China’s Great Stagnation

China’s Great Stagnation

China’s economy is stalling. The most likely economic scenario over the course of the next decade is not high growth or an economic collapse, but stagnation. American policymakers need to pay attention.

Shortly after taking power, Xi began to undo the CCP’s collective leadership structure and consolidated power for himself. Xi now holds 10 government and party titles, including “not only head of state and head of the military but also leader of the Party’s most powerful committees.” As of 2014, Xi chaired six of the CCP’s 11 “leading small groups,” informal committees that direct policy. In terms of the formal exercise of power, Xi may be the strongest Chinese leader since Mao.

The second element of Xi’s political strategy has been a high-profile crackdown on corruption, an area in which previous leaders looked the other way, at best. Thus far, the campaign has indicted thousands of officials, ranging from former politburo members to provincial apparatchiks. Absent very high levels of economic growth, Xi has to demonstrate to the people that the CCP still deserves the “mandate of heaven”—a legitimacy that always relies on the perception that the government is a virtuous one. The anti-corruption campaign thus serves two purposes: it is a both a demonstration that Xi is removing the rot inside the government and a strategy for neutralizing potentially powerful opponents. According to Minxin Pei, “although Xi’s signature campaign appears to be popular, it has almost overnight dismantled the system the ruling elites painstakingly constructed in the post-Tiananmen era to maintain their unity.” Corruption, which in essence was a guarantee to party elites that they would get rich, and consensus-based leadership are no longer the glue holding the party together.

The third element of his political strategy is the escalation of CCP repression of civil society, including foreign media, nonprofits, human rights activities, and religious groups. This crackdown is also meant to expunge China of Western “spiritual pollution.” Xi has stated that “all news media run by the Party must work to speak for the Party’s will and its propositions, and protect the Party’s authority and unity” and acted accordingly. In February 2016, the Ministry of Industry and Information Technology released new rules stating that foreign media outlets were prohibited from publishing online in China without explicit government approval. China has passed a law severely limiting the activities of nongovernmental organizations (NGOs) and attempted to purge the teaching of “harmful” Western ideas from educational curricula. In January 2015, the minister of education stated that schools should limit use of Western educational materials in higher education in order to avoid undermining the party. The CCP has also continued to brazenly arrest its political enemies. Just last year mainland authorities abducted five booksellers from Hong Kong who published material critical of the party.

All this means that Xi has eschewed another political strategy available to him: restarting Deng-style reforms. While market-driven reforms would have been politically painful, Xi’s strategy carries serious risks as well. It is now probable that a powerful enemy, harmed by Xi, will emerge to try to undermine him. Elites marginalized from decision making and exposed to corruption investigations are doubtless waiting for the opportunity to strike back. For example, there was already open discontent over Xi’s handling of the July 2015 stock market crash, leaving elites wondering if Xi knows how to manage the economy. It is now possible to imagine a coalition of disgruntled party leaders, members of the business class, and embittered reformers emerging to pose a real threat to Xi.

This development ought to be worrisome for a CCP that has survived post-Tiananmen by remaining more or less unified at the top. The CCP is no longer upholding its end of the social bargain with the people: economic growth in exchange for political quiescence. So now the two pillars of CCP survival—elite unity and economic growth—are crumbling.

As the promise of a rapidly increasing quality of life diminishes for many Chinese, incidents of protest against the regime’s many injustices will also increase. CCP leaders have always worried that “external influences” are working with Chinese citizens to “subvert” Communist rule, whether they are Uighurs influenced by international Islamic movements or lawyers who get support from foreign NGOs. Under Xi this concern has intensified.

Perhaps because of the fractures caused by his anticorruption campaign, his takedown of powerful internal security czar Zhou Yongkang, the fallen Bo Xilai’s ties to the security services, and growing sources of unrest throughout China, Xi has reemphasized to the security services their allegiance to him and the party. As Murray Tanner argues, “Beginning soon after coming to office, Xi made inspection visits to People’s Armed Police units, issued numerous important security policy directives, and made major speeches to national meetings of police and judicial officials.” In 2014, Xi gave a high-profile counterterror speech titled “Safeguard National Security and Social Stability,” stating that Chinese people must be vigilant against both internal and external threats.

