Xi Jinping is the paramount leader of China and of the Chinese Communist Party, the CCP. Xi is all-powerful. Xi is incapable of admitting fallibility. That failing undermines economic growth. The fractures in the Chinese economy are becoming wide and obvious, and China is facing an economic earthquake.
Xi’s economic policies are failing. China is doomed to be permanently entwined in the middle-income trap, unable to embrace the policies of creative destruction necessary for a country to achieve the productivity levels of wealthy nations, such as the United States and Japan.
Still, Xi’s mistakes are many. His failed strategy on COVID-19 is on global display. Geographies of China, responsible for 60% of its GDP, are in some form of lockdown, and the negative effects are being felt worldwide. Apple’s share price is under pressure because Apple’s Chinese suppliers are locked down. The price of oil is also down over 10% because of demand fears from China’s COVID-19 policies.
Equally devastating is Xi’s embrace of the state-owned enterprise, SOE, of the Chinese manufacturing and services sectors. Because of Xi’s overt preference for less efficient SOEs, productivity growth in China has slowed to 0.6%, much lower than the 1.5% productivity growth of the U.S. China’s SOEs total factor productivity is 30% lower than the total factor productivity of the more dynamic private sector. Return on assets for SOEs is 50% lower than for China’s private sector. Yet, Xi persists in favoring SOEs in order to ensure the continued primacy of the Chinese Communist Party and to maintain social stability. Xi is burning scarce capital.
Even in the advanced technology sector, Xi’s policies are failing. China remains dependent on Western semiconductor technology, and China’s well-publicized $40 billion Integrated Circuit Fund is under close scrutiny for fraud and not meeting investment goals.
Xi and China face other problems which the CCP is incapable of addressing because the Party values stability over creative dynamism. The youth unemployment rate in China approaches 20%. The unemployment rate for recent university graduates is similar. Young Chinese sit idle as their knowledge and skills atrophy. Underemployment of the brightest contributes to social disharmony.
Perhaps China’s most intractable problem is demographics. China’s population is aging and will soon begin to decline. Cheap labor can no longer propel the Chinese economy, and its wages are no longer competitive with other countries in Southeast Asia. Wages in Mexico are lower than in China.
Even in the area of foreign affairs, Xi’s policies are running into roadblocks. China’s vaunted Belt and Road foreign investment initiative, which was intended to enhance China’s international prestige and expand China’s global economic influence, is having the opposite effect. Governments such as Pakistan, Sri Lanka, and several governments in Africa are unable to meet interest payments on loans associated with it. China is viewed as a predatory lender.
The economic glory days of China are over, and the U.S. must manage China’s decline. Xi was all-knowing until he was not. China will be living in interesting times.
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.
