China: Xi’s third term – part one: growth, investment and consumption

China’s Congress of the Communist Party takes place this week.  This is an important event not only for China, but globally.  The Western media have concentrated on the fact that current party leader Xi Jinping will be confirmed for an unprecedented third term as party leader and thus also continue as President of China when the National Congress meets next March.

Naturally, the Western pundits are strongly opposed to Xi having a third term.  The FT’s Keynesian guru, Martin Wolf reckoned Xi’s continuation in power would ‘dangerous’ for China and the world. It is dangerous for both. It would be dangerous even if he had proven himself a ruler of matchless competence. But he has not done so. As it is, the risks are those of ossification at home and increasing friction abroad… Ten years is always enough.. It is simply realistic to expect the next 10 years of Xi to be worse than the last.”  And apparently, that has been bad enough.

The antagonism to Xi and the current leadership is less to do with the lack of democracy and one-party rule in China – the Western pundits and international agencies seldom mentioned that in their past analyses of China before Xi took over.  The strong antagonism now is really to do with two things: 1) under Xi, China’s economic policy has emphasised state control and a reduction of the sway of the capitalist sector; and 2) under Xi, China is resisting to being contained and squeezed by US imperialism in its escalating attempt to stop China’s progress as a major rival in trade, technology and global influence.

When it comes to the current state of China’s economy and its future prospects, Western analysts (and especially those based nearby in Hong Kong, Taiwan etc) veer from reckoning that the Chinese economy is about to implode under the weight of record high debt and a property bust to long-term stagnation due to demographics, the lack of consumer demand and slowing productivity growth, induced by Xi’s bias towards the state over the market. 

For decades, Western analysts have been predicting China’s demise and collapse under the weight of rising debt and state control.  That has not materialised.  Now the main emphasis is on arguing that China can no longer expand its national output at any reasonable pace and won’t be able to get out of what is called the ‘middle income trap’ and so meet the needs of an urbanized population – unless it breaks with its state-led economy and allows the capitalist sector to flourish to meet the consumption demands of the burgeoning middle-class.

But is this view of China’s economic future any more accurate than the one adopted for the last two decades that China was about to implode?  First, what is the current state of the economy?  For the first time since the 1990s, China’s real GDP growth this year and next is likely to be lower than the average growth in the East Asian region.  This year, economic growth will probably be under 3% and next year rising to about 4.5%.  That’s well below the long-term target of about 5% a year.

Why is this?  There are two reasons.  The first is the impact of COVID and China’s zero COVID policy.  The West never had such a policy and eventually just relied on vaccinations to overcome the worst of the COVID impact on lives and health.  But the virus in various forms continues to spread across economies, delivering yet more deaths and above all lingering ‘long COVID’ illnesses that have stopped millions working.  China rejected this ‘open up the economy’ approach.  Instead, it imposed strict and drastic lockdowns at the first sign of infections picking up and is still doing so.  The government was not prepared to repeat the disaster of the first eruption in Wuhan.  As a result, China has had the lowest death rate from COVID in the world.

The Chinese Center for Disease Control and Prevention warned that if the country followed the opening-up strategies taken by countries such as the UK and the US, it would cause hundreds of thousands of cases a day, of which more than 10,000 would present severe symptoms if there was a sizeable community outbreak. “We are not ready to embrace ‘open-up’ strategies resting solely on the hypothesis of herd immunity induced by vaccination advocated by certain western countries,” the Center wrote.

A key reason that China adopted lockdowns as well as vaccinations to curb COVID was its relatively weak public health service and the lack of the latest most effective MRNA vaccines.  China has a patchy network of poorly-resourced hospitals and a huge elderly population at a higher risk of severe illness, as well as comparatively low efficacy of its domestically-produced vaccines. While there are more hospital beds per capita in China than in the US and the UK, the number of intensive care beds available — crucial to keep Covid-19-infected patients alive — is a quarter of the OECD average. Resources are especially thin outside of the big cities; rural areas have half the doctors and beds on a per capita basis of urban areas.

China rolled out the first wave of vaccinations at breakneck speed, at its peak jabbing more than 22mn people a day. Domestically, 3bn vaccine doses have been administered to the country’s 1.4bn people. China has sent around 1.6bn vaccine doses to developing countries, making it the world’s single largest exporter of jabs. Chinese health officials and experts believe they have prevented at least 200mn infections and 3mn deaths.

