China’s economy nosedives

After Mao’s death in 1976, Deng Xiaoping led China through a series of far-reaching market economy reforms earning him the reputation as the ‘Architect of modern China’. His ‘Open Door Policy’ welcomed foreigners to set up factories. Through the years Jiang Zemin (1989-2002) and Hu Jintao (2003-2012) kept certain aspects of capitalism in order to achieve socialism. China’s economy grew fast. Many Chinese entrepreneurs got rich and China became a middle-income society.

When in 2013 Xi Jinping introduced his Belt and Road Initiative, China made a big leap forward. But later in his ‘Xi Jinping Thought’ in 2021, he announced ‘profound changes’ particularly a transformation from the capital-centered to a people-centered economy and a return to ‘the essence of socialism’.

When the 20th National People’s Congress awarded Xi a third five-year term as the nation’s president, he replaced the two economy experts Li Keqiang and Wang Yang in the Standing Politburo Committee with ideological loyalists. Herewith he rejected the long-standing success formula. China’s economy nosedives.

Wang Yang is a direct inheritor of his mentor Deng’s market mechanisms. Private entrepreneurs praise him as the one who is in touch with the needs of ordinary people and who can save the Chinese economy based on free-market solutions.

Li Keqiang got at odds with Xi in 2020 over the ‘street stall debate’. Li proposed to create more jobs by re-admitting and furthering small enterprises engaging in street and night market business. But Xi pushed through his ideological vision of large state-owned and -controlled enterprises.

The Marxists’ claim for expropriation of the expropriators is still present in the minds of CCP ideologists. They suspect private entrepreneurs to exploit their employees for profit maximization. Xi plays nasty tricks on them by sending cadres into private companies harassing them with bureaucratic chicaneries in order to keep them in party line. Private firms have less access to raw materials and credit. State regulators restrict private companies from becoming too rich. Their most famous victim is Jack Ma.

Despite the discriminations the Chinese entrepreneurial spirit remains vibrant. Concurring among themselves, private firms traditionally are the purveyors of inventions and innovations. In the newest Global Innovation Index China fell back from rank 11 to 12 while Philippines landed three spots higher compared to 2022.

In recent years security-obsessed Xi passed 15 national security laws. The new anti-espionage law is in effect since July 1. It entails pernicious consequences for foreign businessmen. The law allows authorities to inspect the belongings of suspects including electronic devices and business facilities. The law does not define what falls under ‘China’s national security and interests’ leaving it to the courts to interpret what is an infraction of the law and what isn’t. Foreign executives say the law can make a crime out of any everyday activity amid a climate of suspicion. Western nations warn of increased risk of doing business in China. Dozens of Chinese and foreign nationals have been arbitrarily detained on suspicion of espionage.

Consequently, thousands of enterprises are moving out of China to Vietnam, India, Mexico, Indonesia, Bangladesh, Thailand, Japan (but not to RP). There they find a more stable political environment and friendlier work conditions.

Despite sky-high youth unemployment in China enterprises cannot find qualified talented workers. The ‘lay low’ youth --only when hungry look for odd jobs and the ‘let-it-rot’ employees intentionally do a sloppy job.

I saw videos of deserted streets in Beijing, Shanghai, and Shenzhen where few months ago foreigners were flocking to beerhouses and cafés. Where stores used to be buzzing with customers now the roller blinds are down and for-sale tags are displayed. But nobody buys a non-performing shop. There is one lost couple dining in a large restaurant where extended families used to splurge their money for copious delicacies. How come people don’t spend their money anymore?

Businesses that stocked up on goods in anticipation of a rise in demand after the lifting of COVID-19-induced restrictions are now under pressure to cut prices. The expected revenge consumption fails to take place. Consumers don’t buy items and services, waiting for the prices to fall further. Deflation is an indication that the economy is stagnating. This results in companies reducing their production which leads to lower salaries and layoffs. A vicious circle begins to spin: Less money = lesser consumer spending = more deflation.

Li Keqiang and Wang Yang, as studied economists, know how to fight deflation. But the ideologists will likely be at a loss. Economy dilettante Xi cannot retract from his line without losing face. China’s economy nosedives further.

Erich Wannemacher

Lapu-Lapu City