An empty road is seen in Chengdu in Sichuan Province, China, as the provincial capital city suffers under COVID-19 lockdown on Sept. 2, 2022. CFOTO/Future Publishing via Getty Images
The Chinese Communist Party’s (CCP) state media has recently been working hard to promote private enterprises in the country, claiming that China’s economy will soon recover and resume high growth as the CCP drops its pandemic policies.
The real challenge at this stage for China’s economy is that its investment-led growth model is facing serious revenue erosion. Only structural reforms can reverse the current downturn, but the CCP is unlikely to implement such reforms, according to financial experts.
CCP State Media Promotes Private Firms
On Jan. 6, the CCP’s mouthpiece CCTV invited 21 leading private entrepreneurs—including Alibaba Board Chairman Zhang Yong, Jingdong Group CEO Xu Lei, and Fosun International Chairman Guo Guangchang—to appear on their TV program, attempting to boost confidence in China’s economy.
Since Dec. 21 last year, CCTV has been featuring interviews and commentaries on private enterprises in two major TV programs, “News Broadcast” and “CCTV Financial Review." The programs claimed that private enterprises would soon flourish in China with the CCP’s supporting policies and measures. Various provincial authorities also expressed support for private businesses and enterprises.
According to Standard Chartered Bank’s survey data, China’s small and medium-sized enterprises (SME) Index was in contraction for the third consecutive month in December, falling below the 50 mark, indicating that the business conditions of SMEs have become depressed. The continued decline in the business conditions of SMEs, which support urban employment and the primary market in China, is a reflection of the poor economic situation in the country as a whole.
According to the data released by the National Bureau of Statistics of China (NBSC), the purchasing managers’ index (PMI) for manufacturing and non-manufacturing sectors dropped in December. The non-manufacturing PMI was 41.6 percent, a 5.1 percentage point drop and the lowest level since February 2020. In particular, the business activity index for retail, road transportation, accommodation, food and beverage, and residential services sectors was below 35.0 percent.
In this regard, Nomura Securities Chief Economist Lu Ting said at a recent event held by the Shanghai Institute of Finance that data from 2020 and 2021 cannot be used as a benchmark for growth in 2023, as the global economic backdrop has changed significantly. Lu said that many premises behind the optimism in economic recovery in 2023 are not necessarily tenable, such as claims that China will still maintain its growth rate before the COVID-19 pandemic, demand will soon return to pre-pandemic levels, and so on.
According to Bloomberg NEF data, Beijing, the capital of China, had only 3.6 million subway rides on Dec. 22 last year, 70 percent lower than the same period in 2019, and traffic congestion on city streets was only 30 percent of that in January 2021. Other major cities, such as Chongqing, Guangzhou, Shanghai, Tianjin, and Wuhan, also saw similar declines.
In response, Chinese economist Ren Zeping wrote in NetEase that December’s PMI showed a sharp economic contraction. He warned against being optimistic about the economic situation in 2023 and believing that “as long as the pandemic is over, the economy will bounce back along with consumption.”
Japan-based current affairs commentator Ji Lin said in an interview with The Epoch Times on Jan. 7 that, in general, modern democracies govern with the people’s consent, but the CCP is an authoritarian regime, so its mandate to govern comes from economic growth alone. By developing the economy, Chinese people’s lives improved, which eased the grievances of the people at the bottom of society.
Beijing’s zero-COVID policy has devastated e-commerce and many other industries in the past three years. The people’s living standards have declined significantly, leading to increased discontent and mass protests, such as the White Paper movement. This pressured the CCP to maintain its political stability because its governing mandate through economic stability had been compromised. Ji believes the Chinese regime may not be far from collapse since it is now losing its mandate all across the board.
A demonstrator holds a blank sign and chants slogans during a protest against draconian COVID-19 measures in Beijing on Nov. 28, 2022. Bloomberg via Getty Images
Gary Hufbauer, a senior researcher at the Peterson Institute for International Economics, told Voice of America, “He [Xi Jinping] needs more than 4 percent growth to maintain the CCP’s legitimacy, and an active private sector is the only way to stimulate growth.”
China’s Economic Growth Model Faces Challenges
Ever since China’s accession to the World Trade Organization (WTO) in 2001, the country’s GDP growth has been driven by the accumulation of raw capital through export earnings, which became the central bank’s basis for money creation and commercial bank’s capital in the form of foreign exchange accounts, and then establishing credit through real estate infrastructure. Now, China’s growth model of “export earnings + real estate” is facing challenges.
According to the Chinese General Administration of Customs, China’s exports in November 2022 were $296.09 billion, down 8.9 percent year-on-year. For December, China’s export growth rate was forecasted to fall by 9.5 percent, 10 percent, and 6.7 percent by CICC Macro, CITIC Securities, and Guotai Junan Futures, respectively.
Looking at Chinese real estate, a report released by Kerry Property Ltd. Research and Ratings show that in December, new property sales by China’s top 100 largest real estate companies amounted to 677.51 billion yuan (about $98.2 billion), down 30.8 percent year-on-year, compared with a 25.5 percent drop in November. In terms of cumulative results, the top 100 real estate companies achieved sales of 6,462.22 billion yuan (about $936.56 billion) from January to December, down 41.6 percent year-on-year.
“The real economic challenge in China is that the investment-led growth model is facing serious revenue erosion,” said economist Dr. Andy Xie in an opinion piece in the South China Morning Post. “A decade of interconnected real estate bubbles and an undervalued exchange rate have subsidized the cost of capital. Low or negative interest rates due to undervalued exchange rates have partially offset the decline in the rate of return on fixed investment,” he wrote. This distortion came at the cost of a decline in consumption as a share of GDP and an increase in household debt.
Li Xunlei, the chief economist of China Securities, wrote in a blog that the reason behind unsatisfactory policy results is that over the years, policies in China have mostly touched on areas that are easy to operate, while those that are not easy to operate are mostly deep-rooted problems or in areas where there is not a strong will to implement new policies. The prioritization of restoring and expanding consumption in China implies that the CCP needs to implement structural reforms, which is quite difficult.
Xie said: “So far, China has not shown any willingness to change course. That’s why its economic growth will be low in the next few years.”
David Chu
Author
David Chu is a London-based journalist who has been working in the financial sector for almost 30 years in major cities in China and abroad, including South Korea, Thailand, and other Southeast Asian countries. He was born in a family specializing in Traditional Chinese Medicine and has a background in ancient Chinese literature.
