China’s big fix and President Xi’s shrill ‘pep talk’

Supreme leader Xi Jinping came up with the usual Communist Party propaganda in his New Year address. Beamed to China’s 1.4 billion people, his pep talk reaffirmed that unification with Taiwan is “unstoppable” after live-fire drills around the self-ruled island this week.

He also pointed out, yet again, that it was “time to write a new chapter in the story of China’s miracle.” A reference to the nation’s economic and geopolitical rise on the global stage. “Let us turn our great vision into beautiful realities,” President Xi reiterated.

But behind the sound bites about “innovation,” lies an economy in crisis, bobbing around in a sea of debt. The situation was so bad he was forced to appoint a new budget czar, Li Dawei, to comb through the red ink-laced books of China’s local governments.

Already unemployment is rising, wages are stagnating, and consumer confidence has “evaporated” despite stimulus measures. Deflation stalks the nation after the collapse of the crucial property sector amid shriveling industrial profits.

“The downsizing continues in the labor market. The focus is on increasing efficiency, automation, and cost reduction. Industry is increasing production with fewer employees,” China Business Spotlight reported earlier this week.

Structural headwinds from the property downturn are set to persist.

Julian Evans-Pritchard at Capital Economics

Pressure points:

• Dubious data showed that factory activity edged up to 50.1 in December. The National Bureau of Statistics’ numbers snapped eight months of decline.
• But the rise might be “short-lived,” fueled by the Chinese New Year holidays in February. Overall, the economy remains fragile amid shrinking investment.

Delve deeper: “We think it will likely be a short-lived upturn on the back of month-to-month swings in fiscal spending rather than the start of a sustained pick-up,” Julian Evans-Pritchard, the head of China economics at Capital Economics, said this week.

Between the lines: “The big picture is that the structural headwinds from the property downturn and industrial overcapacity are set to persist,” he told the Reuters news agency.

Big picture: Still, snail-paced growth will focus minds after Xi’s latest five-year plan was rolled out in November. Kick-starting the economy and boosting consumer spending while tackling sky-high unemployment among Generation Z or Zoomers will be a priority.

Bottom line: “Falling employment limits income growth and weighs on private consumption. Without a broader income base, domestic demand remains vulnerable,” China Business Spotlight stated, warning of the risks facing the Communist Party.

China Factor comment: Just as critical is the controversy swirling around the country’s “dodgy data.” The Rhodium Group think tank estimated that the economy grew by just 2.5% to 3% this year, or half of the official 5% target. The report, of course, has been suppressed.