China after the slowdown

6 May 2024
April Holcombe
Chinese President Xi Jinping PHOTO: Ng Han Guan/AP

China’s boom is well and truly over. Through the 2000s, the economy enjoyed double-digit annual growth. Now, few expect it to hit the 5 percent target announced at this year’s National People’s Congress, the dictatorship’s rubber-stamp parliament. Previous pillars of growth, property and infrastructure are teetering on mountains of debt, and the United States is trying to block the country’s advance into high-tech manufacturing.

In anticipation of an economic slowdown, President Xi Jinping has long centralised political power. “The current leadership believes that it can survive an economic downturn by tightening its control over society, eradicating autonomous elite factions, and adopting a more assertive posture on the international stage amid rising geopolitical tension”, Ho-fung Hung writes in New Left Review.

That assertive posture involves directing investment into “new quality productive forces”. The first group of outputs in this category includes solar panels, electric vehicles and lithium batteries, areas it already dominates in terms of global production. China hopes to remain the pre-eminent manufacturer of such goods.

The second group includes silicon chips, IT systems and artificial intelligence. Here it faces sanctions and other obstacles because such technologies are crucial for military hardware and are of supreme importance in the country’s rivalry with the United States. With growth slowing and foreign investors leaving, a single-minded focus on technological innovation means squeezing greater profits from Chinese workers.

Modern China’s meteoric rise involved two phases. Through the 1990s and 2000s, the country welcomed a flood of foreign direct investment into low-end manufacturing and assembly plants, attracted by seemingly inexhaustible reserves of cheap labour held down by the “Communist” dictatorship. Deeply dependent on exports and foreign investment, China narrowly avoided being dragged down with the West during the Global Financial Crisis of 2008.

It shifted rapidly to a second, domestic phase of growth: infrastructure development. In his book Ghost Cities of China, Wayne Shepard described the country in the 2010s as like a giant construction site. “The old is being replaced with the new, and the new is being replaced with the newer, in a cyclical process of creation and destruction”, he wrote. Local governments were given free rein to sell land and build bridges, roads, airports, shopping centres and apartment blocks. Beginning in 2002, the government built a high-speed rail network from scratch. By 2015 there were 12,000 kilometres of tracks; today, the network stretches 45,000 kilometres.

While the United States and Europe stagnated through what Marxist economist Michael Roberts called “the long depression” (beginning with the financial crisis), China enjoyed another decade of strong growth. Yet this led to enormous government debts, the world’s largest property bubble, and significant excess industrial capacity. The government is now banning new highway and building projects in ten of China’s most indebted provinces, according to documents viewed by the Financial Times.

Many Western commentators anticipate China falling like a house of cards under this debt burden. But Kevin Lin, a researcher specialising in China and its labour movement, is sceptical of such prognoses. “There have been predictions of an imminent economic crisis going back twenty years now”, he tells Red Flag. “It’s not just a prediction, it’s almost like a hope.”

The regime keeps a tight grip on national banks, allowing it to simply “roll over” what is owed by local government and state-owned enterprises. This is something Shepard also noted. “When considering domestic ‘debt’ in China, what we’re really discussing is the amount of money the Communist Party owes to the Communist Party”, he wrote.

That the debt might indeed be manageable is evident in the country’s property sector. Housing has been the number one investment for China’s burgeoning middle classes. And decades of untrammelled private investment in urbanisation resulted in skyrocketing valuations, which reached US$52 trillion combined, according to US investment bank Goldman Sachs. The speculative bubble centred on the world’s largest property company, Evergrande. Rather than let it burst, the government began a controlled demolition of the firm before it was finally liquidated. The process has lowered property prices and squeezed many households. But it also prevented a financial crisis.

“It hasn’t eliminated the risks—some of them are structural to capitalism, so they won’t just go away because of better economic management”, Lin says. “But if we take the longer view, instead of a crash, the economic crisis may be a continual slowdown for years to come.”

There are undoubtedly additional problems. Depressed consumer spending and falling prices have hurt economic growth. But President Xi Jinping has no plan to expand service industries or increase welfare. That would mean raising wages, increasing holiday leave and taxing the rich to fund higher pensions for a rapidly ageing population. Instead, spending is being directed towards the “new productive forces”. So bosses are suppressing wage growth and increasing the number of hours worked, while Xi tells young people that they must be prepared to “eat bitterness”.

