Xi’s Gamble: Will He Save China’s Economy or Let It Collapse?

 

Xi Jinping’s obsession with discipline over demand is strangling the Chinese economy; it’s time for him to prioritize growth over control, or watch his legacy unravel.

The dragon that once roared with economic might now finds itself coughing in the smoke of its missteps, while the world watches to see if China can breathe fire into its faltering growth. The Chinese economy, which once symbolized unstoppable progress, faces a year of peril if bold action is not taken. The Central Economic Work Conference, an annual gathering of the Communist Party elite, set the tone for the upcoming year with an ominous focus on economic challenges. Consumer confidence has remained shattered since the spring 2022 COVID lockdowns, retail sales underperformed by rising only 3% year-on-year, and inflation has stagnated at a meager 0.2%. These figures hint at an uncomfortable truth: China's economic strategy needs urgent recalibration.

The looming threat of a renewed trade war with the United States casts a long shadow over China's prospects. Donald Trump, now gearing up for his return to the presidency, has vowed to impose tariffs of up to 60% on Chinese imports, with an additional 10% penalty for insufficient cooperation in curbing the flow of fentanyl precursors. Such measures, if implemented, could carve as much as 2.4 percentage points from China’s GDP growth. The economic implications would ripple far beyond Beijing, shaking global markets and exacerbating domestic woes.

China has faced daunting challenges before and emerged stronger, notably during the 2008 global financial crisis. Back then, a sweeping stimulus package reinvigorated its economy, even as Western export markets collapsed. The government mobilized state-owned banks and enterprises, leveraging its centralized control to sustain growth. However, those rescue efforts left a trail of bloated debts and overcapacity that haunt China's economy today. This legacy of excess has made current policymakers reluctant to repeat such measures.

President Xi Jinping's emphasis on "supply-side structural reform," a policy framework introduced in 2015, sought to address these imbalances. By tightening regulations on debt, reducing industrial overcapacity, and restricting property developers with the "three red lines" policy, Xi aimed to stabilize long-term growth. Yet these measures have inadvertently hampered China's ability to respond to the economic slowdown of 2024. The cautious stimulus measures deployed this year—such as modest interest rate cuts and directives for banks to support a "white list" of developers—have largely failed to reignite demand. In fact, the property market, once a pillar of China's economy, remains burdened by unsold flats and faltering developer confidence.

Adding to the complexity, local governments are grappling with immense debt, estimated at 10 trillion yuan in "hidden liabilities." While the central government has recently allowed these debts to be refinanced through new bond issuances, this approach only scratches the surface of a deeper fiscal crisis. Local governments, constrained by decades of borrowing and declining revenue from land sales, are struggling to fund essential services and infrastructure projects. These limitations are a stark reminder that Beijing's top-down approach often overlooks the granular realities of its sprawling economy.

Nevertheless, some policy shifts suggest that Beijing recognizes the urgency of the moment. The Central Economic Work Conference emphasized the need to "vigorously boost consumption," signaling a pivot away from supply-side austerity. Electronic shopping coupons, currently being trialed in cities like Shanghai, aim to stimulate consumer spending on dining, entertainment, and retail. Trade-in programs for household appliances and vehicles have already shown promise, with sales of appliances surging by 22% in November compared to the previous year.

However, these piecemeal measures may not suffice. The Chinese consumer remains wary, burdened by stagnant wages, rising living costs, and a volatile property market. To truly unleash consumer spending, the government must address these underlying issues with targeted and substantial reforms. Increasing pensions and health insurance subsidies, as promised, is a step in the right direction. Goldman Sachs estimates that these measures could expand China's fiscal deficit by nearly 2% of GDP in 2025, providing a much-needed boost to household incomes.

The housing market, too, offers a glimmer of hope. November marked the first year-on-year increase in new residential property sales in over three years, excluding a brief post-COVID surge in early 2023. While this stabilization is encouraging, it remains fragile, dependent on sustained policy support and consumer confidence. The government’s efforts to convert unsold flats into affordable housing have seen limited uptake, highlighting the need for more innovative and aggressive approaches.

On the international front, China faces mounting pressure to navigate a challenging geopolitical landscape. The Biden administration, like its predecessor, has maintained a firm stance on trade and technology restrictions, complicating China's export-driven growth model. The potential for a high-tech "decoupling" between the U.S. and China threatens to erode Beijing's competitive edge in key industries. Bold action is required to develop domestic innovation capabilities and reduce reliance on foreign technology, but these efforts will take years to bear fruit.

China's leaders must also contend with the demographic time bomb of an aging population and declining birth rates. The workforce is shrinking, placing additional strain on social safety nets and limiting long-term economic potential. Addressing this crisis will require policies that go beyond financial incentives for families, such as improving access to childcare, education, and healthcare.

Ultimately, China stands at a crossroads. The challenges it faces are multifaceted and interwoven, requiring not just bold policies but a fundamental shift in economic strategy. The era of high-speed growth fueled by exports and infrastructure investment is over. In its place, China must cultivate a more balanced and resilient economy, driven by domestic consumption, technological innovation, and sustainable development.

An old Chinese proverb warns, "He who hesitates is lost." For Beijing, hesitation could mean prolonged stagnation and diminished global influence. The decisions made in the coming months will not only shape China's economic trajectory but also reverberate across the global economy. If the country's leadership fails to act decisively, the dragon may find itself shackled by its own missteps, reduced to a shadow of its former glory.

And perhaps, in a twist of irony befitting the times, the architects of China's rise may find themselves searching for answers in a world they once sought to dominate. After all, even the most fearsome dragon can be tamed by the weight of its own hubris.