Of the many economic and financial problems plaguing China today, underlying all is a critical issue of trust or, more accurately, the lack of it.
Private businesses in China have lost faith in the future and lost trust in the Chinese Communist Party (CCP). More than the headline-grabbing property crisis, the economy’s long-term future—the growth and prosperity that the Chinese people and the CCP want—depends heavily on winning back that trust. That effort is faltering.
Some 50 years ago, when China began its remarkable period of development, then-CCP leader Deng Xiaoping described development realities as a phase in the nation’s journey to a more perfect socialist future. It worked. Chinese enterprise flourished, the economy grew at a phenomenal rate, and millions were lifted from poverty.
This description of what China was doing implicitly forecasted its own end, that at some future date, the country would become more socialist. Some have described Deng as cynical, saying he used his characterization simply to get around communist ideology. Others say he sincerely meant what he said. It matters little now. The man has been dead for years. What is clear is that the current leader, Xi Jinping, seems to have taken Deng’s phase narrative on board and believes that it is about time for China to take the next step into a more socialist phase of its political-economic life. Acting on that belief, he has done considerable economic harm to his country.
Even before the COVID-19 pandemic, Xi had begun to make clear his intention of moving to this next phase. He showed extreme discomfort with private business. In 2018, for instance, his regime accused the founder of Anbang Insurance Group, Wu Xiachui, of illegal activities. Mr. Wu was sentenced to 18 years in prison, but Beijing did more. True to its disdain for private business, the regime seized the company.
Over the years since then, the CCP has done more along these lines. It has, for instance, cut off funding to two very successful after-school tutorial companies, Juren Education and Wall Street English, driving them into bankruptcy. The firms served hundreds of thousands of Chinese students.
Beijing did the same to Jack Ma’s wildly successful retail operation, Alibaba, and also fined the firm for what it described as an antitrust violation. The company survived but has taken a lower profile than previously.
As if to underscore the political origin of these moves, Xi told the 19th Party Congress that it was time for China to pass into a “new era,” that is, take the step from Deng’s development phase to a more socialist/communist structure. And so that people would make no mistake about what he meant, he said variously in several following speeches that private business owners and managers needed to become “politically sensible,” spend less time on their narrow business interests, and “follow the Party.” He spoke of educating “private businesspeople to weaponize their minds with socialist ideology.”
Private business owners and managers could not help but get the message that their future was becoming less secure and their wealth more vulnerable. In the words of an economist, Chen Kang, writing for the e-magazine Think China, “In such a business environment, they can surely only be thinking of transferring assets overseas and emigration instead of continued investments.”
China makes such transfers and movements overseas difficult, but a clear reluctance by private money to invest says loudly that these men and women have received Xi’s message. Private capital investment in real productive assets, which typically amounts to half the country’s total, has slowed from a growth rate of more than 23 percent in 2013, before all the talk of “new eras” began, to 10 percent in 2015 to 5 percent in 2019 to an outright, if small decline last year.
But now, with China’s cumulating economic troubles—a property crisis dragging down home buying, building activity, and real estate prices; hostility toward China trade growing in Washington, Brussels, and Tokyo; and business in the developed world diversifying its sourcing away from China—Xi and his colleagues in Zhongnanhai are rethinking their attitude toward private Chinese business, at least for the time being. They desperately need a spur to growth and want a more enthusiastic business community.
So at least for now, Xi has changed his tune. Instead of demanding fealty to Party interests, he has begun to say of business owners that they “belong to our own family.” Beijing’s recent 31-point program to spur economic growth includes 28 measures to boost the private economy.
So far, however, there has been little positive response. Private investment in fixed productive assets as of February, the most recent period for which data are available, rose barely at all from year-ago levels.
Xi and his colleagues may yet win over private Chinese businesses. Even if they do, the triumph will only relieve—not remedy—China’s economic problems. But it is far from apparent that winning over has begun at all.
As the old saying goes, “Trust, once lost, is hard to recover.”
Xi’s former posture had clearly done a lot of damage. It will take a long time, if ever, to fix. And right now, time is a luxury that Xi, his economy, and his regime can ill afford.
