HomeOppression and Human RightsThe Unfortunate Destiny of Xi's "Capitalist"Economic Strategy

The Unfortunate Destiny of Xi’s “Capitalist”Economic Strategy

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Chinese President Xi Jinping is known for introducing major policies with great enthusiasm only to discard them abruptly, often without acknowledging their previous existence. This pattern of policy reversals has contributed to the erosion of the Chinese Communist Party’s (CCP) credibility under Xi’s leadership.

One such policy that experienced a short lifespan was “common prosperity.” Initially embraced by Xi as a means to rally the economy and promote fairness and equality in society, common prosperity quickly lost its prominence. The state sector regained power, references to common prosperity vanished, and the government shifted its focus to supporting private tech initiatives and cheering the stock market.

In December 2022, a new policy called “consumption-led growth” was announced as the centerpiece of a 12-year economic plan. This policy prioritized expanding household consumption as a long-term strategy, aiming to avoid the middle-income trap and stimulate economic growth through consumer spending. Economists widely praised this shift. However, the prospects for successful implementation of consumption-led growth in Xi’s China are grim.

In contemplating the likelihood of a Communist totalitarian endeavoring to realize the fruits of capitalist, free enterprise economic measures, one is hard-pressed to conceive of a more probable failure. At the heart of a “consumer led growth” economy lies the essence of freedom: freedom to partake in consumption, freedom to forge new enterprises and nurture growth without the haunting specter of a totalitarian regime unjustly stripping away one’s achievements. Xi, resolute in his totalitarian disposition, will never release his grasp on power to allow such a transformation to happen. Moreover, his unwavering commitment to state-led investment continues to impede progress on this path.

Consumption-led growth aims to address the problem of low household spending, which currently accounts for only 38 percent of China’s gross domestic product (GDP) compared to the global average of around 68 percent. Under Xi’s rule, the economy has become increasingly dependent on state-led investment and spending in strategic sectors, constraining the share of GDP that goes to households. The government employs various policies to redirect resources towards preferred businesses and sectors, such as manipulating the exchange rate, regressive tax rates, weak social safety nets, restrictions on urban migrants’ rights, and interventions in the stock market.

This focus on state-directed investment has led to overbuilding in housing and infrastructure, declining productivity, and soaring debt levels. Consumption-led growth, if properly implemented, could bring positive changes. Speculation in real estate would decrease, living standards would rise, investment would flow into more productive sectors dominated by private firms, bad debt would decrease, imports would increase, and tensions with market economies would ease.

However, consumption-led growth clashes with the Chinese government’s immediate priorities, particularly the goal of boosting short-term GDP growth. The government resorts to property support measures to counter falls in home prices, ensuring desired GDP numbers. Additionally, there are concerns about political blowback, exporters being hurt, indebted local governments losing resources, and diminished central government control over production and technology initiatives. Foreign business confidence in China has also declined, further complicating the consumption-led growth strategy.

Early signs indicate that Xi’s consumption drive is failing. Weak domestic demand and the need to push goods abroad have resulted in a surge in exports, declining imports, and a trade surplus. Youth unemployment is high, the stock market has declined, savings have increased, and household debt has soared. The slumping property market suppresses demand for industrial materials and consumer durables, while local governments face revenue challenges. Rapid population aging and declining public confidence in the state’s ability to support the elderly further dampen consumption.

Despite Xi’s declarations and seeming commitment, the Chinese government continues to prioritize state-owned enterprises and strategic sectors over consumer demands. If China genuinely sought to build a consumption-led economy, it could learn from the prosperity and consumer sovereignty observed in Hong Kong, which has a higher household consumption share of GDP.

While consumption-led growth appears sensible in theory, its implementation in Xi’s China is unlikely to succeed. The pattern of policy reversals, conflicting priorities, financial and demographic challenges, and the government’s focus on state-led investment make it improbable that Xi will allow a consumer-led economy to take hold in mainland China.

Editor’s note: Communism doesn’t work, and a communist’s version of a capitalist economy won’t work either.

This article is based on Xi’s Plan for China’s Economy Is Doomed to Fail By Zongyuan Zoe Liu and Benn Steil from Foreign Affairs.

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