However, there are signs that the domestic jabs, which use traditional inactivated vaccines — where the pathogen is killed or modified so it cannot replicate — produce weaker immune responses to the Covid-19 virus than the newer messenger RNA used in Moderna and BioNTech/Pfizer jabs and the viral-vector technology in Johnson & Johnson and AstraZeneca. Over the past 12 months, the spread of the highly infectious Delta and Omicron variants has put the spotlight on the fading efficacy of these vaccines. The lockdowns have continued on and off throughout this year and this has made economic recovery more intermittent and weaker as a result. 

But China opted to save lives over economic expansion.  Of course, Western analysts claim that China’s lockdown ‘zero COVID’ policy is more to do with controlling the population by an autocratic regime – yet most opinion surveys in the past have shown broad support for the policy among the population, although it is true that ‘lockdown fatigue’ is beginning to have an impact, mainly because there is no democratic decision-making on health policy, which is just imposed from above.

The other reason that China’s economic growth has slipped this year is the general slowdown towards a slump in the rest of the world.  The major capitalist economies are stuck in supply-chain congestion, weak investment expansion and now rising interest rates and inflation that threaten outright global recession. 

World trade growth has fallen away.  The World Trade Organisation reckons that total exports and imports of goods are likely to grow by just 1% in 2023. The most recent World Bank projections put China’s GDP growth for the year at 2.8%, down from its initial forecast of 5% and well below the rest of Asia.

But China is not heading into a slump like the G7 economies.  Indeed, both the World Bank and the IMF expect China’s real GDP to rise by over 4% next year, while the most G7 economies will be contracting or have near zero growth.

Looking longer term, Western analysts reckon China is heading for much slower growth and this will threaten Xi’s future.  Up to now, China’s unprecedented economic growth record has been based on high investment rates and exports of manufactured goods to the rest of the world. 

But the COVID slump and the dissipating global economic recovery has hit export growth hard.  Exports fell in dollar terms by 1% in the year of the COVID slump and then rose sharply in the 2021 global recovery year by 21%.  But in the first eight months of this year (2022) exports are down to 7.1% yoy.  As a result, industrial production has risen only 3.6% and retail sales up only 0.5%.  Fixed asset investment has remained stronger at near 6% yoy, based on increased infrastructure investment (roads, rail, bridges and public services). 

From hereon, the Western analysts claim that China will enter a period of low growth and will not escape the ‘middle income trap’ that so many so-called emerging economies are locked into.  China will not catch up even with the GDP level of the US as previously expected.

This claim is based on two assumptions.  First, that China’s ageing population and declining working-age sector will reduce growth rates and second that the high-saving, high-investment model of Chinese growth no longer works.

China won’t be able to grow as fast as before as the working population is declining and there will be an insufficient rise in the productivity of labour to compensate.  I have discussed at length in previous posts these claims by Western experts that China’s falling working-age population and its slowing productivity growth rate mean that it will begin to fail.  The arguments are weak and faulty.  Indeed, even on the adjusted (A) Western measures of labour productivity growth during the COVID period, China has done way better than the ‘dynamic’ USA.

Longer term, the IMF forecasts that China will grow at a subdued rate of 5% a year.  But that rate would still be more than twice as fast as the US, and more than four times as fast as the rest of the G7 – and that’s assuming no slump in the G7 economies in the next five years.

The other argument of the Western analysts is that China cannot grow at any reasonable pace from hereon unless it switches from a high-savings, high-investment, export-oriented economy to a traditional consumer-led capitalist economy existing in most of the major capitalist economies, particularly the US and the UK.  The usual basis for this view is that personal consumption rates are too low in China and this will hold back demand-led growth. 

For example, take this view by Chen Zhiwu, a professor in Chinese finance and economy at the University of Hong Kong.  Chen argues that, under Xi, major reforms towards a private sector, consumer-led economy have been sidelined.  “The 60 reforms would have largely expanded the role of consumption and private initiatives,” he says. “However, the market-oriented reform agenda has been largely sidelined . . . resulting in a larger role for the state and a shrunken role for the private sector.”  According to Chen, this will mean China’s economy will stagnate from hereon.

Another prominent and widely-followed Western analyst, Michael Pettis, who is based in Shanghai, makes a similar argument, namely that what will push China into Japanese-style stagnation is the failure to expand personal consumption and continue to expand investment through rising debt.  It is no accident, in my view that both these analysts come from the finance sector.

And yet how can anybody claim that the mature ‘consumer-led’ economies of the G7 have been successful in achieving steady and fast economic growth, or that real wages and consumption growth have been stronger there?  Indeed, in the G7 capitalist economies consumption has failed to drive economic growth and wages have stagnated in real terms over the last ten years, while real wages in China have shot up.

