China’s Leader Faces Challenge: Fixing Economy While Pursuing Growth

China’s President Xi Jinping has faced and survived many challenges in life. He spent years as a teenager toiling in the countryside after his father was persecuted. He worked his way up to the top echelons of power and carried out a massive anti-corruption campaign that earned him many enemies.

But as he’s about to get an unprecedented third term, Xi faces what may perhaps be his toughest challenge – fixing the serious problems that have metastasized in China following four decades of rapid, unbridled and wasteful economic growth, and putting the world’s second biggest and soon-to-be-biggest economy in order.

Experts say it won’t be easy, and Xi himself may be his biggest obstacle.

“China has essentially reached the peak of its growth period, much of it fueled by debt. The result is they’ll have difficulty unless he wants to reform the economy and he has no plans to do that,” said Andrew Collier, a Hong Kong-based expert in China’s macroeconomy.

Under the past four decades of China’s opening, its economy has grown 18 times bigger – from a GDP of $149.5 billion in 1978 to $17.7 trillion last year, making up about 18.5% of the world’s economy. Since Xi came into power in 2012, it has doubled in size, surpassing the European Union last year.

But a lot of that growth has been unhealthy, especially in the manufacturing and construction sectors, where excessive growth has turned out “ghost cities” and unnecessary infrastructure. Not only has this damaged the environment, but it also has created a lot of internal debt.

Property developers

A symptom of the problem exploded recently when overambitious property developers, funded by state banks, defaulted, leaving apartment buildings unfinished and angry homebuyers boycotting their mortgages and amassing in rare protests.

Xi seems unable to rein in these excesses. While he has famously said that “houses are for living in, not for speculation,” the property bubble has continued to balloon over the past decade that he’s been in power.

“It was a bubble before, but it has gotten much bigger, so obviously the talk has not been followed by action,” said Shanghai-based independent economist Andy Xie.

He estimated Chinese property developers owe at least $10 trillion in debt and says that’s a “very conservative estimate.”

While some companies may be bailed out, China simply cannot continue growing like this and Xi knows it.

In his speech at the opening of the 20th Party Congress on Sunday, he said, “Development was imbalanced, uncoordinated, and unsustainable, and the traditional development model could no longer keep us moving forward.”

He said the next five years will be “crucial” for building a “modern socialist country” by engaging in “high-quality” development.

State-owned emphasis

Analysts say that instead of continuing to put emphasis on state-owned enterprises, which are less efficient and less profitable, Xi should support the private sector. But they say he’s doing the opposite.

“He’s essentially doubled down on his existing policies to promote the state-owned system and … the crackdown on the tech sector that occurred in the past couple of years is very much part of his world view,” said Collier, managing director of Orient Capital Research.

Collier suggests allocating more bank loans to the private sector, shifting focus to boosting domestic consumption, and allowing more free market decision making.

But Collier notes, “That’s not part of his DNA.”

In a recent report, the World Bank also advised China to remove remaining barriers to market competition, spur innovation and productivity, and focus on the service and consumption sector by boosting spending on health and education, so that Chinese people wouldn’t feel the need to save so much.

But Xie asserts that Xi wants to control the market economy.

“The Chinese Communist Party is about keeping the party in charge, but the market is not about that, it’s about power decentralization; the market makes decisions on its own,” Xie said. “Coexistence has been uneasy. Now the market has been brought under control.”

Examples: One tech company’s planned IPO (initial public offering) was stopped in its tracks. Big tech firms have been pressured to make large donations to charities, and government intervention has caused the stock prices of some companies, like Alibaba, to plunge. Even the video game and private tutoring industries have been ordered to stop putting profits above children’s welfare.

Observers believe it would be better if China reformed and updated its tax system to adequately tax the country’s growing number of ultra-rich people, including property speculators, and narrow the wealth gap.

But contrary to Xi’s image as a strongman, he may not have that much control over economic matters.

While political power is centralized in the party, economically, China is very decentralized, Collier said.

“He can control state-owned firms, but at the end of the day, it’s up to provinces to try to generate growth,” said Collier.

With the property sector, for example, land sales and taxes from transactions contribute to 10% of the nation’s annual GDP and to more than half of many local governments’ revenue, so Xi’s hands may be tied.

Multiple challenges

So far, Xi seems to prefer a soft landing – slowing growth to avoid China’s economic bubble completely bursting, avoiding massive discontent and social unrest, which could threaten his party’s survival.

In his speech, Xi vowed to deepen reforms of state-owned enterprises and help them grow larger and more competitive, while also promising to encourage entrepreneurship and help private Chinese companies “become world-class outfits.”

He also pledged to accelerate China’s transition toward green, low-carbon development – meaning the world’s factory ostensibly will manufacture higher-end goods and in less polluting ways.

At the same time, he vowed to improve the income tax system, increase earnings for low-wage workers and expand the middle class.

With millions still living in poverty and youth unemployment very high, that’s a major challenge, especially as economic growth is forecast to fall from 8.1% last year to just 3.2% this year, the second lowest rate in nearly five decades.

If Xi fails to carry out necessary reforms in his third term, China’s economy — while still predicted to surpass that of the U.S. by 2030 because of its much bigger population and manufacturing sector — could reach a crisis point. Additionally, since China is the biggest market, trade partner, and also increasingly the key investor for many countries, that could have huge implications for the rest of the world.

“The world spins around China,” economist Xie said.


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