Why is Xi Jinping ready to slow down the Chinese economy?


China’s GDP grew 4.9 percent year-on-year in the third quarter of 2021, a whopping three percentage points lower than in the previous period. It’s a big deal for the world’s second-largest economy, the only large one that has grown throughout the pandemic – and now risks missing its 6% growth target for the entire year.

Normally, such a drastic slowdown would have made the ruling Communist Party dizzy. But this time, Xi Jinping knows that is the price he has to pay for his grand plans to reduce growing inequalities and boost the middle class at the expense of the CCP’s traditional economic mantra: high growth above all else.

Why is GDP growth slowing now? On the one hand, a combination of rising coal prices, stricter regulations on energy consumption linked to climate policy, and growing demand in countries that buy a lot of Chinese-made products have all resulted in an energy crisis that will likely worsen global disruptions. supply chains that depend heavily on China.

On the other hand, Xi’s crackdown on excessive borrowing in the real estate sector – which accounts for nearly 30% of China’s economic activity but was so in the red that it posed a systemic risk – does a lot of harm. . Evergrande and other major real estate developers are missing their creditors’ payment deadlines and shutting down projects for homes they have already sold but have no money to build.

Finally, there’s the pandemic itself, via strict local lockdowns that have hurt Chinese retail and travel in the only country in the world that still believes in zero COVID.

Chinese leader believes economic slowdown, even painful in the short term, will be worth it in the long term because the economy needs structural reforms to close the income gap and deliver what Xi calls “common prosperity.”

In a speech that stunned the business community two months ago, Xi confirmed that “common prosperity” means dramatically expanding China’s middle class, in part by raising taxes for the rich. He wants part of this wealth to be redistributed in order to make China a more egalitarian society. (Indeed, the 1% saw the writing on the wall – a single mention of the “excessively high income” regulation prompted several panicked CEOs to immediately donate billions to charity just as Xi s ‘took on the tech industry.)

Xi’s goal is for China’s GDP to continue growing, but at a less ambitious pace Thus, Chinese workers have time to earn more and become more productive at the same time. China, he said, should stop producing mostly cheap exports that pollute the planet like Chinese factories have been doing for decades and focus on producing high-quality, sustainable products for the local market.

But it is a risky move. Reducing economic activity to the annual growth levels of 2-3% of mature economies like the United States or Germany will be a delicate balancing act for China. Slow growth that drags on could discourage investment and trigger social unrest if unemployment becomes too high as a result.

Meanwhile, China’s slowing economic growth will have serious repercussions on the rest of the world, given the disproportionate role of China in the global economy.

The so-called “factory of the world” will likely continue to export a lot, but not as much as before, and more of its exports will be high-value technology products. Local companies will also likely outsource more of their manufacturing to low-cost neighbors such as Bangladesh or Myanmar, and over time most products made in China will become more expensive.

Xi’s vision of “common prosperity” carries many risks for the heavyweight of the Chinese economy. But if he keeps his promise, expect him to stay in power for a long time.


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