From Deng to Xi: China’s decline

For those who are interested in global geopolitics, the biggest question is not about the wars in Ukraine or Israel. While these may seem world-changing, these two wars will not really change the global order. There is one potential scenario that could shake up the world order. This is the possible end of China’s economic miracle.

Over the last 45 years, China has transformed itself from one of the world’s poorest and most isolated country into an economic superpower, second only to the United States. The question now is whether China’s economy has peaked. A corollary question is what has caused China’s economic stagnation. While Xi Jinping is becoming the absolute leader of China, the real author of the economic boom in that country was actually Deng Xiaoping.

It was Deng’s market-oriented reforms that drove growth and restrained the Communist Party from over interfering in the private sector. One evidence of the private sector being the main driver of the economic miracle of China is that between 1980 and 2013, the years before Xi Jinping took control, China’s private investment grew 2.6 times the growth of state investment.

During that same period, 1980 to 2013, the share of state investment fell from 80 percent to 33 percent of total investment. Another illustration of the growth of the private sector is that in 1980, private urban companies employed only 150,000 Chinese workers. By 2012, the year before Xi Jinping took control, that number had grown 250 million urban workers in private firms in China.

These figures show that private firms accounted for 95 percent of the growth of urban jobs in China. During that same period, China opened the country to foreign investment.

Under Xi Jinping, the share of credit going to the private sector has declined steadily every year. In 2020, Xi issued a directive to expand the role of the Communist Party in the corporate governance of private firms. After Xi’s takeover, growth in private investment declined to half the level of growth in state investments.

There was also an increase in government intervention at the expense of the private sector and barriers to international investments were raised. The present economy of China is a drastic deviation from more than three decades of the preceding Chinese leadership of restraining economic intervention by the government.

The new autocracy under Xi has implemented tremendous restraint on the freedom of the highly successful entrepreneurs such as Jack Ma.

Criticism of government policies has been severely limited by the CCP. The use of electronic surveillance and repression has grown in recent years. Even before Xi took over, I was already noting several studies that pointed out that China cannot continue its economic growth at the expense of the rest of the world. The balance of trade between China and the other countries has become so large that industries in other countries were forced to literally close down.

In recent years, other countries like the United States and those in Europe have taken steps to protect their own industries and limit the loss of jobs due to the severe competition from cheaper Chinese goods.

While this was considered “unfair” by China, the government in those countries really had no choice if they wanted to stop the further loss of jobs to China.

For example, the United States has placed a 100 percent tariff on the importation of electric vehicles. Global economists have been warning that China must start shifting its emphasis to depending more on its domestic economy and less on its use of cheap exports. Unfortunately for China, the lure of export has continued to be its main economic growth driver.

The current economic stagnation of China’s economy has been the result of the reversal of Deng Xiaoping’s economic reforms by Xi Jinping. The increase in repression in China has also increased discontent among the Chinese people. Unemployment, especially among the young, has grown dramatically under Xi’s leadership. Under his autocratic rule, people in China have started leaving the country.

This is illustrated by several examples. The number of illegal migrants to the United States from China has seen a dramatic rise in recent years.

Here in the Philippines, the number of Chinese illegally in the country working in POGOs (Philippine offshore gaming operators) is another proof of the decreasing number of job opportunities in China.

The domestic consumption in China has also suffered under Xi Jinping’s rule for a number of reasons. The economic stagnation has led to Chinese households building up their liquid savings instead of consuming durable goods. Business enterprises are remaining liquid and investing less to reduce the risk of expropriation and possible downturns in the economy. Many observers have also noticed that better off Chinese citizens are physically exiting by moving their assets and even their production and even their families abroad.

Even the offer of subsidies for auto sales and mortgage payments have not succeeded to stimulate Chinese consumption. Xi has shifted from the market-oriented economy under Deng to an autocratic approach to managing the economy.

The current campaign by the present leadership in China to inculcate a nationalist fervor is seen as part of their effort to distract China’s population from the travails caused by its economic stagnation.