A
What is the apparent economic growth rate of China in 2023 according to official data?
-China's economy grew by 5.2% in 2023 according to official data from Beijing.
How does China's reported growth rate compare to that of the United States?
-China's reported growth rate of 5.2% is almost double that of the United States, which had a growth rate of around 2.7%.
Why is the reported 5.2% growth rate considered disappointing by some economists?
-Some economists consider the 5.2% growth rate disappointing because Beijing invests about 40% of its GDP annually, which is twice as much as the United States, suggesting the growth rate should be higher given the level of investment.
What approach has Xi Jinping taken towards China's economic policy?
-Xi Jinping has taken a top-down control approach, consolidating power and centralizing decision-making rather than relying on collective decision-making as in the past.
How has Xi's control affected China's property sector?
-Xi's crackdown on the property sector, intended to address developer debt, has led to a slowdown in construction, leaving many pre-sold homes unfinished and causing significant economic strain on developers and banks.
What impact has Xi's 'Made in China 2025' initiative had on China's manufacturing sector?
-The 'Made in China 2025' initiative aimed to shift China from low-cost manufacturing to high-value goods production, but it led to foreign investors looking elsewhere and contributed to a decline in the manufacturing sector's contribution to GDP.
How have foreign investors reacted to Xi's economic policies?
-Foreign investors have been deterred by Xi's policies, including the anti-espionage law, which has made it difficult for them to conduct due diligence and has led to significant capital outflows.
What has been the effect of Xi's policies on local government finances in China?
-Xi's policies, including the reduction in land sale revenues due to the property market downturn, have significantly strained local government finances, exacerbating a long-standing issue of local governments bearing a disproportionate share of expenditure.
What are some of the systemic issues within China's economy as highlighted by experts?
-Experts point to an over-indebted property sector, commercial banks with questionable loan books, and a lack of transparency in economic data as systemic issues within China's economy.
What potential positive aspect of China's economy does the script mention?
-The script mentions that household deposits in China exceed the country's GDP, providing state-owned banks with a cheap source of money to fund loans to high-end manufacturing companies.
Outlines
📉 China's Economic Collapse Blamed on Xi Jinping
China's economy grew by 5.2% in 2023, surpassing the 5% target set by President Xi Jinping. However, this apparent success hides underlying issues. Despite impressive figures compared to the U.S.'s 2.7% growth, China's economy is facing a serious threat from within. The primary issue is Xi's top-down control approach, which has shifted away from collective decision-making and concentrated power into his hands. This has led to a distorted economic environment where heavy investment masks deeper problems.
🔍 Hidden Problems Behind China's Economic Growth
Xi Jinping's focus on top-down control means that the 5.2% growth touted as a success is misleading. China invests heavily, amounting to 40% of its GDP, which makes the growth rate less impressive. Xi's consolidation of power and sidelining of economic experts have led to a chaotic economic environment. Experts like Carsten Holz point out issues such as an over-indebted property sector and problematic loan books in commercial banks, painting a picture of instability despite official figures.
🏦 Xi's Overhaul of Financial Regulation
The establishment of the National Financial Regulatory Administration (NFRA) in March 2023, replacing the China Banking and Insurance Regulatory Commission (CBIRC), reflects Xi's control over the financial sector. The NFRA, led by Communist Party official Li Yunze, blurs the lines between the state and the CCP, allowing Xi to exert more influence. This shift towards governance through special CCP organs indicates Xi's desire for tighter control, despite the NFRA's surface-level intentions to address corruption and speculation.
🔍 Anti-Espionage Law and Its Economic Impact
China's new anti-espionage law raises concerns for international businesses involved in consulting and business intelligence. The $1.5 million fine against American firm Mintz Group for 'unapproved statistical work' exemplifies how the law can deter foreign investment. Xi's approach to control foreign investors, combined with the significant outflow of investment, signals a troubling future for China's economy. Xi's desire to control economic information is seen as a way to mask deeper economic issues.
