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Xi Jinping's Debt Trap

October 16, 2018 Topic: Security Region: Asia Tags: ChinaSouth China SeaXi JinpingMao ZedongForeign Policy

Xi Jinping's Debt Trap

President Donald Trump’s “trade war”—the imposition of tariffs—has the potential for shaking the export-dependent Chinese economy.

There is a growing awareness that China’s next downturn will be severe. Chinese leaders, it has become evident, will prevent adjustments until they no longer have the ability to do so. And, when that fateful time comes, their system will undoubtedly go into free fall.

Xi has been avoiding crisis by increasing state control over the economy, but he has, despite a half decade, not been able to fashion a solution to the underlying problem of a slowing economy. The only long-term solution would be to reverse the trend toward state dominance; in other words, allow, as Deng did at the 1978 Third Plenum, market forces to allocate resources.

SO WHY doesn’t China’s leader do what worked four decades ago and what virtually everyone knows is the only way out now? More state control fits in with Xi’s view that China must have a strong ruler, and he has spent his tenure atop China cementing the Communist Party’s control over the country and consolidating his control over the Party. Many have likened Xi to Mao, the first ruler of the People’s Republic of China, but he is also compared—more appropriately—to Qin Shi Huang, considered the first emperor of a unified China.

Xi, by adopting in his pronouncements the language and imagery of Chinese emperors, has invited such comparisons. It is no accident that the leader of a Chinese state sliding from authoritarianism to totalitarianism—Xi is known as the “Chairman of Everything, Everywhere, and Everyone”—would seek to emulate emperors. “As long as the Chinese authoritarian political system remains unchanged, for its political security and survival,” Fei-Ling Wang of the Georgia Institute of Technology told me, “China’s ruling group is bound to behave like a typical Chinese imperial regime of the past: to centrally control as much as possible of everything at home.”

Central control is the basis of China’s imperial concept of tianxia, or “all under heaven.” Chinese emperors maintained they were the world’s only legitimate rulers, and to enforce that system they closed off the Chinese portion of their realm from what they considered their other domains. Wang notes in The China Order: Centralia, World Empire, and the Nature of Chinese Power that this was not a formula for success, writing that the tianxia system

has a record of suboptimal performance that features despotic governance, long stagnation of economy, suffocation of science and technology, retardation of spiritual pursuits, irrational allocation of resources, great depreciation of human dignity and life, low and declining living standards for the masses, and mass death and destruction periodically and frequently.

Wang also points out that there were, interspersed during millennia of horrible governance, three golden periods: the centuries immediately before the rule of Qin Shi Huang; the Song era, from the tenth to thirteenth centuries; and the period beginning in the late nineteenth century. All three times were marked by China’s relative openness and repudiation of tianxia.

Xi Jinping, for more than a decade, has been repudiating openness and speaking as if he were an emperor, often invoking tianxia themes. In the last several years, Xi’s imperial-inspired language has become increasingly explicit. As he declared in his 2017 New Year’s Message, “The Chinese have always held that the world is united and all under heaven are one family.”

The vision of unity is cherished by strongmen, especially those promoting utopian ideologies in polities that are in fact divided. Communist China these days is by no means united.

DISCONTENT IS widespread, and economic decline is one of the motors of unrest. In August, for instance, protestors traveled to far-flung locations to gather at the offices of defaulting companies, like conglomerate HNA Group in Hainan, or to the center of Chinese power. In the capital, hundreds of police had to “lock down” the city’s financial district in the face of demonstrations against failed peer-to-peer (P2P) lending platforms. Hundreds of thousands of investors across the country have lost money in these “P2P” vehicles, and they are, with some justification, blaming the state for losses. They therefore converged on the offices of the China Banking and Insurance Regulatory Commission and a critical Communist Party body: the Central Commission for Discipline Inspection, the anti-corruption watchdog.

The “financial refugees,” as they call themselves, unnerved Chinese leaders. These types of protests are of special concern because the 1989 demonstrations in Beijing and 370 other cities were originally fueled by mismanagement of growth, specifically inflation. This time, discontent is more of a concern to the regime because two generations knowing nothing but increasing standards of living are facing the prospect of a severe downturn.

