Xi Jinping struggles to patch cracks in the Chinese success story

Readers consuming theflood of media reports on the dire state of Chinaoverthe last few weeksmay be convinced that the country'seconomy is doomed.

And perhaps not just the economy. China scholar Charles Burton this week offered the view that the leadership of Chinese autocrat Xi Jinpingmay itself be threatened as rising youth unemployment adds to popular disillusionment with the leadership in Beijing.

Burton, in an opinion piece for The Globe andMail,reminds us that in 1930, as he was struggling to hold his revolution together against pessimists, Mao Zedong, the communist founder of the People's Republic of China,quoted the Chinese proverb that "asingle spark can start a prairie fire."Could disenchanted youth be a new spark for the next Chinese revolution?

And it is not just youth who are disenchanted. Shares in the Chinese property giant Evergrandelost more than 80 per cent of their value this week. Meanwhile,Evergrande's competitorCountry Garden,previously seen as safe, was struggling to avoid default.

The property sector accounts for 30 per cent of China's economy. So citizens, mom and pop investors, and businesseshoping for a commercial rebound after the government'sdraconian pandemic lockdown have been disappointed. Consumers are reconsideringspending plans as deflation begins to bite.

It's allbeing framed by someas China's Lehman moment, when trouble in the U.S. property market turned into the crash of Lehman Brothers, one of the world's most influential banks, resulting in the 2008 collapse of the U.S. economy. Othersare instead characterizing it as China's Minsky moment a similarphenomenonwhen excessive investment leads to a crash caused in this caseby too much debt.

Others yet are comparing it to the overinvestment by Japanese banks, supported by theirgovernment, causingwhat had been seen as the 1980s Japanese economic miracle to betransformed into its 1990s"lost decade."

"We could possibly be at a crossroads where things could turn in a direction we haven't seen for a while," said Steve Tsang, director of the China Institute at the University of London's School of Oriental and African Studies, in a phone conversation this week.

Most China watchers, including those I spoke to, stop short of expecting anything like a new Chinese revolution.But as Gordon Houlden,director emeritus at the University of Alberta's China Institute, told me, accidents can happen.

'Despotic capitalism'

After 30 years of spectacular market-led economic growth thatraised living standards, based partly on a glut of public spending,the country is suffering from financial indigestion.

And while the whole world mayhavea similar malady, as outlined by commentatorMartin Wolfin his recent bookon the important links between politics and business,what he calls "China'sform of despotic capitalism" may be dangerously brittle.

"The move towards an Orwellian 'Big Brother'society, in which surveillance technology is employed by the party-state down to the very last individual, may work. But it is terrifying, threatening to crush the human desire for autonomy and self-expression," Wolf wrote in The Crisis in Democratic Capitalism, published earlier this year.

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"Arbitrary state power makes all private property insecure and so threatens the market economy."

As Tsang and others have observed, China'smoment ofinstability arrives just as the structural advantages that powered its economic boom are waning. That includes new signs of a decliningpopulation.

"Instead of having a demographic bonus, it's now starting to suffer from a demographic deficit," said Tsang. "All the easy to reach fruits have been picked."

Tsangsays there are signs that the country may not attain the kind of economic growth that could complete its transition from a developing country into something more like high-income Japan, South Korea, Europe and North America. In other words, it will fail to break out of what is called the "middle incometrap."

Other advantages thatsparked the boom and made the country the factory to the worldare also disappearing, such asWestern technical transfers and investment, saysTsang,as countries like Canada look for more reliable partners. Local government borrowing that spurred investment, including in the gluttedhousing sector, has reached a breaking point.And that retrenchment has damaged the enthusiasmthat acted as a virtuous circle of new investment and spending.

"The real estate market... has a huge impact on people's feel-good factor," said Tsang. "Things that have been very beneficial to China are being turned on their heads."

'A thousand supposed collapses'

So, will the latest structural and property crisislead to some sort of Chinese economic or political collapse?Gordon Houlden is skeptical.

"I've lived through a thousand supposed collapses of the Chinese economy and we're not there yet," said the longtime China watcher from Penticton, B.C., last week.

It is true that a Google search for news stories warning of China's imminentMinsky moment shows they go back at least a decade.

As we've seen with the Canadian property market, in economicscoverage,doom sells.And while major cracksin Canadian housing or the Chinese economy could stillhappen, it is reasonable to assume there will bemore dire warnings than there are collapses.

"If you said the Chinese economy has got some serious structural problemsparticularly debt, slower growth, aging population? Absolutely," said Houlden. "Does this mean we are on the brink of some gigantic meltdown? I don't thinkso."

But can accidents happen? "Absolutely," he said, andChina and its leadership must overcome a list of difficultconundrums, including that its startling growth rates of more than 20 per cent were simply unsustainable. Inevitably, growth has declined.

"To me that's simply coming back to real-world growth rates that are more or less the same as more mature economies," said Houlden.

Broken promises

The issue, according to Burton and others, is thatcurrent and future rates of growth may not be enough to satisfy the "post-Tiananmen bargain" a tacit agreement that popular agitationfor more democracy wasrelinquished in exchangefor a promise of government-led widespread prosperity. The endless boom is not turning out the way the Chinese people expected.

By that way of thinking, in order to keep its mandate to govern, the Xi-led government must struggle to preventits economy from declining further, including by depending less on exports and creating a strongdomestic consumer economy.

"That hasn't worked out as well as they thought," said Houlden, "partly because Chinese are prodigious savers, and when things get a little bit dicier, they save even more."

Like Tsang, Houlden notes the effects of declining population that he saysareunlikely to be reversed. Government spending, especially at the regional level, cannot continue at recent levels.Dependence on imports has proven hard to break. But he says China has advantages includingthat, unlike the U.S., its borrowing is domestic.

Houlden says he is not an optimist but a realist and that even at relatively low levels of growth, the enormous Chinese economy remains on track to exceed that of the United States over the next decade.

"I call it the 'tyranny of the headlines.' When we see indications of the Chinese economy slowing we say 'Oh my God! Collapse! The miracle's over.' It's not," said Houlden.

LikeWolf, he thinks restricting informationaboutthe economyfrom the peopletrying to make the economy function, as we've seen with banning of youth employment statistics, is not productive. He says previous leaders assumed a strong economy required a more open economy and morewidespread knowledge of how it was functioning.

"Xi is a different kind of cat," said Houlden, but he says hesees a recent pullback on attempts to micromanage the economy.

"I think that there may have been some recognition by Xi and his advisers that there's a risk that they can kill the golden goose by over-regulation," he said.

Like Houlden, Tsangsays Xiwill be willing to make changes in the short term to try to get the economy back on track to growth.

"This guy is first and foremost focused on staying in power," said Tsangpointing to Xi's reversal on stringent lockdowns after widespread public demonstrations. "So if he sees those problems as potentially going to threaten his hold on power, he'll make changes."

But Tsang is worried that the kind of fixes Xi will be willing to try just won't work, and if China's economic downturn stretchesout from months to a year or more, it will be very hard to disguise the fact that Xi's economic strategy has failed.

"If and when that point is reached, Xi will turn to much harsher repression and xenophobiato stay in power," predictedTsang.