🏠 The Property Market Crisis
China's property market, once a cornerstone of economic growth, is now in crisis. The market's downturn since 2021, driven by Xi's crackdown on developers' debt, has led to a significant drop in home prices and a stalled construction sector. The 'pre-sales model' allowed developers to sell homes before completion, leading to a surplus of unfinished projects. This has resulted in significant financial losses for families and developers, with the property sector's decline threatening millions of jobs and increasing debt burdens on state-owned banks.
🏭 Decline of the Manufacturing Sector
China's manufacturing sector has seen a decline since Xi took power, dropping from 31% of GDP in 2013 to around 27-28% in 2023. Competing countries like Vietnam and Mexico have attracted foreign investment that once flowed into China. Xi's 'Made in China 2025' initiative aimed to shift China from low-cost manufacturing to high-value innovation, but it has driven foreign investors away and contributed to trade tensions with key partners like the U.S. The policy has not resulted in the expected manufacturing renaissance, weakening the sector further.
💰 Local Government Financial Struggles
Xi's policies have exacerbated financial struggles for local governments in China. The reliance on land sales for revenue has diminished, with regional governments generating less income from this source by 2022. Despite attempts to clean up local government financing, debt related to local government financing vehicles (LGFVs) has surged, contributing to China's high debt-to-GDP ratio. Xi's centralization of power and control over local finances has left many cities, especially smaller ones, in financial distress.
🔍 Wealth Inequality and Economic Challenges
Xi's policies have failed to reduce wealth inequality in China. The income gap between the top 20% and the bottom 20% of urban households is at its highest since 1985. Economic growth is lackluster relative to GDP expenditure, and the property and manufacturing sectors are in decline. High youth unemployment and a weakening consumer market further compound the issues. Xi's top-down approach and focus on control have led to economic stress within China and negatively impacted foreign businesses reliant on Chinese consumers.
🔮 Future Prospects and Savings Cushion
Despite the economic challenges, household deposits in China exceed the country's GDP, providing a source of cheap money for state-owned banks. This has allowed for loans to high-end manufacturing companies, aligning with Xi's 'Made in China 2025' policy. However, the overall economic outlook remains bleak, with significant issues in property, manufacturing, and foreign investment sectors. The question remains whether Xi's approach will lead to recovery or further economic strain.
Mindmap
Keywords
💡Economic Collapse
💡Top-Down Control
💡GDP Growth
💡Common Prosperity
💡National Financial Regulatory Administration (NFRA)
💡Anti-Espionage Law
💡Property Sector
💡Made in China 2025
💡Local Government Debt
💡Wealth Inequality
Highlights
China's economy grew by 5.2% in 2023, surpassing the 5% target set by Xi Jinping.
Despite impressive growth figures, Beijing invests about 40% of its GDP annually, double that of the United States.
Xi Jinping's top-down control approach has consolidated power and centralized economic decision-making.
Xi's policies have led to an over-indebted property sector and commercial banks with questionable loan books.
The establishment of the National Financial Regulatory Administration (NFRA) signifies increased CCP control over China's financial sector.
Xi's anti-espionage law has made foreign investors wary, resulting in a significant outflow of foreign investment.
China's property market downturn started in 2021, with significant drops in home prices in Tier 2 and Tier 3 cities.
Xi's crackdown on the property sector has resulted in many unfinished homes and a struggling construction industry.
China's manufacturing sector has declined from 31% of GDP in 2013 to around 27-28% in 2023.
The 'Made in China 2025' initiative aimed to shift China to high-value manufacturing but has deterred foreign investment.
Xi's policies have perpetuated local government financial struggles, with local governments holding massive debt.
Wealth inequality in China has increased, with the top 20% of urban households earning 6.3 times more than the bottom 20%.
Youth unemployment is high, and China's consumer market is weakening, affecting global companies reliant on Chinese consumers.
Household deposits in China exceed the country's GDP, providing a cheap source of money for state-owned banks.
Xi's policies have created an insular China, alienating foreign investors and causing significant economic stress.
