Xi’s policies retarding China’s economic growth

Yogesh Gupta
Former Ambassador

THE economic growth of China under President Xi Jinping is declining due to his ideological obsession and policy choices. During the previous decade (2011-20), which included nine years of Xi’s rule, the average economic growth was 6.29 per cent as compared to 10.55 per cent during 2001-10 and 10.45 per cent from 1991-2000. In the pandemic years, the GDP grew by 2.2 per cent in 2020 and 8.1 per cent in 2021, but is expected to decline to 2.8 per cent in 2022 (World Bank figures).

In recent years, there has been some structural constraints to higher growth such as the declining labour force, rising labour cost, diminishing returns on investment and slowing productivity growth. But Xi’s choice of certain policies such as zero-Covid, slowing down of market reforms, over-regulation of real estate and technology sectors and lack of adequate strategy to boost domestic consumption have further constrained China’s economic recovery. Xi’s ambition to seek global dominance, pursuit of massive militarisation and “rejuvenation” of the Chinese nation by recovering disputed territories from China’s neighbours have attracted sanctions from the US and other countries on import of high-end technologies and trade, impacting the overall growth.

China’s high growth in recent years was driven mainly by the government investment in infrastructure and real estate, boost to low-cost manufacturing and export. Now that the country has developed vast infrastructure, bubbles have started appearing in the property sector and debt has become unmanageable; it can’t continue with big investments in these areas. With the global environment becoming more challenging, the government expressed its intent to promote domestic economy through increase in consumption, but a comprehensive strategy is yet to be deployed.

The foreign trade, which had traditionally contributed a significant chunk to the economic growth, is declining due to lower demand in the US, Europe and the ASEAN, dislocations in China’s exports due to its zero-Covid policy and supply chain disruptions. Due to combination of these factors, China’s economy has come under stress.

The zero-Covid policy personally spearheaded by Xi from January 2020 to November 2022 further caused considerable damage to China’s economy by shutting off several towns, industries, confining people repeatedly in quarantine centres, disrupting manufacturing, export, supply chains, domestic consumption, employment and wages. This policy had some rationale in 2020 when the government was unprepared. But after 2021, when effective vaccines became available, it made no sense and was driven by Xi’s ideological obsession and irrational fears, refusing to accept advice from scientists and experts, including the World Health Organisation (WHO). Reduction in economic growth from a modest 5 per cent (average in recent years) to about 2.8 per cent (World Bank estimate) would cause China a loss of $384 billion in GDP in 2022 alone.

The manner in which the Xi regime suddenly ended the zero-Covid policy (after widespread public protests) without building the public health infrastructure further compounded the problem, exposing millions of Chinese to Omicron infection with shortage of medicines, oxygen and ICU beds.

According to an estimate, Covid has already infected more than 300 million people in China; in the coming weeks, this number could rise to 800 million as the virus travels to rural areas, according to the Chinese Centre for Disease Control and Prevention, which would overwhelm the hospitals. Some analysts are calling the zero-Covid policy as one of Xi’s worst human rights abuse as it destroyed the lives of millions of people and caused huge economic loss to China.

Xi started his tenure in 2013 with an impressive 60-point programme for market reforms, granting more land rights to farmers, migrant workers, partial privatisation of the state-owned enterprises (SOEs) and enforcing a property tax. But he soon felt that the growth of the private sector would lead to weakening of the Chinese Communist Party’s (CCP) control over the state and economy. Since the latter was his top priority, he reversed the course and began supporting the SOEs. The bank lending to SOEs was more than doubled from 2013 to 2016 while private firms were squeezed out. Since most SOEs are inefficient, the rapid growth made possible earlier by more productive private companies moderated.

Domestic consumption, which accounts for a large part of the growth of major economies, has grown at a snail’s pace in China. Major problem is that the country invests little in social sectors such as health, education, housing and pension. Before the pandemic, China’s expenditure on health as percentage of GDP was 5.4 per cent less than half of the average of OECD (Organisation for Economic Cooperation and Development) countries (12.5 per cent) and one-third of the US (16.7 per cent). A hip replacement surgery in Beijing in 2016 cost $28,000 at a decent hospital. Since pensions are low, people are required to save a large part of their income to meet social expenses resulting in big private savings (about 45 per cent of the GDP) lowering the private consumption. The Chinese rulers, including Xi, have been reluctant to spend too much on social welfare so as to “not to nurture lazy people through welfarism”.

At the Central Economic Work Conference on December 16, 2022, in Beijing, Xi announced a policy shift to address the economic headwinds by “fine-tuning policies to loosen crackdown on the housing market, to keep the state and private sectors on equal footing and to support the private economy, including consumption.” In the absence of any specific steps, doubts are being expressed if these pronouncements are just a ploy to win domestic support.

The conference ended without spelling any growth target for 2023. At the 20th Party Congress in October 2022, Xi ousted prominent reformers from the Politburo replacing them with his favourites. Given his strong proclivity to maintain the CCP’s tight control and reliance on the state control of economy, many China watchers believe that Xi’s policies would further retard the country’s economic growth, killing the economic dynamism of the Deng Xiaoping era.