All this comes with increased financial costs. According to Cheng Li,

The cost of ‘maintaining social stability’ (weiwen), primarily through the police force, has become astonishingly high. The Chinese government’s official budget for national defense in 2012 was 670.3 billion renminbi (about $109 billion), while the budget for police and public security was 701.8 billion renminbi (more than $114 billion).

Notwithstanding China’s notorious budgetary opacity, there is reason to believe that maintaining a surveillance state costs as much as maintaining the People’s Liberation Army.

Increasing social welfare costs should be counted as internal security expenses, since an aging population that is uncared for would undoubtedly cause enormous social dissension. China has not had a real social safety net since the dismantling of the Communist work unit, and its pension and “social security” systems are grossly underfunded. Greater Pacific Capital reports:

China, due to its historic one-child policy, has a fertility rate of 1.6 (below replacement levels) and a well-documented looming demographic cliff with its old-age dependency ratio set to increase to close to by almost 4x between 2010 and 2050. . . . Pension expenditure is already the single largest expense of the Chinese government, at US$200bn annually, higher than infrastructure, healthcare or defence, almost 20% of its total budget, (but still only totaling 2.7% of annual GDP), with coverage provided to less than half of the population above the age of sixty.

These numbers will only rise.

These are only rough estimates, and retirees will certainly not be funded at the same level as their counterparts in Western countries. But the financial liabilities are large nonetheless and will far exceed spending on foreign and internal security policy. Given the levels of debt, China will have difficulty funding obligations to its elderly. It seems almost unimaginable that it can sustain rapid growth in security spending as well. Xi’s only political option given these circumstances is to create and sustain a new elite coalition around his nationalist program of “national rejuvenation” and the “China dream.” Given slow economic growth and unfunded promises to seniors, Xi like Mao before him will have to ready his people for “sacrifices” in furtherance of China’s return to greatness.

Xi’s Foreign Policy in the Era of Stagnation:

Even as he faces greater financial strain, thus far Xi’s national security approach has been to centralize control over security policy, to expand internal security, and most importantly to continue with Hu’s more muscular stand on territorial claims in the South and East China Seas. In addition to these efforts, Xi has also put forth an ambitious development and strategic plan called One Belt One Road (OBOR), in which China will create a network of infrastructure projects linking itself with over 60 Central Asian, Middle Eastern, and European countries.

Just as Hu halted economic reform, he also initiated a more assertive foreign policy. For example, Hu had to respond to a commodities shock (with high growth, China’s commodities demand rocketed higher), so he encouraged state companies to scour the earth for resources. He followed this “going out” strategy with a call for the People’s Liberation Navy to undertake “New Historic Missions” to protect China’s newfound overseas interests in the Gulf and Africa.

As Chinese entities went overseas to find resources, security leaders feared that the US and its allies could cut off supply in the event of a downturn in Sino-American relations. To expand its maritime presence, China has deployed a naval task force in the Gulf of Aden since 2008, developed military forces able to project power into both the South China Sea and Indian Ocean, and built diplomatic and military logistics relationships through port calls in the Persian Gulf and Africa. Plans are on track to build China’s first overseas base in Djibouti, as well. Hu also began to press maritime claims in the East and South China seas and demonstrated a dangerous capability with a high-profile anti-satellite weapons test in 2007.

While Hu began to demonstrate Chinese power, Xi has taken the approach one step further. Under Xi, China has more decisively shifted the balance of power in East Asia’s littoral seas. In the South China Sea, China has constructed over 3,000 acres of manmade military outposts and begun forward deploying missiles batteries, drones, and fighter aircraft to these new bases. All the while, Chinese coast guard and fishing fleets continue to harass Filipino, Vietnamese, and Indonesian fishing and coast guard vessels. In the East China Sea, Chinese maritime militias and fishing fleets maintain a regular presence around the Senkaku islands, which Beijing disputes with Tokyo. Chinese air force activity in Japanese airspace has increased dramatically in the past five years. In 2015 alone, Japan scrambled jets a record 571 times to escort intruding Chinese fighters.