This is the real point.  Consumption is rising much faster in China than in the G7 because investment is higher. One follows the other; it is not a zero-sum game. Pettis’ view is a crude Keynesian analysis that ignores even Keynes’ view himself that it is investment that grows an economy with consumption following, not vice versa.

And not all consumption has to be ‘personal’; more important is ‘social consumption’, that is, public services like health, education, transport, communication and housing; not just motor cars and gadgets. Increased consumption of basic social services is not accounted for in the personal consumption ratios.  China has a long way to go in social consumption too, but it is way ahead of its emerging market peers in many social areas and not so far behind leading G7 economies, who started more than 100 years before.  I defer to Citibank’s economists in their recent in-depth study of the Chinese economy “In other words, it is quite possible for the Chinese economy to deliver greater opportunities for consumption without consumption being a specific target for policy.”  “household disposable income has been growing faster than GDP in the real terms in the past few years (except 2016), a trend likely to extend into the future. At the same time, the unlocking of wealth effects should help the consumer.”

The real challenge for China’s economic future is how to avoid much of its investment going into unproductive areas like finance and property that have now led to serious problems.  And also in what way the growing contradictions between the state and capitalist sectors in China are to be handled in Xi’s third term.

In the part two, I shall deal with these issues.

16 thoughts on “China: Xi’s third term – part one: growth, investment and consumption

  1. This paragraph seems weird to me: “But the COVID slump and the dissipating global economic recovery has hit export growth hard. Exports fell in dollar terms by 1% in the year of the COVID slump and then rose sharply in the 2012 global recovery year by 21%. But in the first eight months of this year exports are down 7.5%. As a result, industrial production has risen only 3.6% and retail sales up only 0.5%. Fixed asset investment has remained strong at over 20% yoy, based on increased infrastructure investment (roads, rail, bridges and public services).”

    Exports fell by 1% in 2020 and then rose by 21% in 2021 (not 2012, as it´s written there) – I don´t understand this …

  2. I read in Caixin in the past three or four days that a China produced mRNA vaccine has been licensed to be manufactured in Indonesia. In terms Chinba of not ‘opening up’ why change public health policy from one that is proven to work, following to WHO public health protocols, to one that relies vaccines that rely on virus mutations that are not fatal? The wonders of capitalism sees Moderna sue Pfizer over IPR.

  3. Hi, interesting article, look forward to the next two. It’s always refreshing to get an evidence based, take on China’s economy, rahter than the ideological hot air.

    2 typos – Ist para after Haver Analytics @FT Graph 2012 should read 2021. Last paragraph ‘away’ should read ‘way’

  4. Lots of considerations to take from this post, even in its partial form (as it is only “part 1”). No wonder, given the historical importance of the 20th Congress.

    1) The Communists (i.e. Communist Law) don’t have a concept of Rule of Law. Following Bolshevik tradition, the Chinese Constitution is not absolute. To the Marxist-Leninists, the Constitution is only a tool that must be constantly revised or even ignored according to the necessities of class struggle and the cause of the proletariat. That’s why suddenly “changing the rules” in order to give Xi Jinping a third term is not legally absurd to the Chinese: it was immediately obvious he was an exceptional leader, therefore, analyzing the concrete case in the concrete situation, the CPC decided that he should continue as long as it is needed. This is consolidated jurisprudence in Communist legal theory. We should not apply liberal law principles to communist law;

    2) China’s healthcare system is weak not because it is undemocratic, but mainly because of a mix of still low levels of development of productive forces (a top-of-the-line universal healthcare system like the NHS is and always will be, by its very nature, very expensive, still way above China’s means) and because, unfortunately, the CPC laid on the fact that it is a millennial tradition of the Chinese people that the healthcare of the parents must fall exclusively on their children. The useful met the enjoyable, and, it is true, the CPC got lazy on both evolving their healthcare system and their pension system. However, it is wrong to claim its existing healthcare system can’t work by today’s standards, as it is a copy and paste of the Japanese system (the Japanese enjoyed the longest life expectancy for quite some time). Most of the time, the development of the productive forces mask the failures of the system, which we can visualize in the abyss that separates the quality of life between China and Japan;

    3) I don’t see why Zero Covid is the wrong policy. Simulations done by the West itself estimated China would see the same death rates as the USA had it not adopted it. That would mean more than 10 million dead (because China has a much larger population). If China has a demographic problem, then isn’t Zero Covid not only the most humanist, but also the most economically rational policy? You sacrifice some years of extra GDP growth in order to keep your demographic bonus. The Western pundits have to decide which is the decisive factor: demography or Zero Covid;

