China - The Way Ahead

On the eve of the National Congress of the Communist Party of China it will be worth taking stock of the situation with regard to China. Today’s China is a complex country. Listening to talks by George Friedman and Peter Zeihan and Shekhar Gupta brought home the fact that we, and the world in general, think very superficially.

We tend to take world events at face value. Whenever any world leader makes any statement, it is taken as gospel by the public and the media. This is more the case when the regime is authoritative to the extreme, as in China.  

In the late seventies Japan was at the peak of its economic power. In the eighties it began to invest in the rest of the world. It bought Warner Brothers, and many other companies in the world. Many thought that the Japan has arrived in the world, and they are buying out assets in the world. This was taken to be a sign of the rising power of Japan.

It was in fact, exactly the opposite. Japan was investing outside of Japan because return on capital had fallen inside Japan. Even in the peak of their economic boom return on capital in Japan was very low.

Today China is doing the same. They started the Belt and Road initiative and made massive investments around the world. But the return on investment they are getting from these projects is dismal. In countries like China a growing economy has to be defined differently. In China growth has to be achieved to create jobs, not wealth, like in other economies. Most of the private sector in China is heavily subsidized. China produces a lot, but very inefficiently. Their return on capital is a dismal 1.7%. Loss of jobs means social unrest, which is what the CPC fears the most.

Now Xi Jinping has secured his third term as leader of the CPC in the on-going Party Congress. If he has his way, he could anoint himself president for life. This would be unprecedented. Xi Jinping has built a personality cult around himself. He is trying for absolute power in China, for life. In the modern age, this looks rather unrealistic. But in China absolute power is still achievable. Xi gas surrounded himself with yes men, loyalists.  Whether he will be able to retain this absolute power, however, is the real question.

Where will China go from here? Looking at the economy of China there is not much room to maneuver. China faces many problems. The housing crisis has now ballooned and threatens to slow down the entire economy. The spillover effect of this crisis has started affecting other sectors too. The Local governments and some banks have been facing serious funds crunch. The zero covid strategy is not working and is causing huge anxiety among people. It has also derailed China’s manufacturing sector causing unemployment. Experts say, the lack of an effective vaccine has forced the leaders to continue with the policy. 

Some interesting facts have been brought to light by experts. It seems, by studying the satellite imagery of the intensity of night- time lights of a country, experts can draw conclusions about the amount of economic activity in a country and by inference its relative affluence. China has not released its data for the 3rd quarter of 2022. This prompted economists and data scientists to resort to unconventional methods to gauge the progress of China's economy. 

What Xi Jinping really has done is increased the cost of political failure in China. Deng Xiaoping had introduced the principle of collective responsibility based on consensus. Failure of a policy or its success was considered to be that of the whole Politburo and not of any individual. This consensus had made the CPC somewhat benign. But now the balance of power in the CPC is gone and the Xi faction has no opposition. Purges have had to be carried out as in the case of Hu Jintao.

Moreover, many old co-operatives have been restarted by Xi Jinping. This would suggest that Xi wants to take China back to the co-operative economy of the Mao era. Experts suggest, Xi may be either preparing for war or a famine.  

It is not so anymore. Now power is concentrated in one person and so is the responsibility that goes with it. If Xi fails to achieve any of his declared goals, he stands to lose everything, maybe even his life. He has created many enemies on his way up, who now will be looking for a weakness to exploit. 

The top leadership in China is locked in a bitter power struggle which could continue for a long time even after the conclusion of the Congress.

Xi Jinping is taking China back to the Mao era. He wants to create his own legacy. The recently concluded CPC Congress has laid down China's future path in no uncertain terms. Nationalism has taken center stage. Inside China it is no more about development anymore. It is about socialism as dictated by the CPC and its complete domination of the Chinese society. Foreign investors, as a result, are having second thoughts about investing in China and are looking for alternatives. The CPC has gone into its comfort zone, which is repression. 

With absolute power in his grasp the leader now has the tools to force his will on his people. The world should expect a more belligerent and unpredictable China.