Transcripts
China is on the brink of economic collapse and there’s only one
man to blame – President Xi Jinping. It may not look like it on the surface.
In January 2024, official data out of Beijing showed that China’s economy grew by 5.2% in 2023,
surpassing the 5% target Xi had set for the country at the beginning of the year. That’s
almost double U.S. growth – which Bloomberg says hit around 2.7% – so all seems rosy in
China, right? Not so fast.
Lurking beneath the shiny surface of China’s economic apple is a core that’s
slowly rotting away. And making its way through that core is a devastating worm
– Xi himself – who threatens to leave China’s economy in turmoil in the coming years.
The question is simple: Why?
Why is Xi the reason for China’s economic woes? After all, isn’t he the great savior of the
country? The man who’s pushed China’s military through rapid modernization
efforts to the point where it’s now one of the world’s strongest nations? How could he
be killing the country’s economy? It starts with a couple of words:
Top-Down Control. Let’s start with that announcement of
5.2% growth for 2023. Official sources in Beijing will tout that as a major success for the country,
especially after a fairly lackluster 2022. Xi Jinping could hang his hat on the fact
that Chinese growth has outstripped America’s, perhaps giving himself a nice little ego boost
in the process. But what he may not tell you – and what certainly isn’t mentioned in
China’s official figures – is that Beijing invests about 40% of its gross domestic product, or GDP,
every year. That’s twice as much as the United States, with such heavy investment even leading to
economists saying that the supposedly impressive 5.2% growth rate is actually a “disappointing
figure” when you dig deeper into it. So, 5.2% is less a great achievement for Xi,
and more a little ego boost that hides what’s really going on. And that’s where the concept
of “top-down control” comes into play. Ever since he came to power, Xi has made
it his life’s work to consolidate. Anything that matters to China falls under his control,
with the quote-on-quote President taking a near-totalitarian approach to the country’s
economic policy. That clashes with China’s traditional approach. Rather than using the
collective decision-making that guided the country in the past,
Xi worked hard to concentrate power into his hands, essentially making the Chinese state
and its ruling communist party one and the same. Just take his treatment of China’s premier – the
second-highest-ranking official in China’s governmental system – as an example.
Before Xi took the reins, China’s premier typically set the tone of the country’s economic
policy. That setup saw the premier consulting with a team of experts, with the quality of
those experts ultimately determining the success of the policies the premier implemented. The
president – for their part – was more of a figurehead in this realm. He’d relay the
policies that the premier (and his team) developed while focusing on the bigger picture for China.
That’s not how it works anymore. Xi decided that China’s economic policy needed
to shift when he came to power, bringing with it the ideas of stability and “common prosperity.”
In short – he wanted to close the gap between the “haves” and the “have-nots,” by creating a policy
that gave more Chinese people a chance to gain a share of the wealth that the country generates.
An admirable approach. But it’s one that saw Xi
quickly lose faith in his premier and the team of economic experts who informed policy-making before
he came along. Unsatisfied with the answers they were giving to his questions, Xi wrested power
away from them, becoming a team of one expert – answerable only to himself – on issues of
economic policy. The result, according to some experts, has been an almost anarchic economic
environment within China that’s often hidden by the official figures coming out of Beijing.
Carsten Holz is one of those experts. He studies the Chinese economy as an
expert at the Hong Kong University of Science and Technology, and he says that Xi’s approach has
made it extremely difficult to gain a clear picture of the economic reality in China.
He points to issues like an “over-indebted property sector” and “commercial banks loan
books of questionable quality,” essentially painting a picture of a system that sees a
lot of internal chaos even when it presents itself as one of the strongest in the world.
Xi is at the center of all of this. And a perfect example comes from his
establishment of the National Financial Regulatory Administration, or NFRA.
On the surface, the NRFA seems like a step in the right direction. Formed in March 2023 to
replace the China Banking and Insurance Regulatory Commission, or CBIRC, the new body represents what
CNN calls “the biggest overhaul of the government in decades.” The group will serve a similar
purpose to the SEC in the United States, with some of its key responsibilities being to oversee
investor and consumer rights in the financial sector while controlling the central bank.
