Faltering Chinese Economy Calls for Desperate Measures in Beijing

Faltering Chinese Economy Calls for Desperate Measures in Beijing - Chinese leader Xi Jinping is a communist, not an economist, who proves it almost daily. His top priority is the political security of his communist regime, with every other consideration, including the impact of his Mao-like national security regime on the Chinese economy, a distant second.

Sep 30, 2023 - 04:31

Faltering Chinese Economy Calls for Desperate Measures in Beijing

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Chinese leader Xi Jinping is a communist, not an economist, who proves it almost daily. His top priority is the political security of his communist regime, with every other consideration, including the impact of his Mao-like national security regime on the Chinese economy, a distant second.

Preserving the Chinese Communist Party’s (CCP) control over all aspects of Chinese life appears to be Mr. Xi’s primary focus. His efforts to instill harsh communist orthodoxy and discipline throughout the Chinese bureaucracy and state-owned enterprises while attempting to enlist average Chinese in rooting out corruption, dissent, and perceived foreign threats by pushing his new anti-espionage law have added new burdens to an economy that was flattened by another of Mr. Xi’s arbitrary specialties—the zero-COVID policy.

While the state-run Chinese media continue to put lipstick on the pig of the faltering Chinese economy, foreign investors are not fooled by the healthy doses of influence-peddling and gestures of Chinese friendship like Mr. Xi’s recent praise of the World War II-era Flying Tigers.

The bottom line for investors revolves around basic economic concepts of risk, reward, cost of capital and labor, and the regulatory environment in which businesses must operate. These concepts don’t seem to compute in Zhongnanhai.

Let us examine the topic.

CCP Meddling, Led by Xi

Unfortunately for Mr. Xi, mandating the study of “Xi Thought” and communist orthodoxy to strengthen the CCP’s political base does nothing to grow the Chinese economy. In fact, the impact is quite the opposite. Four main pillars that have powered the growth of the Chinese economy in recent decades are real estate, exports, domestic markets, and foreign direct investment. All four have been negatively impacted by arbitrary CCP tinkering, meddling, and destructive policies.

Real Estate Market

Approximately 70 percent of household wealth in China involves property. The economic downturn caused by Mr. Xi’s prolonged zero-COVID policy depressed property sales and inflated the debts of local governments. High youth unemployment due to the faltering economy has also contributed to a sinking demand for housing and slumping house prices. As a result, property developers such as Sino-Ocean and Country Garden have missed international bond payments within the last two months.

Export Economy

In recent decades, China built a massive export economy through a massive infusion of Western capital, technology, and intellectual property, plus a heavy dose of Chinese mercantilism to capture overseas markets.

Low labor costs and 1.4 billion potential consumers comprised a siren song that lured many multinational corporations to mainland China at the expense of home countries. The resultant capture of supply chains created built-in dependencies on China for pharmaceuticals, automobile parts, green technology components, and many other items.

China’s merchandise trade surplus with the rest of the world in 2022 topped $877.6 billion, "reaching a historical high,” according to Statista, as the rest of the world struggled to restart their economies after the COVID-19 pandemic.

However, the worm has turned in 2023, as CNBC reported in August that “exports have fallen year-on-year for every month since April as global demand for Chinese goods wanes.” The triple whammy of Mr. Xi’s zero-COVID policy, new regulations on business, and Chinese military belligerence in East Asia have stimulated countries to seek alternatives to Chinese sources through decoupling and "de-risking."

People attend a job fair in Huaian, in China's eastern Jiangsu Province, on May 26, 2023. (STR/AFP via Getty Images)
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Domestic Markets

Domestic demand is a key element of the Chinese economy. The East Asia Forum reported that “the share of GDP attributable to domestic consumption [reached] 55 percent in 2019.”

China’s population growth has stalled due to the CCP’s misguided mandates on the number of children authorized. Mr. Xi’s zero-COVID policy depressed demand over the past three years, making it difficult for the average Chinese to live, work, and travel (business and leisure).

Despite the declining birth rate, urban youth unemployment (ages 16 to 24) has topped 21.3 percent in June, according to Statista. The numbers and trend must be very bad because, in August, China's National Bureau of Statistics announced that it wouldn't publish youth unemployment data.

