The curtain goes up on the National People’s Congress in Beijing’s Great Hall of the People. Photo: Xinhua

Picking up the pieces of China’s shattered economy 

President Xi and the Communist Party elite face a ‘crisis of confidence’ at the political show of the year

ByChina Factor Staff

China is facing an existential economic crisis. There is no quick fix. Only lessons to be learned from Japan’s imploding growth model in the 1990s, triggering the “lost decade” before lingering into the early 21st Century.

Instead of creating sustainable growth, the Communist Party state has ushered in a nationwide malaise, revolving around the three “Ds” of deflation, debt and despair. 

For many in China, “it feels like a recession” or a “crisis of confidence” ahead of this week’s “Two Sessions” of the National People’s Congress, the Party’s rubber-stamp parliament.

“[The danger for President Xi Jinping] is that the fallout of the old growth model might be so great it prevents him from moving into the new growth model,” academic Yuen Yuen Ang told Bloomberg as reported in the Next China newsletter last week.  

“The big question is, can you make that change fast enough,” Ang, a professor of China’s political economy at Johns Hopkins University, said.

Great Wall of debt:

  • Crippling unemployment among the young and stagnating wages threaten stability in the world’s second-largest economy.
  • Local government debt is hovering around US$11 trillion after the real estate sector went from boom to bust.
  • Factory activity has also dipped as consumer spending shrinks on big-ticket items. 
  • China’s stock market mayhem has only added to the sense of economic gloom.
  • Roughly $6 trillion has been wiped off the value of shares in the past three years or the equivalent of twice the United Kingdom’s annual economic output. 

Deflation is entrenched, monetary policy is ineffective.

Martin Wolf, chief economics commentator at the Financial Times

Delve deeper: “Deflation is entrenched, monetary policy is ineffective … So that seems to me the lesson from Japan if the bubble bursts,” Martin Wolf, the chief economics commentator at the Financial Times, said.

Between the lines:  “How likely is that? I don’t know. But my sense is the chances of this happening are quite significant,” he told an event organized last month by the Center for China and Globalization think tank.

Big picture: Amid the economic decay, Beijing has rolled out another Xi-inspired slogan, “New Productive Forces.” In short, sci-tech sectors, such as electric vehicles or EVs, Artificial Intelligence or AI and semiconductors.   

Behind the rhetoric: “[But] don’t expect the development to be easy. High-tech industries are unlikely to be big job providers,” Dexter Roberts, the author of The Myth of Chinese Capitalism, posted in his Trade War newsletter.

The bottom line: “And there is the likelihood of pushback from countries around the world [if China tries] to ramp up exports through the use of supportive policies and subsidies,” Roberts, a senior fellow at the Atlantic Council’s Indo-Pacific Security Initiative and Global China Hub, said.

China Factor comment: General Secretary Xi’s dogma has failed to stop the economic turmoil. His latest catchphrase sounds like more hot air.