    4) I think the concept of a “democratic decision over healthcare” a contradiction of terms even by liberal standards. The greatest innovation of the French Revolution Constitution was the creation of the concept of individual rights (before that, there were only the rights of the clan/family). The very foundation of any possible individual right is the right to life – after all, you can’t enjoy freedom if you’re not alive. Zero Covid saved more than 10 million lives, should that be put to a vote? Should the people have the right to decide, democratically, if other people should live or die? According to the French Constitution of 1789 and beyond, it should be illegal to put this to a vote, since the right to life is beyond freedom, beyond any individual rights. The people should not have the democratic right to decide for the life of other people, because that would be the self-destruction of the very concept of individual rights. Unless you adopt the laissez-faire interpretation of “force it to live, let it die” (i.e. the right to life is only limited to be born, i.e. against abortion, but, once the human is born alive, he/she has no right to live);

    5) It makes all the sense in the world that China suddenly stopped growing after its decision to adopt Zero Covid. China stopped growing because it decided to stop growing. That’s the feature of a centrally planned economy: the State decides the economy. After the pandemic is defeated, the CPC will turn the economy machine back to work on all its cylinders, and it will go back to growth as before. If they decide to grow less again, say, because it wants to enforce a technological modernization (which will lower OCC, therefore slow down growth), then it will grow less again. As long as everything is decided according to the centrally defined plan, everything will be fine, because that’s the point of having a centrally planned economy. To criticize the CPC for that would be the same as to criticize any capitalist government for sacrificing lives in order to save the social profit rate (that being the entire point of having a capitalist system).

    1. Here are my two cents on 3) the Zero Policy.
      If China decides to open now, it may not reach 10 million death or so, considered the much lower severity and fatality of Omicron. Nevertheless, China still would face tough challenges, because of the low vaccination rate, poor public communication, and weak health services. I have to say I am pessimistic on whether the governments can well handle the issues. Just one example. The rumour that the vaccine can cause leukemia, derived from both foreign conspiracy theories and malicious misinformation of some local media, has not been well handled. The rumour got widely spread at least in late May, and then develops into various versions, but only got officially refuted in late July.

      Nevertheless, this does not mean Zero Policy is better. On one hand, studies on the pandemic controlling model do not support the current policy, as it is not efficient and, even, effective. On the other hand, some problematic governance has also caused serious issues, not only the financial costs but many living problems. Shanghai experienced an almost three-month lockdown since March when daily life has been severely impacted due to some mindless policies (e.g. the pause of delivery service and markets leads to the shortage of all goods, including food.) Let alone how small businesses are hurt. Similar issues happen again and again in other cities, later and now. I should also highlight that during these times, people die for lack of basic health services, which nevertheless are not counted as death cases. Thus, I doubt quite much on your either-or rhetoric within ‘demography or Zero Covid.’

      This should echo back to your 1) on the jurisprudence. I agreed that the constitution is historical and more tool-oriented. Yet I would rather save the question whether the current CCP is communist. Many now have reservations on Xi, because we have witnessed several significant regress this decade, in the fields of gender, ethnicity, and even, labour. Back to the days of revising the constitution, no, this is absurd, for all wings, as you may find heated debates on the media. It got a 100% pass because the procedure is that only those against should vote while those who support or abstain should not. From these perspectives, your defense sounds rather romantic to me.

      1. If you see this post’s very first graphic, you’ll immediately see that China has the lowest COVID-19 mortality in the world – all of that with, as you said, “low vaccination rate, poor public communication, and weak health services”.

        So, clearly, Zero Covid works.

        China’s Sinovac/Coronavac vaccine is very effective against the original strains of COVID-19 and China’s vaccination rate is high. The problem is that, with the Omicron variant, the virus finally escaped all the vaccines’ reach. A new generation of vaccines, engineered specifically against the Omicron, is needed. This is how vaccines work: each year, we need a new flu vaccine because the virus mutates.

    2. Extremely well made point #4.

      I would also add that before even talking about right to live, unfortunately there is still not enough discussion about the long term effects(long COVID) or even how much pain and suffering COVID causes during the worst phase for patients in ICU. I almost wouldn’t wish this on my worst enemies.

      As you said not only the idea of “democratically” deciding health policies in cases like this silly but it is basically deciding who gets to go through an extremely painful experience with now confirmed long term effects on your health.

      Also perhaps this is even a false argument because it is already decided who will suffer the most in this case, the list of comorbidity factors for COVID is already well known too. Could you imagine? “Oh are you obese? Out of luck! Old and frail? Sorry our society decided you should suffer now, better hope the vaccine holds up! Don’t worry we voted for this so its perfectly good and rational.”

