Xi Jinping’s Solution Is China’s Problem

If Xi Jinping’s ambition is a problem for America, it is a bigger problem for China. In addition to the lockdowns and quarantines that are a part of Xi’s desire to claim victory over Covid, his reassertion of communist centralization and planning threatens to undermine China’s economic miracle and severely constrain any future growth potential.

Covid and the severe lockdowns and quarantines Beijing has imposed are the most immediate threat to China’s economy. The severity of Beijing’s strictures will not only fail to conquer the virus but will do considerable economic harm while achieving little beyond the much more economically friendly approaches used in the west. Covid policy has also needlessly held back the economy by sowing fear among the Chinese public. Beijing has hidden the fact that the Omicron variant is milder and how Europe and America are effectively coping with the virus in less severe ways. Beijing seems also to believe that its authority requires it to deny the Chinese public the benefits of foreign vaccines and other medicines. There can be little doubt that these draconian actions have their roots in past Beijing propaganda claiming that China had handled the virus more effectively than other nations. For Beijing now to admit that the west has anything more effective and is recovering would undermine an important internal propaganda fiction.

The economic damage of shutting down Shanghai, Hong Kong, and other centers may yet be incalculable, but it is undeniably significant. As Premier Li Keqiang made clear in his recent widespread address, the shutdowns alone may keep China from reaching even its already downgraded real growth target of 5.5 percent this year. Joblessness has already risen from 4.9 percent late last year to 6.1 percent this spring. Consumer optimism has fallen from an index level of 128 last year to barely 114 at last measure. Housing sales, growing at double-digit rates only three years ago, have all but stalled in 2022. Exports have lifted Chinese manufacturing after months of serious declines, but that rise reflects a recovery overseas more than in China.

Ultimately more destructive is Xi’s reassertion of communist principles in economic management. His “New Development Concept” (NDC) has several elements, but at base it constitutes what Kevin Rudd, president of the Asia Society, aptly describes as China’s “pivot to the state.” It would, for the first time since Mao, re-orient Chinese economic management around a strictly enforced industrial policy in which Beijing, through a revivified state-owned sector, would centrally direct the country’s entire economic effort.

Already under this approach, Beijing has denied financing to several otherwise fast-growing consumer service providers. Even though these companies were clearly meeting an economic need, they fell outside the planners’ preferences. As part of his “pivot,” Xi has hotly criticized the “patriotism” of the leaders of these firms and any business leader who would stray from Beijing-approved economic directions. He has made it clear that regardless of ownership these people live in “partnership with the state” under the direction of its planners and ultimately the Chinese Communist Party (CCP).

Xi’s NDC has also stressed what he refers to as a “dual circulation economy.” under it China would shed its dependence on exports and rely more on domestic sources of growth. And he has emphasized what his plan calls “common prosperity” which would redistribute income from China’s business elites to the people. Despite the humanitarian language surrounding this aspect of the NDC, it is less likely aimed at the benefit of the middle and working classes and more likely aimed at weakening business power centers outside the CCP.

Given China’s startling success after Deng Xiaoping opened /China’s economy in the late 1970s, this authoritarian/communistic turn might surprise. But in many ways Beijing has long advertise it. From Deng to Xi, China’s leadership has always described “liberalization” only as a means to the ultimate ideological goals of communism. Deng made that clear at the start in how he defined “socialism with Chinese characteristics” in just this way. In the west, such hints were taken as cynical rhetoric to old ideals by leaders who could see a different future, much the way western leaders, for the sake of votes, rhetorically bow to traditional norms in which they no longer believe. But such interpretations fit less with reality than with the west believing what it wanted to believe about China. Now it seems Beijing was always populated less by cynics than by true communist believers. Xi, after all, only recently explained his NDC by stating that the “overwhelming abundance of material wealth” brought by markets has positioned China for a next step in the road to socialism.

If Xi really is poised to take this next step, China’s growth and development are in for trouble. For one, his NDC contradicts itself. The only way China can prosper in the industries his planners are emphasizing – semiconductors, artificial intelligence, quantum computing, and modernized manufacturing — is to seize world domination in those areas, a move that would thwart his parallel plan to reduce China’s dependence on exports. Sill more basically, the move to rigid planning would sap the dynamism of China’s economy. One of the reasons open markets accelerate development is that their decentralized nature creates a diversity of efforts to capture the future. Since no one can see the future, that diversity is more likely to hit on its economic needs than could any plan, which by nature, as the NDC does, concentrates on only a few areas.

The NDC may get lucky. World dominance in semiconductors, artificial intelligence and quantum computing may be the future. They are certainly hot in the present. But over time, the odds are against planning’s choices, especially in the world of technology. When the planners make a mistake, and they will, a huge national effort goes in the wrong direction, something less likely in fundamentally decentralized markets. In time, a communistic centralization will waste resources as well as stifle imagination and experimentation and steal from China the economic dynamism of past decades. The economy will stagnate long after the Covid lockdowns are just a bad memory.