The problem? The NFRA represents the blurring of state
and communist party lines we previously mentioned. Look into its leadership, and you’ll discover a
man named Li Yunze. Though he previously worked for China Construction Bank and the Industrial
and Commercial Bank of China, Li ascended to the role of deputy governor of Sichuan in 2018.
He’s a communist party official. And being an official means that, for all of his
expertise, Li’s actions are ultimately governed by Xi. The Financial Times puts this approach in
perspective, stating that the formation of the NFRA is really “the latest indication of how Xi
is seeking to govern through special CCP organs, over which he can more easily assert influence.”
Again, it’s the top-down approach exemplified. The CBIRC certainly had its problems, particularly
with corruption, but it was still a state entity rather than a Chinese Communist Party,
or CCP, one. With the NFRA, Xi demonstrates an outward desire to solve the problems inherent
to the CBIRC, while actually creating a replacement over which he can exert even
more control than he already had. Clamping down on corruption and speculation is all well and good,
but it comes at the cost of Xi strengthening his control over Beijing’s financial sector.
The message from Xi is clear: I know best.
But the reality is that there are plenty of issues in China that demonstrate the extent
of his economic policy failure. Take the creation of China’s
new anti-espionage law as an example. On the surface, that doesn’t seem like
it should have anything to do with the economy. But that law sees Beijing raising questions about
international businesses handling consulting work within the Chinese security sector,
as well as business intelligence work conducted by investors. Not long after that law came into
effect, China levied a $1.5 million fine against the American investment firm Mintz Group.
The reason? Doing “unapproved statistical work.”
That “unapproved” work would have been typical of any investment firm. The company needs to do
its due diligence before choosing where to invest its money. But Xi has made it clear
that foreign investors can essentially only work from the statistics that China provides for them,
with the need for approval from Beijing allowing Xi to hide any economic issues that would cause
an investor to be wary. It’s all about control.
The $1.5 million fine combined an administrative penalty for supposedly breaking the law with China
claiming “illegal proceeds” from Mintz Group. This could almost be seen as strong-arming the American
firm. The raid was essentially a message to other investment groups that any money they earn from
China – especially if they try to take it out of China – could be at risk through the application
of Xi’s new anti-espionage rules. Like so many of Xi’s policies,
there’s logic behind the policy. He believes that one of the causes of
China’s economic woes comes down to international investors taking money out of the Chinese economy.
And he has a point. In the fourth quarter of 2023 alone, about $140 billion of long-term foreign
investment left China, representing about 1% of the nation’s GDP. Chatham House showcases why
this is a problem, pointing out that just 10 years before, China had actually attracted an influx of
foreign investment equivalent to 2% of its GDP. It seems that Xi wants the money to keep flowing
in, but is extremely hesitant to allow it to flow back out.
Unfortunately, the approach of using anti-espionage laws to essentially claim
money back from foreign investors will come back to bite him. Investors are now rattled.
Rather than seeing China as a place where they can make money, which would encourage them to
pump money into its economy, they now see it as a place where they could be punished for simply
conducting the due diligence expected of them. As Chenggang Xu – a senior research scholar
on China’s economy and institutions at Stanford Center – says, “It’s a communist totalitarianism.”
The goal seems to be for the CCP to control everything, from China’s regulatory bodies to its
private firms – including foreign firms that have invested so heavily in the country for decades.
Xu goes on to say that Xi’s desire for control will likely result in a purge of many of these
foreign firms. Not because they don’t add value to China. But because they won’t allow themselves
to be controlled to such an extent by the CCP. Xi is cutting off his nose to spite his face.
By attempting to exert so much control, he’s actively dissuading the foreign investors
who’ve played such a huge part in making China an economic powerhouse in the 21st century.
So, China faces a future where foreign money won’t be flowing in.
Now, let’s shift our focus a little closer to home for Xi – the property market.
