Is China Reaching Its Glasnost/Perestroika Moment?

Structural decline in economic growth accelerates as tighter controls and one-man rule continue Commentary After decades of double-digit growth, China may be edging closer to an extended structural economic decline. In broad terms, the factors that could lead up to this period of decline are already in place. In most cases, they stem from the excesses of China’s policies over the past several years of placing political primacy over economic growth. Looking Like the Old USSR? Even though China is technologically more advanced than the former Soviet Union, its growing state control and economic stagnancy are reminiscent of the old USSR in the late 1980s. Recall that after 70 or more years in power, the effects of state control and the corruption that comes with it led to an extended period of economic stagnation for the USSR. Inefficient, unprofitable, and costly state-owned companies and economies led to an irreversible economic decline for the Eastern European economies in the former Soviet Union and the abdication of the Soviet Communist Party. Will the Chinese Communist Party (CCP) face a similar moment? The reality is that China’s economy is facing the very real possibility of a similar prolonged slowdown. It faces several significant obstacles to long-term growth. Recent statistics show that the economy grew just 0.8 percent in the second quarter, down from 2.2 percent in the first three months of 2023. Near-term forecasts aren’t favorable either, as domestic demand continues to stagnate. Consumer savings rates remain high, a clear sign of fear for the future. What’s more, youth unemployment is over 20 percent. People attending a job fair in Beijing on Aug. 26, 2022. (Jade Gao/AFP via Getty Images) However, given that the CCP’s legitimacy lies in its promises for economic growth, there’s good reason to believe that the level of unemployment is even higher, as are the obstacles that block future economic growth. Structural Challenges Intensify In any case, several structural challenges are contributing to this negative long-term outlook. For example, the CCP is expanding state-owned enterprises (SOEs) to maintain control over the floundering economy. But adding more state-controlled firms means confiscating successful, privately owned enterprises and turning them into costly and less-efficient SOEs. As a result, the CCP’s SOE policy will not result in growing the economy. In fact, it will lead to a further slowdown. Given his failure, civil dissatisfaction, and unrest, Chinese leader Xi Jinping can’t risk loosening his grip on the Chinese people. The rising risk of China’s debt-driven growth model is related to the failing SOE policy. The Evergrande Fallout Continues The impact of the collapse of the real estate development sector, which comprises about 30 percent of the Chinese economy, is the poster child for the risk of unbridled borrowing to stimulate growth. Evergrande’s crash meant a loss of $81 billion over the past two years, and it still owes tens of billions of dollar-denominated debt to investors. At the same time, Evergrande’s total assets are only about $256 billion, which means the brightest star in China’s real estate development industry could actually be bankrupt. Perhaps even worse, the fallout from Evergrande and other development company failures continues to drag the economy downward. New construction starts, which are a leading indicator for the real estate market in the next year, declined by 44 percent in September, 36 percent in October, and 50 percent in November of last year. Correspondingly, in June 2023, property sales saw a decline of 28.1 percent, and property investment declined by 20.6 percent year-over-year. Declining Infrastructure Investment Activity on the infrastructure investment front is also down as local government financing vehicles (LGFVs) face declining revenues from falling land prices and lower sales. Local governments are under fiscal pressure due to sinking land prices and fewer sales. LGFVs—the primary mechanisms for implementing infrastructure projects—are in the midst of a credit crunch and are at risk of defaulting in 2023. According to Moody’s Analytics economist Harry Murphy Cruise, “China’s recovery is going from bad to worse,” he said. “After a sugar injection in the opening months of 2023, the pandemic hangover is plaguing China’s recovery.” Government spending is unlikely to be a “silver bullet.” Managing Banking Risks—for Now If such defaults can’t be averted, China’s banking sector would also be at risk. In fact, some banks have already seen significant devaluations. A man walks past a booth of the Bank of China at the Main Press Centre of the 2022 Winter Olympics in Beijing on Jan. 28, 2022. (Fabrice Coffrini/AFP via Getty Images) The current strategy is to extend existing loans to LGFVs and delay interest rate hikes to give them time to recover. In light of other negatives, how that will happen remains to be

Is China Reaching Its Glasnost/Perestroika Moment?

Structural decline in economic growth accelerates as tighter controls and one-man rule continue

Commentary

After decades of double-digit growth, China may be edging closer to an extended structural economic decline. In broad terms, the factors that could lead up to this period of decline are already in place. In most cases, they stem from the excesses of China’s policies over the past several years of placing political primacy over economic growth.

Looking Like the Old USSR?

Even though China is technologically more advanced than the former Soviet Union, its growing state control and economic stagnancy are reminiscent of the old USSR in the late 1980s.

Recall that after 70 or more years in power, the effects of state control and the corruption that comes with it led to an extended period of economic stagnation for the USSR. Inefficient, unprofitable, and costly state-owned companies and economies led to an irreversible economic decline for the Eastern European economies in the former Soviet Union and the abdication of the Soviet Communist Party.

Will the Chinese Communist Party (CCP) face a similar moment?

