Xi Jinping's Flawed Escape from Stagnation: A Strategy Doomed to Disappoint China and Incite Global Ire

 

Xi Jinping's economic strategy, a high-stakes gamble on techno-utopianism and centralized control, risks catapulting China into a maelstrom of domestic discontent and global isolation.

China is currently grappling with its most significant economic challenge since Deng Xiaoping's transformative reforms of the 1990s. The country, once synonymous with unparalleled economic growth, is now confronting a reality where its key pillars of prosperity are under threat. The 2022 growth rate plummeted to a mere 5%, underscored by a shrinking workforce, a collapse in the property market, and the fragmentation of the global free trade system, which had previously been a major growth driver.

In response, President Xi Jinping has chosen to aggressively pursue a comprehensive economic overhaul. This strategy melds elements of techno-utopianism with centralized control and an intense focus on security. This article examines why this plan is fundamentally flawed and potentially harmful not only for China but also for the global community.

The current economic environment in China is precarious. Consumer confidence is on a downward trajectory, and the entrepreneurial spirit is dampened. Though there was a slight increase in industrial output in March 2023, the broader economic mood is pessimistic. Projections indicate a 20% reduction in China’s workforce by 2050. Furthermore, the real estate sector, which constitutes a fifth of the nation's GDP, is in chaos. While a recent phone call between Xi Jinping and U.S. President Joe Biden might hint at a stabilizing Sino-American relationship, there remains an undercurrent of tension and the prospect of increased trade restrictions by the U.S.

China's strategy centers on developing what its officials call "new productive forces," deviating from the traditional approach of consumer stimulus. The plan is to boost state-supported advanced manufacturing sectors to enhance job productivity, achieve self-sufficiency, and protect against perceived American threats. This includes a push into industries like electric vehicles, biomanufacturing, and drones. Remarkably, annual investment in these sectors has surged to $1.6 trillion, making up a significant chunk of China’s total investments.

However, this  strategy, while ambitious in its scope, demonstrates notable deficiencies, particularly in its approach towards the consumer sector. Despite being a substantial part of China's economy, the consumer sector only contributes to 37% of the GDP, which is considerably lower than the global norm. This sector's significance cannot be overstated, especially in a period where China is experiencing a sharp downturn in its real estate market. The decline in property values not only erodes consumer wealth but also dampens the overall consumer sentiment. Reviving consumer confidence is critical in this context, necessitating a robust stimulus package and substantial improvements in social security and healthcare systems. However, there seems to be a marked reluctance on the part of Xi's administration to embark on such initiatives. The hesitation to pump more money into the economy, particularly in sectors that directly affect the daily lives of ordinary Chinese citizens, underlines a critical gap in the current strategy.

Furthermore, the strategy appears to misinterpret the evolving global economic landscape, which is increasingly leaning towards protectionism and moving away from the ethos of free-trade that characterized previous decades. As China aggressively scales up its production capabilities, especially in advanced technological sectors, it faces the looming possibility of encountering significant barriers in global markets. This is particularly pertinent in the context of relations with the U.S. and Europe, both of which are showing signs of growing skepticism towards Chinese imports. The West’s concerns about trade imbalances, intellectual property rights, and national security are leading to a more guarded stance on trade with China. This shift in the global trade environment poses a substantial challenge to China’s export-oriented growth model, which has been a cornerstone of its economic success. As a result, the increased output from China’s ramped-up production is at risk of encountering limited international market access, potentially leading to an oversupply within the domestic market.

The third critical concern in Xi’s strategy is the apparent misunderstanding of the role of entrepreneurship in economic growth. While there is a visible increase in state investment in certain preferred industries, the fundamental principles of capitalist enterprise, particularly the dynamics of risk-taking, appear to be under threat. This issue is becoming increasingly pronounced in the business environment, where there is a growing sense of uncertainty and apprehension among entrepreneurs and investors. The unpredictability of policy direction and the perceived risk of regulatory crackdowns are causing unease. This sentiment is reflected in the declining stock market valuations relative to global markets and indications of capital flight. Entrepreneurs, traditionally the engines of innovation and economic dynamism, find themselves in a constrained environment. This not only stifles innovation but also impedes the efficient allocation of resources, leading to potential long-term economic stagnation and a decline in global competitiveness. The Chinese government’s focus on state-led industries, while sidelining the entrepreneurial spirit that fueled much of China’s economic rise, could be a significant misstep in its quest to maintain sustainable economic growth and global economic influence.

If China continues down this path, it risks experiencing a situation akin to Japan's economic stagnation in the 1990s. More worryingly, its lopsided growth model could disrupt international trade, heightening geopolitical tensions. The international community, particularly America and its allies, must not underestimate the potential dangers of a stagnant and disgruntled China.

Simply put, Xi Jinping's approach, characterized by an austere outlook and a prioritization of national security over economic prosperity, overlooks crucial economic realities. The marginalization of economic advisors and an overriding focus on security have dangerously skewed China’s economic direction. A reevaluation of this strategy is crucial; failure to do so could have significant implications for both China and the global community. It is vital for global observers and policymakers to understand the consequences of this approach and prepare for a future where China's economic decisions could have widespread global effects.