For decades, China was practically dependent on its property market to fuel its economy. As long
as the population kept growing, Chinese developers could rely on a near-constant influx of customers
for their homes. And Beijing was more than happy to stoke the fires of that industry growth. After
all, the property sector created construction jobs for millions, as well as tangible assets through
which the country’s middle class could store their ever-growing wealth. Even local governments loved
the strong property market – they made a fortune from selling land to developers.
That’s all fine… Until the real estate sector goes pop.
This approach to real estate led to the average family having about 70% of their assets tied up
in property, ultimately making those families dependent on the strength of the industry. When
house prices went up, all was well. But when they started going down, it spelled pain both for the
families and China’s economy as a whole. The downturn started in 2021.
According to Bloomberg, the two years between 2021 and 2023 saw existing home prices in over
half of China’s Tier 2 and Tier 3 cities drop by at least 15% from their peak. For context, every
5% decline in China’s house prices represents a loss of 19 trillion yuan – approximately $2.7
trillion – in housing wealth. So, 15% means just over $8 trillion gone in the blink of an eye.
The culprit behind these massive losses: Xi’s property sector policy.
In truth, Xi Jinping inherited many of China’s property woes. The sector had been the crutch
upon which China’s economy leaned long before he came along, and he was happy to let it continue
that way for several years after his ascension to president in 2013. But about seven years later,
Xi executed a crackdown on China’s property development market, with that crackdown
serving as his response to the debt being accumulated by the country’s developers.
Rewind to 2018 and you see a market in shambles. Bloomberg says that 2018 saw real estate account
for nearly 20% of China’s GDP. But at the same time, it only employed 2% of the country’s
workforce. And this wasn’t glamorous employment. Most of the 16 million people who worked in the
industry were migrants spending long days at construction sites while getting paid a
pittance for their efforts. They were essentially building houses that they could never afford,
with those on top becoming billionaires on the back of their hard work. The more cynical among
you may say that’s essentially how capitalism works, but it’s not conducive to a thriving
economy. If the people in one of your most important industries are barely being paid
enough to survive, how can you expect them to pump money into your country’s economy?
To his credit, Xi recognized rampant corruption – which he’d also allowed
to continue – and decided to crack down. We see that in the investigation of Hui Ka Yan,
the founder of China Evergrande Group. In 2017, he became China’s richest man. Three years later,
he was under investigation after China Evergrande Group defaulted on a huge number of dollar bonds.
So, Xi is cracking down on construction in development.
Great. But it all came too late.
Under Xi, property developers had spent the time between 2013 and 2020 creating what
Bloomberg calls a “pre-sales model.” The idea was simple – sell apartments to customers up to two
years in advance, allowing the developer to earn operating cash early in the process. Using that
money – which came from wiring the prospective owner’s down payment and their mortgage into an
escrow account – the developer could get to work and deliver the home. The scheme incentivized
developers to keep breaking ground, creating a constant stream of new houses that could
counteract the rising property prices that were keeping many Chinese people out of homeownership.
The scheme grew out of control. By 2020 – when Xi’s crackdowns finally came into
effect – residential construction projects that were under construction accounted for about 10
times the actual amount of completed floor space. The crackdowns came. Construction slowed. And now,
many of China’s developers have simply run out of money to build the homes that they’ve
essentially already sold to customers. By 2023, China found itself in a situation where there
were 18 unfinished homes – most tied to pre-sales – for every completed property.
What we have here is anarchy. Xi’s early – some might call
lackadaisical – approach to the property market allowed developers to run rampant. The average
citizen was priced out while the middle and upper classes saw their assets skyrocket in
value. Following the crackdowns, much of China is becoming a sort of development hell. The more
affordable homes that were meant to be coming simply aren’t being built. And in many areas
of China, property prices are plummeting so fast that those who’d invested before are seeing huge
portions of their family wealth wiped out. Bloomberg estimates that the correction of
the market may affect over 5 million jobs. And it’s easy to see why. With developers
more hesitant than ever to break ground (or finish projects they’ve started) the poor
migrant workers who relied on their construction jobs to survive may see China’s most important
industry wiped out from underneath them. And there are knock-on effects beyond that.