These demonstrations are occurring at about the same time as other elements in society are taking to the streets over economic issues. In May and June, thousands of People’s Liberation Army veterans converged in various cities around the country—and especially in Zhenjiang in the coastal Jiangsu province—to protest the beating of a fellow veteran. But the outpouring was fueled, like veteran demonstrations were in 2016, by poor job prospects, inadequate benefits and broken government promises.

Authorities were able to defuse each of these sets of protests—and others over essentially non-economic issues like adulterated vaccines for children—but the bad news for Xi Jinping is that demonstrations are now coming in waves, showing fundamental unhappiness in Chinese society.

There is unhappiness in part because the regime’s elite has kept too many resources for itself. For one thing, the amount of corruption has been almost beyond belief. “The Chinese economy is coming off a decade of financial elites feasting off trillions in debt,” Stevenson-Yang points out. “The amount of skimming is absolutely staggering.”

Also staggering are Xi’s commitments, like those contemplated by his “project of the century,” the “21st Century Maritime Silk Road” and the “Silk Road Economic Belt”—the two components of his much-talked about “One Belt, One Road.”  The Belt and Road Initiative, as it is also called, is a trillion-dollar commitment to infrastructure that advances Xi’s geopolitical goals to route global trade through China but which the private sector had continually shunned as uneconomic.

Moreover, Xi has other grand ambitions requiring large commitments of cash. There are, for instance, hundreds of billions of dollars for modernization of the armed forces and tens of billions in foreign aid and loans that will never be paid back. Many worry about China’s “debt-trap diplomacy” ensnaring nations that cannot repay and therefore falling into China’s orbit. But the consequence of that is China carrying doubtful loans on its books, like some $23 billion still owed by Venezuela.

Some of these projects may pay dividends in the future, but Beijing will bear carrying costs in the meantime. Xi, in short, has overextended China, which now faces economic demands, both internal and external, that the country cannot possibly meet.

AT A time when Xi has pursued a closed economic model that has failed China so many times in the past, he must deal with three factors that will inhibit growth in the future. First, there is extreme environmental degradation. Decades of pursuing growth, especially during the 1950s and the four decades of the reform era, have left the country with poisonous air, black water and toxic soil. Water has become scarce, even where it was once plentiful. China can continue to destroy its environment to permit factories to churn out products, but people are demanding cleaner surroundings. As they do so, planned facilities are often delayed, sometimes reduced in scale or on occasion dropped altogether.

Second, demography will inhibit China’s growth. China’s economy grew fast in the reform era in large part because of the “demographic dividend”—an extraordinary bulge in the workforce caused by Mao Zedong’s push to out-procreate the rest of the world. Now, however, the country’s population is approaching rapid decline due to Deng’s One-Child Policy. The workforce is already shrinking, first peaking in 2011 according to official statistics. Beijing now maintains the population as a whole will hit the high point “around 2030.” In reality, the peak will probably occur well before then, perhaps as soon as 2020 as one senior official publicly said a few years ago. In any event, China’s population is on course to drop by more than 400 million this century, mirroring the frightening fertility declines occurring in, among other East Asian jurisdictions, Japan, Taiwan and Singapore.

Beijing’s move to a two-child policy, effective the beginning of 2016, has not arrested alarming demographic trends. China’s birth rate has continued to fall with 17.23 million births last year, down from 17.86 million in 2016.

None of this says that Chinese technocrats cannot grow their economy in the future. But it does say they will have to manage in spite of declining birth rates, not be propelled by them. The Communist Party has shown it can reduce births—officials proudly claimed the coercive One-Child Policy prevented 400 million of them—but it has so far failed to increase fertility, its latest effort.

Third, China no longer enjoys the support of the United States or even the European Union. Decades of Beijing’s predatory trade practices have changed minds in foreign capitals as have Xi’s overtly aggressive and belligerent geopolitical moves. Until recently, China had progressed fast in large part because successive American administrations wanted it to succeed. Now, the United States has become either hostile or indifferent. As a result of American policies that either are intended to undermine China or do not take into account Beijing’s interests, the increasingly rigid Chinese economy and financial system are being stressed. Other countries and blocs, especially the European Union, are following suit in challenging Beijing.