The reality is that China’s economy is facing the very real possibility of a similar prolonged slowdown. It faces several significant obstacles to long-term growth. Recent statistics show that the economy grew just 0.8 percent in the second quarter, down from 2.2 percent in the first three months of 2023. Near-term forecasts aren’t favorable either, as domestic demand continues to stagnate. Consumer savings rates remain high, a clear sign of fear for the future.

What’s more, youth unemployment is over 20 percent.

Epoch Times Photo
People attending a job fair in Beijing on Aug. 26, 2022. (Jade Gao/AFP via Getty Images)

However, given that the CCP’s legitimacy lies in its promises for economic growth, there’s good reason to believe that the level of unemployment is even higher, as are the obstacles that block future economic growth.

Structural Challenges Intensify

In any case, several structural challenges are contributing to this negative long-term outlook.

For example, the CCP is expanding state-owned enterprises (SOEs) to maintain control over the floundering economy. But adding more state-controlled firms means confiscating successful, privately owned enterprises and turning them into costly and less-efficient SOEs. As a result, the CCP’s SOE policy will not result in growing the economy. In fact, it will lead to a further slowdown.

Given his failure, civil dissatisfaction, and unrest, Chinese leader Xi Jinping can’t risk loosening his grip on the Chinese people.

The rising risk of China’s debt-driven growth model is related to the failing SOE policy.

The Evergrande Fallout Continues

The impact of the collapse of the real estate development sector, which comprises about 30 percent of the Chinese economy, is the poster child for the risk of unbridled borrowing to stimulate growth. Evergrande’s crash meant a loss of $81 billion over the past two years, and it still owes tens of billions of dollar-denominated debt to investors. At the same time, Evergrande’s total assets are only about $256 billion, which means the brightest star in China’s real estate development industry could actually be bankrupt.

Perhaps even worse, the fallout from Evergrande and other development company failures continues to drag the economy downward.

New construction starts, which are a leading indicator for the real estate market in the next year, declined by 44 percent in September, 36 percent in October, and 50 percent in November of last year. Correspondingly, in June 2023, property sales saw a decline of 28.1 percent, and property investment declined by 20.6 percent year-over-year.

Declining Infrastructure Investment

Activity on the infrastructure investment front is also down as local government financing vehicles (LGFVs) face declining revenues from falling land prices and lower sales.

Local governments are under fiscal pressure due to sinking land prices and fewer sales. LGFVs—the primary mechanisms for implementing infrastructure projects—are in the midst of a credit crunch and are at risk of defaulting in 2023. According to Moody’s Analytics economist Harry Murphy Cruise, “China’s recovery is going from bad to worse,” he said. “After a sugar injection in the opening months of 2023, the pandemic hangover is plaguing China’s recovery.”

Government spending is unlikely to be a “silver bullet.”

Managing Banking Risks—for Now

If such defaults can’t be averted, China’s banking sector would also be at risk. In fact, some banks have already seen significant devaluations.

Epoch Times Photo
A man walks past a booth of the Bank of China at the Main Press Centre of the 2022 Winter Olympics in Beijing on Jan. 28, 2022. (Fabrice Coffrini/AFP via Getty Images)

The current strategy is to extend existing loans to LGFVs and delay interest rate hikes to give them time to recover. In light of other negatives, how that will happen remains to be seen.

Foreign Demand Won’t Be Back Soon

Another challenge that can’t be easily fixed or whitewashed by Chinese state media is the declining foreign demand for China’s goods and services. Beijing’s support for Moscow’s invasion of Ukraine has dampened the European taste and demand for Chinese goods even further than before.

The war and other trade bellicosities have only worsened China’s already poor reputation as a business partner. It has long been known for stealing intellectual property, bribing its way into markets, and other ways of undercutting its erstwhile Western business partners. Plus, as recession remains on the horizon, external demand is more likely to fall rather than rise.

As a result, upwards of 30 percent of China’s manufacturing capacity remains unused, which helps explain the very high and likely underreported unemployment rate among the younger generation.

The CCP’s Cure: Killing the Economy

Apparently, Mr. Xi and the CCP plan to gain an even tighter grip on the economy, mandate economic activity, and hire workers through more stimulus.

Much of the CCP’s growth plans hinge on its ability to goose domestic demand to achieve the growth numbers needed. But cash infusions into the economy have diminishing returns. The likelihood of gaining enough bang for the yuan in terms of growth isn’t as high as it used to be. Government spending won’t be as effective as it used to be and would add more debt to an economy already at unsustainable levels.

But from where will new domestic demand come?

Property development investing, a key sector driving industrial and consumer demand, fell 7.9 percent in June year-over-year.

How will the CCP add confidence to the consumers who’ve been burned by the collapses in real estate investments and the COVID-19 lockdowns, have parents to take care of, and are increasingly deciding to have only one child, if any?

China isn’t at the Glasnost/Perestroika point yet, but that moment may arrive sooner than later, regardless of what the CCP does.

If or when it does, don’t expect the Party’s response to be to surrender power.

A more likely event would be to divert attention to an external event, such as making a move on Taiwan.

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