Now racked with mountains of debt that they’re struggling to pay back, Chinese developers are
missing their loan payments. For instance, Country Garden Holdings Company – previously
one of China’s biggest developers in terms of pure sales numbers – is in a $200 billion black hole,
with half of that money relating to pre-sold properties. That’s money that isn’t going to
be paid back any time soon. So, not only do the people who’d bought the homes that aren’t being
built going to suffer, but so will China’s state-owned banks that are now tied into this
debt through the mortgages that they provided. Add to all of that the failed loan payments,
and you have a financial sector that’s going to struggle under the weight of
loans it perhaps should never have made. Xi knows that China needs to reduce its
reliance on property. His mantra has always been that “housing is to be lived in,
not speculated on.” But the approach he’s taken has created enormous problems for many in China,
from regular citizens to developers, banks, and the country’s middle class.
Housing to be lived in is only effective when that housing is actually being built.
And property is far from the only problem. China’s manufacturing sector is also struggling
massively, and its downfall happens to coincide with the years in which Xi has held power.
In the year that Xi took power, China was the world’s factory. Its manufacturing sector
accounted for 31% of China’s GDP, putting it ahead of even the property industry. But by 2020,
the sector’s contribution to GDP had dropped so significantly that
it was only accounting for 26%. Even now, in 2023, it hovers around the 27% to 28% mark.
What happened? Part of the issue comes down to other
countries emerging as more attractive propositions for companies that need manufacturing. Vietnam
and Mexico have emerged as major competitors to China in the years since Xi took power,
snatching away some of the foreign investment into the sector from Beijing’s clutches.
But perhaps far more damaging – as well as being a contributing factor to other countries rising
as manufacturing players – is Xi’s “Made in China 2025” initiative. Announced in May 2015,
the goal of this policy was to have China shed its reputation as the world’s factory. No longer would
China be the byword for cheap and low-quality goods produced because it offered low labor
costs to the rest of the world. Instead, China would focus on the “innovation-driven” production
of much higher-value goods. Again, this seems like a
logical policy on the surface. Yes, China would lose some foreign
investment from companies that previously relied on it for low manufacturing costs.
But Xi’s policy would supposedly turn it into a manufacturing powerhouse, with
Chinese goods making money for Chinese companies, propelling the country’s economy in the process.
We’ve already seen from the statistics that this didn’t happen.
Though many overseas saw this policy as an attempt by China to first catch up
to and then move past Western technological prowess, the reality is that “Made in China
2025” simply encouraged foreign investors into the country’s manufacturing industry to
look elsewhere. Just as Xi’s anti-espionage laws from 2023 are warding off investors,
so too is China’s shift toward trying to position itself as a manufacturing innovator. In fact,
the policy was so impactful overseas that it became the impetus for the trade war that marked
much of Donald Trump’s time as U.S. president. Xi’s approach was to provide governmental
subsidies to companies that he believed would be able to propel China’s manufacturing sector
forward. However, according to the Center for Economic Policy Research, or CEPR,
Beijing has never made the list of companies that got the nod from Xi publicly. We know
that some Chinese manufacturers are receiving subsidies from the CCP. We just don’t know who,
or why. All of that information is controlled by Xi, again demonstrating how his top-down
economic policy is causing problems for China. Instead of strengthening Chinese companies,
“Made in China 2025” sparked restrictions, tariffs, and export controls from many of
its key trading partners. Xi responded with trade restrictions of his own,
leading to the situation we see now – China isn’t the manufacturing powerhouse that it once was.
So, we see how Xi’s top-down approach has wreaked havoc on China’s property and manufacturing
sectors. We also see just how much he’s doing to ward off foreign investment, making China more
insular at a time when it could really do with attracting solid injections of overseas cash.
