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Insecurity Will Engulf China

By Asish Singh

Authoritarian regimes outbeat everyone at glossing over weaknesses and boasting off strengths. But policymakers in New Delhi must be heedful to discern the picture China projects from the realities it confronts. For all the impediments India is facing, those that China faces are greater and severe. The Chinese political system is growing increasingly primordial and reflexive as it concentrates around CPC party boss Xi Jinping. Once looked upon by the world for its technocratic competence, the CPC is running backwards into a Leninist rigidity, characterized by appropriation of economics into the contingencies and compulsions of politics. It is projecting an iron-triangle formation of politics, economics, and control.

China was fortuitous to have the ‘magic mix’ of population around the same time it was integrating with the global sentiment of economic neoliberalisation and globalization. In the first decade of this century, China laid it on by boasting by boasting ten working-age adults for every senior citizen. The average is closer to five for most major major economies. Today, the population question has come out as the most detrimental consequence of the CPC’s lust for complete social engineering, most conspicuously visible in the one-child and similar policies. Latest census data reveals that population growth over the last decade was the slowest. The proportion of people aged 60 and above rose to almost a fifth. The size of the 65-and-over will likely double over the next two decades as the workforce contracts, crowning China a “super-aged society.” In an ageing society, a large and less economically productive citizenry which is most dependent on public healthcare and pensions, will be supported by a proportionally smaller number of productive people. The burden of extra care this misalliance poses to families, the government and the economy, can be a severe drag on growth. 

Current projections point that age-related spending must triple by 2050, from 10 percent to 30 percent of GDP. For context, understand that all of Chinese government spending currently totals about 30 percent of GDP. The demographic decline China is facing is almost beyond repair. Permitting upto three children now, as per analysts, is equivalent to flogging a dead horse. Reversing the policy or legislating some compulsory ‘minimum children policy’ from its sorcerical policy apparatus runs the danger of shattering the steel frame of political legitimacy in which the CPC nestles. Admitting failure and controlling lives now will trigger cracks in the implicit Chinese compact of “you stay aloof politics, and party will provide.” Population engineering (suppose legally fixing the minimum number of offspring) is no more a source of legitimacy for the CPC, and Xi knows he would do well not to tinker with the reproductive lives of the dominant Han Chinese.

A graying China with atrophying fundamentals will pull down productivity. By 2050, China will go from having eight workers per retiree now to two workers per retiree. Chinese debt has more than doubled in the past decades, from 141 percent of GDP in 2008 to over 300 percent in 2019. Swelling debt levels and gloomy long-term growth prospects will make it tougher for China to spend its way up the ladder from low-end manufacturing to high value-added production (read services), as Taiwan, Japan and South Korea did at similar levels of development. A country’s workers are its most important consumers. When working-aged population goes down, so do revenues. As Japan’s working-age population declined, domestic consumption graphs floundered. Japanese firms started falling off the Global 500 list. The correlation between the decline in the working-age population and Japanese firms’ leaving the Global 500 was 94 percent. China faces the same situation. Dictator Xi consistently hecatombs innovation for political power. Private firms generate most of China’s wealth and savings, yet they are starved of liquidity. Rather, inefficient state-owned enterprises (SOEs) receive upto 80 percent of government loans and subsidies. China SOE’s are a nudnik productivity-wise. A third of them are loss-making. Recent measures by Xi however have cushioned the SOEs and worsened prospects for private businesses. 

Xi’s ‘creative destruction’ is a project not in ‘common prosperity’ but common legitimacy. His crackdown on the private sector has cost Chinese tech companies over USD 1 trillion in stock market value, and over USD 100 billion of wealth of Chinese entrepreneurs. In this climate, the negative sentiment with respect to entrepreneurship among Chinese youth reflected in the number of them registering for the national exam for selecting government workers hitting a record high of 2.1 million this year. 

By wielding a tight control over pricing, resource allocation, information and logistics, the CCP controls the country’s entire economy. It has been quick to withdraw the freedom to innovate and expand from companies which have grown to a size which could secure them substantial market power, some famous examples include Ant Group, Alibaba Group Holding and Didi Global this year. China needs to up its innovation game to upgrade its economy and stay relevant. But Xi’s model of authoritarian capitalism (not to be equated with even state capitalism) might be the greatest hindrance. 

The party is, and needs to be, vehemently adamant. It seeks to propel rapid growth through technological innovation, and R & D spending has tripled since 2006. Yet its efforts dwindled in increasing productivity, with China still accounting for only small shares of global markets in most high-tech sectors. Its top-down R & D system, which might be good at mobilizing resources, smothers open flow of information and capital required for sustained innovation. Xi’s clampdown only underscores his insecurity and short-term view to score populist points, even if that adds to China’s already high debt levels. Note that according to Goldman Sachs, China’s hidden local government debt has expanded to more than half the size of the economy. Xi’s geopolitical position seems to tolerate growing headwinds to private businesses, a housing market crisis causing demand for land to slump, power shortages and supply chain disruptions. 

The IMF remains pessimistic: “International experience suggests that China’s credit growth is on a dangerous trajectory, with increasing risks of a disruptive adjustment and/or a marked growth slowdown.” Over the past decades, China has been playing a match of economic catch-up (or “convergence”) towards the “frontier” that is occupied by global economic leaders such as the US and Germany. The concept of a world productivity frontier encloses global best practices and know-how, by employing the best available skills, management techniques, technologies and inputs. As per latest available IMF data, China’s labour productivity has converged from 15 percent of the world frontier to only 30 percent over the last two decades. Convergence has been leaden-footed in the services sector, wherein productivity has converged from 10 percent at the end of 1990s to only 26 percent, during an insecure political climate as described above. One might also want to account for the protections and trade barriers shielding the Chinese services sector from international competition. Baidu and WeChat are notable names.

The IMF estimates China’s total factor productivity growth since the global financial crisis has only averaged 2¼ percent a year, which is only about half of its average in the decade before the GFC. In fact, the decline in TFP explains most of the decline in GDP growth between the two periods. In the coming years, given China’s ageing population, the economy will have to shift from more of industry to more of services. Overall productivity growth will slacken further, as the industrial sector tends to have higher productivity.

That China rivals the US today owes more to its gargantuan population (with weak social safety and political freedoms), which is four times higher than the US’s. China has crossed its peak, its best time has already been unbidden and squandered. Xi has still invested political capital heavily, and wilfully, in geopolitical wagers: reclaiming Taiwan, hegemonizing the Indo and Western Pacifics, and claiming a place in the sun. Xi has declared that China seeks a “future where we will win the initiative and have the dominant position.” The China dream should wear off as it faces a world which looks increasingly hostile compared to the golden decades of rapid Chinese growth. As per Lowy institute, global demand is now weaker, globalisation may indeed be in reverse, and China’s access to cutting-edge technologies might get more restricted by the US and the EU. Political compulsions compel Xi to brush off anti-China coalitions like QUAD, NATO and the G-7. But these interlocking groups could soon come to constitute a noose around Xi’s neck.

A study of the world wars will tell you that revisionist powers become most ferocious when the gap between their true prospects and ambitions becomes unmanageable. As a dissatisfied China’s maneuvering space contracts, even a high-risk plunge for victory may come across as more tasteable to Xi than a deadly ouster. It is then, more about managing China’s violent demise. That will happen organically, as issue-based coalitions emerge and act upon containing China on specific issues, like the QUAD, AUKUS, SCRI and the like. The peak of confrontation is yet to come, and Xi’s insecurities shall determine its height.

Asish Singh is a freshman at Ashoka University.

Image credits: Greg Baker — AFP via Getty

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