      That is a parody of what the worst neoliberal capitalist sounds like at best and the sad reality of the western nations since 2020 at worst.

      This is a 9.9/10 article if only Michael would stop paying lip service to these nonsense western ideals, not everything should be put up for a vote.

  5. Michael, I have to correct you on the estimate of YoY growth in fixed asset investment. This is what you said. “Fixed asset investment has remained strong at over 20% yoy, based on increased infrastructure investment (roads, rail, bridges and public services).” This is what the National Bureau of Statistics of China said. “From January to August, the national fixed assets investment (excluding rural households) was 36,710.6 billion yuan, a year-on-year increase of 5.8 percent.” Here is the link True investment in manufacturing went up 10% because China is on a war footing. What dragged down the overall investment rate was the tertiary sector wherein is found real estate, infrastructure etc which grew by only 3.9%. Clearly a slowdown in investment in China has global repercussions.

    Of course, converting to a consumptionist economy is a privilege open to only a few imperialist economies living off surplus value produced by other countries which they can claim, and which is bolstered by the gains of fictitious capital. Given the already $40 trillion loss in paper wealth this year, we will see how long that lasts.

    In terms of productivity, much of the increase in productivity results from China being able to realise a growing proportion of its surplus value within China as it moves up the value chain and produces for Chinese consumers. Its gain is the US, the EU and Japan’s loss and that will be glaringly apparent in 2023. The restructuring of global supply chains is going to substantially add to cost price in the US, the EU and elsewhere. In turn this will further reduce productivity increases in these countries.

    Also, I would not make too much of the mRNA vaccines. Under oath while questioned in Congress, the boss of Pfizer admitted that the vaccine did not prevent the spread of the disease hence the call to get vaccinated to protect others was bogus, and further, using the spike protein as the basis of the vaccine is turning into not such a good idea after all.

    Finally, the embargo of chip technology is equal to the embargo of oil and iron order on Japan in the late 30s. A declaration of war.

  6. In the second post, I would like you to comment on the consequences of US trade restrictions against China in the semiconductor sector. At the moment, China can manufacture 5nm chips with multi-pattern DUV technology, although it is not economically viable compared to EUV.

  7. In the second post, I would like you to comment on the consequences of US trade restrictions against China in the semiconductor sector. At the moment, China can manufacture 5nm chips with multi-pattern DUV technology, although it is not economically viable compared to EUV.

  8. “under Xi, China’s economic policy has emphasised state control and a reduction of the sway of the capitalist sector;”

    This isn’t a reduction of the sway of the capitalist sector. Anyone who read Marx or Engels would actually know this.

    “If the crises demonstrate the incapacity of the bourgeoisie for managing any longer modern productive forces, the transformation of the great establishments for production and distribution into joint-stock companies, trusts, and State property, show how unnecessary the bourgeoisie are for that purpose. All the social functions of the capitalist has no further social function than that of pocketing dividends, tearing off coupons, and gambling on the Stock Exchange, where the different capitalists despoil one another of their capital. At first, the capitalistic mode of production forces out the workers. Now, it forces out the capitalists, and reduces them, just as it reduced the workers, to the ranks of the surplus-population, although not immediately into those of the industrial reserve army.

    But, the transformation — either into joint-stock companies and trusts, or into State-ownership — does not do away with the capitalistic nature of the productive forces. In the joint-stock companies and trusts, this is obvious. And the modern State, again, is only the organization that bourgeois society takes on in order to support the external conditions of the capitalist mode of production against the encroachments as well of the workers as of individual capitalists. The modern state, no matter what its form, is essentially a capitalist machine — the state of the capitalists, the ideal personification of the total national capital. The more it proceeds to the taking over of productive forces, the more does it actually become the national capitalist, the more citizens does it exploit. The workers remain wage-workers — proletarians. The capitalist relation is not done away with. It is, rather, brought to a head. But, brought to a head, it topples over. State-ownership of the productive forces is not the solution of the conflict, but concealed within it are the technical conditions that form the elements of that solution.

    This solution can only consist in the practical recognition of the social nature of the modern forces of production, and therefore in the harmonizing with the socialized character of the means of production. And this can only come about by society openly and directly taking possession of the productive forces which have outgrown all control, except that of society as a whole. The social character of the means of production and of the products today reacts against the producers, periodically disrupts all production and exchange, acts only like a law of Nature working blindly, forcibly, destructively. But,with the taking over by society of the productive forces, the social character of the means of production and of the products will be utilized by the producers with a perfect understanding of its nature, and instead of being a source of disturbance and periodical collapse, will become the most powerful lever of production itself.”

    – Engels, Anti-Dühring

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