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Will China suffer an economic shock in 2018?

The challenge is not short-term turmoil but the long-term costs of Xi's authoritarianism

| China
China's economy continues to hang on the balance between its potential and the Communist Party's damaging penchant for political authority.   © Reuters

The year 2018 will bring a series of signals of supposedly imminent economic shocks in China just as most years have done since the 2008 global financial crisis.

But like earlier warnings of economic collapse, a hard landing, a banking crisis and a real estate crash, the worst forebodings will not materialize. The state-capitalistic model will be able to cope in its way with high debt levels, systemic risks, currency uncertainties and other threats, although they will undoubtedly lead to bouts of market turmoil.

However, this benign scenario of warding off immediate dangers should not conceal a deep longer-term risk faced by China under its increasing imperial leader that is likely to limit its growth and evolution as a global power.

This springs from a fundamental contradiction between the political mindset of Chinese President Xi Jinping and his country's evolving social and economic needs to achieve its potential. For Xi, as he again made clear at the Chinese Communist Party congress in October, it is vital to tighten the party's control, stretching it beyond political rule to the economy, society and the legal system with himself at the center. The inclusion by the congress of "Xi Jinping Thought" in the party constitution means any criticism of him is equivalent to an attack on the party that holds him as personifying the nation. This means that any dissenter, in effect, is a traitor deserving punishment -- as was the case under the old imperial governments.

The extreme regime stiffening this year might lead one to conclude that Xi and his colleagues think their leadership is under imminent threat. But that is far from the case. As his mastery of the congress showed, Xi has established himself firmly as the "core" and did not have to name a successor, leaving himself without an alternative power source in the politburo and creating the possibility of him staying on for a third term in 2022.

The internal security system is as strong as it has ever been. The economy, still key to the communist party's claim to legitimacy, performed better in 2017 than had been generally expected, with estimated growth of just under 7%. Consensus forecasts for 2018 predict more of the same, with GDP growth of around 6.5%. Though data is scarce, protests and strikes appear to have declined in number.

Acknowledging in his congress speech that development had been "unbalanced and inadequate," Xi pointed to policies to reduce the glaring income and regional disparities that have accompanied growth. Environment teams have been dispatched with enhanced powers to reduce pollution - a sign of intent even if the effects have involved shortages of heating from coal-fired power stations in the depths of winter. The centralized authority Xi has built up in the past five years offers some prospect of getting around the local authority logjams that have blocked edicts from Beijing in the past.

Meanwhile, just as Xi was seeking to enlarge China's global influence, along came Donald Trump to open doors for Beijing to walk through as it sought to build up regional links in the face of uncertainty about U.S. intentions and put itself forward as the champion of globalization and fighting climate change. Foreign governments have seemed so relieved at the emergence of an anti-Trump that they have held back from pointing to the reality of China's tariffs, preferential policies, joint venture requirements and environmental crisis.

A glaring paradox

So we are left with a paradox. China appears as stable as it has been for some time. Although the measures decreed by the Xi administration are subject to the usual implementation provisos, there is a greater recognition than in the past of the challenges the country faces. The drive for centralized authority could break through the vested local and sectoral interests that were encouraged by the Deng Xiaoping system of devolved development in the 1980s and 1990s, but which ended up enhancing local interests, fostering misallocation of capital on a vast scale and protecting inefficiencies.

One might think it would be time for a more relaxed, inclusive style of rule while the Xi administration accepts a lower and more sustainable growth pattern, addresses social and economic disparities, makes a serious bid to clean up the air, water and arable land, renders cities more liveable and generally improves the quality of life for China's citizens. But Xi's chosen route to "socialist strengthening" involves instead a tightening of the regime. This reflects the essentially political approach to running China which permeates his policies even when they involve increasingly complex areas of the economy and society. Having spent his whole adult life rising through the hierarchy of the monopoly party and devoted the past five years to increasing its grip, he has never been a man for liberalization, whatever some people imagined when he took the top job at the end of 2012.

In keeping with this mindset, the anti-corruption campaign is to be extended from party members to all officials employed by the state, which presumably includes university teachers as well as civil servants. In keeping with the regime's attachment to the rule by law (rather than the rule of law), suspects can be held for six months without access to a lawyer. Pilot schemes are taking place for what is euphemistically called a "social credit" system which would collect "big data" on citizens to determine their job, housing and other prospects. At the same time, repression of human rights lawyers continues, security has been stepped up against Muslims in the big western territory of Xinjiang, and Tibet remains under lockdown.

This points to the longer-term reason why China's development will be limited by its political system and the importance attached by the leadership to its preservation. The economy has outlived the relatively simple equation of the first generation of growth combining cheap labor, cheap capital and strong export markets. Labor and capital are no longer so cheap and export demand is not what it used to be.

China needs to move up the value chain, boost productivity, develop its own technological drivers and create world brands. That requires innovation and free-ranging, globalized thinking. The creation of heavyweight "national champions" as promoted by the leadership will not be the answer. It is worth noting how the go-go BAT sector (Baidu, Alibaba, Tencent) operates under state regulation that excludes significant foreign competition. Nor will new thinking be helped by the politicized constriction of approved thought to ward off nefarious "Western" notions such as universal values, democracy and an independent legal system.

Slowing growth and the correction of income and wealth disparities will test the state-led model Xi is promoting. But rather than relaxing the authority of the one-party state, Xi will continue to see it as the regime's shield and the path to his "China Dream" of national strengthening and rejuvenation.

China will not collapse. It will remain a major global player seeking equality with the U.S. and jockeying with Japan. A serious economic crisis will not materialize for several years at least. The benefits of materialism may continue to buy off social discontent. But the long-term contradiction between the urge for control rooted deep in the Communist Party's DNA and the loosening of politically driven authority that would free the country's potential will be the greatest brake on its evolution.

Jonathan Fenby is the author of nine books on China, most recently, "Will China Dominate the 21st Century?"

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