But Xi has done more than alienate foreign investors and shatter China’s property
development sector. He’s had a terrible
impact on the local level, too. Prior to Xi implementing his 2020 property
market crackdowns, regional governments generated about a third of their income from land sales. By
2022, the amount was closer to 10%, with ailing developers no longer able to afford the land that
local governments wanted to sell to them. During the same time, local government responsibility for
general expenditure reached 86% – a record high in the 42 years of statistics available from China’s
National Bureau of Statistics. This isn’t all Xi’s doing.
Local government finances have been deteriorating since the 1994 introduction of the Tax Sharing
System, which kickstarted China’s economic burden falling more onto local governments than national
governments. At the time of that reform, local governments’ collective share of China’s revenue
was a little over 75%. In 1994, that plummeted below 50%, and had only just managed to crawl
above that 50% barrier since Xi took charge. Not great when these same governments have
to deal with 85% of Chinese expenditure. But Xi has done little to solve the problem.
Yes, he cleaned up 12 trillion yuan – about $1.67 billion – of local government financing vehicles,
or LGFV, debt during his first term as president. But by 2022,
liabilities related to LGFVs had rocketed up to 57 trillion yuan, or about $7.92 trillion.
That’s 48% of China’s GDP, almost level with national borrowing, and is one of the main
reasons that China’s debt-to-GDP ratio has risen to 360% compared to the 200% it was when Xi took
over. And now, by taking away land as a means to generate income for local governments, Xi has
created a system that will see many of its cities – especially its smaller ones – doomed to fail.
There’s a saying in China: “Those in Beijing hold the purse strings,
while local cadres hold dirty shovels.” The implication is that while all of the
smaller cities and towns do the dirty work, Beijing rakes in the money and, ultimately,
controls how much of that money these smaller locales receive. Xi may not have created that
policy. But he has perpetuated it, much to the detriment of local government finances.
And all of this is in service of creating a stronger China
in which the wealth inequality gap is shortened. But even that noble ambition isn’t coming to pass.
Though Xi goes to great lengths to talk about how his policies are designed to prevent wealth
inequality, the fact is that China’s elite are richer than its low and middle-income
households than ever before. The top 20% of the country’s urban households earn 6.3 times more
than the bottom 20% - the highest gap since 1985. All of this means that China has a cavalcade of
problems. Its economic growth is unimpressive when taken into context with its GDP expenditure. The
property market is in shambles, with the manufacturing sector also struggling. And
given that these are China’s two most important industries, it should come as no surprise that
youth unemployment is high, according to the BBC. And all of this has knock-on effects
for the rest of the world. Due to all of Xi’s failed policies,
China’s consumer market is weakening. That’s bad news for the global companies that sell to
Chinese consumers – such as Apple – because that means they’re receiving less revenue from China.
Less money to these major multinationals results in lower demand for supplies,
affecting thousands of companies within the supply chains of these major hitters.
So, Xi’s failures don’t just lead to unemployment and economic woes in China.
They cause the same issues for many of the foreign businesses that have relied for so long on Chinese
consumers propping up their record profits. The question now is simple:
Is there a light at the end of the economic tunnel for Xi Jinping?
One positive he can take from all of this is that household deposits in China exceed the country’s
GDP. That’s a symptom of the stock market crash of 2015 – which occurred during Xi’s stint – leading
to more Chinese people choosing to save rather than invest. These savings give the state-owned
banks a cheap source of money, which they can then use to provide loans to high-end manufacturing
companies. And it’s certainly the case that loans to these types of companies – which
are intended to be the beneficiaries of Xi’s “Made in China 2025” policy – have skyrocketed.
But can one small win mean much when measured against the devastation wrought elsewhere?
Perhaps Xi is the only man who has the answer. After all, he seems to believe
he has the answers to everything in China. Still, what do you think? Are worries about
China’s economic woes overblown? Perhaps you believe Xi has some sort of master plan that he’s
waiting to unleash? Or, are we simply watching a totalitarian ruler who’s allowing his country’s
people and financial institutions to be placed under immense stress all in service
of his political party gaining more control? Tell us what you think in the comments below.
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