Raids on foreign businesses, the new anti-espionage law, and endless anti-corruption activities have further roiled the economy and lessened consumer confidence. Even worse, weak domestic demand is being blamed for China’s slide into deflation, as reported by Reuters at the end of August.

Foreign Direct Investment

The rise of China’s economy is directly due to massive foreign direct investment over decades. Investment in foreign capital has fueled China’s rapid economic growth and modernization, including the modernization of the People’s Liberation Army.

In 2021, China was the number three destination for foreign direct investment (FDI) behind the United States and the Netherlands, according to the International Monetary Fund. That worm is turning, too, as foreign investors are becoming increasingly skittish about new Chinese regulations affecting businesses, raids on foreign-owned companies, and the new anti-espionage law that adversely affects businesses.

The Wall Street Journal reported in July that “foreign direct investment in China fell to $20 billion in the first quarter [of 2023] from $100 billion a year earlier, hurting an already struggling economy,” according to the research firm Rhodium Group.

Financial Times reported that “foreign investors have dumped a further Rmb23bn ($3.15bn) of Chinese equities so far this month following record outflows in August.”

The Epoch Times summarized the widespread and increasing capital flight from China here.

The CCP realizes the threat to its economy of declining FDI, and state-run media over the past several months have led the chorus of voices appealing to foreigners to “remain in China,” not to decouple, and continue to invest in China.

CCP Influence Peddling to the Rescue

The CCP leadership is not opposed to soliciting foreign investment since Deng Xiaoping showed the way, beginning in the late 1970s. But matters have become especially critical with the slowdown in China’s economy due to CCP policies and the drying up of foreign direct investment noted above. As a result, Beijing took the unprecedented step of labeling 2023 as the “Year of Investing in China.”

Mr. Xi has launched a full-court press to solicit foreign investments via state-run media and the Chinese communist bureaucracy. Voice of America reported that “August saw a flurry of Chinese trade officials talking to state media about the government’s commitment to “improve foreign investment environment” and “spare no effort in keeping foreign capital onshore.”

China Daily reported in August that “China issued a guideline to further optimize the foreign investment environment and intensify efforts, including 24 specific measures in six aspects.” This includes research and development efforts, and pilot areas opened to “value-added telecommunications services,” strengthening international property rights.

That full-court press extends to ramping up influence-peddling and outreach activities to fellow travelers and allies in the United States to reinforce Chinese-American relations, camaraderie, and togetherness while ginning up support for continued investment in China. As reported by China Daily, Mr. Xi has allowed the establishment of two new China-U.S. working groups to begin collaboration: economic and financial. Chinese officials could influence their U.S. counterparts directly, including people predisposed to favor “China engagement.”

The recent report in The Wall Street Journal about returning pandas in the National Zoo in Washington is another good example of Beijing tugging on heartstrings to achieve its political ends. Again, why relocate the pandas now? After all, China has been “renting” pandas to the National Zoo for $1 million annually since 2000.

In July, China’s Center for Language Education and Cooperation (CLEC) under the Ministry of Education launched a new program “featuring China-U.S. youth international Chinese language and drama exchange,” People's Daily reported. This program, coupled with the rebirth of Confucius Institutes in the form of “Confucius Classrooms” in the United States, is a form of psychological warfare aimed at predisposing American children toward Chinese language and culture while ignoring ongoing communist persecution and belligerence.

Mr. Xi’s public praise of the Flying Tigers and the Sino-American Heritage Foundation on Sept. 19 almost seemed like an act of desperation (although banging on Japan is always in the CCP’s political playbook). State-run Chinese media reported that Mr. Xi is “[dedicated] to fostering friendship and understanding between the two peoples.” Again, why now? After all, the Flying Tigers provided their support to Chiang Kai-shek’s Chinese Nationalists—not to Mao Zedong and the communists—during World War II.

The CCP leader apparently seeks to capitalize (pun intended) on warm Chinese-American relations that predated the founding of communist China, as well as on influence operations that have been well-funded by the CCP in the United States in recent decades. Not everyone is fooled, as business and economics are about dollars and cents and yuan and renminbi, not meaningless gestures such as this.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

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