Unemployment, like bitterness, is growing. Twenty-one percent of young people were unemployed by June 2023, before the government suddenly stopped publishing figures (then changed its calculation method). The solar panel giant Longi will sack more than 20,000 workers due to a supply glut, according to Bloomberg, one consequence of capitalist over-investment.

Why is the government doubling down on investment in manufacturing? Over 30 years, the world has relinquished its manufacturing capacity to China, profiting from low wages and economies of scale. It’s not just shoes or iPhone assembly. Last year, the United States built ten commercial shipping vessels. China built more than 1,000.

The focus on “new productive forces” is about pressing this advantage. The regime under Xi Jinping is building what he calls “national champions” to dominate global markets. The “old trio” of textiles, furniture and appliances has given way to the “new trio” of solar panels, electric vehicles and lithium batteries.

So far, it is steamrolling the competition. The New York Times reports that China installed more solar panels in 2023 than the United States has in its history. Its ultra-cheap exports drove European solar companies out of business long ago. Electric vehicle company Tesla has fallen to second place behind China’s BYD in terms of global sales. “In many sectors such as EVs, [Western countries] are—for the first time in modern history—in a technological catch-up mode vis-a-vis a more advanced competitor, which they also consider a key geopolitical rival”, Paolo Gerbaudo wrote in a recent article for political economy website Phenomenal World.

The West is retaliating with what Lin calls “open economic warfare”. The US Congress’s vote to ban Chinese-owned app TikTok is only the latest move towards IT “decoupling”. As Intel, Dell and IBM pull out of Chinese markets, the Communist Party has announced a plan to “Delete A” (“A” being America) and replace all foreign software systems in government computers by 2027. The European Union is poised to impose tariffs on electric vehicles it accuses China of “dumping” into its markets. All this has culminated in foreign direct investment falling to a 30-year low.

Crucially, Chinese capitalism faces the prospect of being blocked from buying the most advanced silicon chips from the United States, Taiwan, Japan, the Netherlands, Germany and South Korea. In response, the government has invested heavily to try to develop its own. Although lagging a generation behind Taiwanese nanochips, China has just released a new Huawei phone series powered by domestically produced chips.

This economic warfare is not only, or even primarily, about short-term profits. “More than the economic benefit to the US, the underlying motivation is to maintain US global hegemony”, Lin says. High-tech manufacturing, especially of semiconductors, is the foundation of military “innovation”. Any country whose missile components are produced in enemy territory has a big problem. The key reason that US imperialism is preventing China from accessing foreign technology is to prevent its military expansion. Mass reserves of foreign exchange will furnish China with the capital to build its own, so the US is trying to block Chinese exports as well.

Beijing is not, however, entirely left out in the cold. Russia and Iran have forged closer economic ties with it to recover from Western sanctions. The Economist magazine estimates that Russia has become the largest importer of Chinese cars: sales have tripled since the invasion of Ukraine, and Russian gas exports to China have spiked in return.

China remains the major trading partner of 120 countries. Despite complaints of Chinese steel dumping, most countries are unlikely to block super-cheap cars, phones and laptop computers. Some middle-ranking powers are exploiting the rivalry between Washington and Beijing, moving politically closer to one and economically closer to the other.

But if the aim of economic strategy is to build military power, China has a long way to go. Military spending has more than doubled since 2015, and its nuclear stockpile is set to quadruple by 2035. This still puts it far behind the United States, which is shoring up its comprehensive system of alliances.

China has rapidly developed its navy (by some measures now the world’s biggest) but can barely project power past its own coastline. Aggressive moves into waters to the east and south have angered its US-allied neighbours along the “first island chain” of the Pacific. Japan is negotiating its first new security pact with the United States in 60 years, while the Philippines has granted the US military access to more of its bases. Taiwan, which faces almost daily intimidation by China’s navy and air force, launched its first domestically built submarine in February.

Chinese armed forces also suffer from corruption, inefficiency and inexperience. “China’s military has definitely achieved a major upgrade from twenty years ago, but I don’t think the government leadership has full confidence in their military”, Lin says. “They have not engaged in any conflict since the invasion of Vietnam in the late 1970s.”

China’s economy is slowing and vulnerable—but not weak. Its high-tech export plan is a strategy to maintain growth and build military power. That’s because, as tensions increase between powerful countries, everything from electric cars to media apps is treated as a potential weapon.

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