[POST] A China that refuses to grow up
Xi's fears of a consumeristic society reveal the absolute limit of China's model
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I have written here in the past about my sense of the absolute political limit of China’s model under Xi, specifically citing his decision to abandon the generations-of-leadership model that should have seen his 5th Generation cohort step aside in 2022 so that the 6th Generation (born in the 1960s) could take over. That group of leaders has largely been thwarted, purged, and demoted, leaving no clear succession pipeline — by design.
In my analysis, Xi’s 2018 decision has led to a culture of dread among the Chinese people — a sense of political and economic dead-ending that elicits direct comparisons to the excesses and repression of Mao Zedong’s long and rather brutal rule. Under previous post-Mao leadership generations (2nd [Deng], 3rd [Zemin], and 4th [Jintao]), the Chinese political system operated with checks and balances within the top leadership and a sense of predictable, peaceful transitions. Xi’s moves have effectively ended this system.
Unsurprisingly, that dynamic of political stagnation has been reflected in China’s economic slowdown. Yes, China has pursued a massive export campaign across the world in anticipation of, and resistance to, Trump’s trade war campaign. While, on the surface, that appears to be a strength-on-strength strategy, it actually reflects a certain dead-ending of the Chinese development model at home.
This dead-ending dynamic is well described by NYT China-beat reporter Keith Bradsher in a recent episode of The Daily. I’m going to quote Bradsher at length here because I found his narrative so helpful.
First off, we all know that China has risen primarily through export-driven growth:
This is an economy built for exports, built for manufacturing dominance, built for maximizing production.
But, eventually, all states that take that route face a moment in which maturing that development trajectory requires a switch to domestic mass consumption as a sustainable, long-term source of growth and economic vitality. This transition is considered crucial because export-led growth can only take you so far before you start encountering trade tensions across your export markets — Trump’s basic and legit gripe with Beijing today. Plus, if you want real economic security, then shifting to a consumption-led model provides a more stable and self-sustaining (and very American) source of demand, supporting job creation, local businesses, and overall economic resilience.
But this is where China gets stuck, per Bradsher:
But [China]’s not a good economy at consuming. It’s not a good economy at having a population that is able, willing, eager, even like many Americans, to spend money and have a better life.
So what ends up happening when you have this enormous excess of production, it has to be exported or the whole system gets in bigger trouble. Basically, China over the last four years has made an enormous bet that it can dominate world markets in practically everything for manufactured goods. That only works as a strategy if you can export.
So that is why, even though the Chinese economy now leads the world in installations of new factory robots, leads the world in the quality of the infrastructure, it leads the world in many categories of economic strength, but it has an enormous dependence on exports.
This is the vulnerability that the Trump administration sees in its ongoing struggle to re-balance trade with China — basically, China needs the US market more than vice versa. China, as noted above, is trying — and succeeding — in reducing that export dependency on the US by ramping it up across the rest of the world, a tactic that doesn’t end China’s trade tension issues but merely shifts them geographically to places like Europe and the Global South.
So, why isn’t China pursuing a more domestic-consumption led growth model? This is where Bradsher’s insights are illuminating:
China has a tax system that is based heavily on taxing consumption, not so much on taxing income. The burden instead hits you when you try to buy anything. So they have a national value added tax. It’s like a kind of sales tax that is twice as high as the typical sales tax in the United States and covers practically everything, whether you want to buy a car, whether you want to buy a washing machine, or even there’s a heavy tax on paying your rent.
Obviously, not a good model, particularly for raising state revenue, which, in turn, means the state has a harder time providing for social welfare:
China has a very modest, threadbare social safety net. The pensions, the equivalent of Social Security in the United States, are tiny. The unemployment insurance is very modest, and a lot of people don’t qualify. And they actually cut back further the number of people who qualified the moment the COVID pandemic ended to make sure that they went back to work immediately.
A Republican dream, is it not?
Enter Xi and his fears of where such consumerism and entitlement might take the Chinese political system:
Xi Jinping has denounced what he calls welfarism, which he says might erode the work ethic of the Chinese people. What he said in a speech four years ago was, quote, “Even in the future, when we have reached a higher level of development and are equipped with more substantial financial resources, we still must not aim too high or go overboard with social security and steer clear of the idleness-breeding trap of welfarism.”
Unsurprisingly, Chinese people take such messaging as indicating they better look out for themselves because their “communist” state will not:
People in China save a lot. In fact, they save more than anyone else in the world. The savings rate is around 40 percent, saving $2 out of every $5 of their paychecks.
Consumers sitting on their money, and not finding much financial rewards in that strategy:
People in China really don’t have as many options as savers in most of the rest of the world. The stock market is very risky and full of dodgy companies. The Chinese government puts very stringent limits on their ability to invest outside of China. And so the alternative has been real estate. The result was that people in China put far, far more of their savings into real estate than in most countries.
Now we get into the history:
If you went all the way back to the 1980s, people in China were living in very small apartments, typically. There was a tremendous shortage of housing. Starting in 1987, China began experimenting on transferring land to private developers and having them begin to build apartment buildings and sell them to the public. And then in 1998, the government transferred millions of apartments from state owned enterprises and local governments to the people who were living in them for almost nothing. That created a very large market.
And so then by the early 2000s, you had a completely new housing market like nobody had seen before. The local governments were selling enormous amounts of land each year to developers, and the revenues from that were immense. And that was what paid for the terrific roads, bridges, highways, high-speed rail, ports. And the developers were putting up 30-story apartment buildings as far as the eye could see.
Hundreds of millions of people benefited greatly. The number of square feet per person in apartments in Chinese cities quadrupled. All of a sudden, you didn’t have to have three generations crammed into a small apartment.
But after meeting a lot of those housing needs, this turned into a speculative mania that got out of control.
Kind of fascinating to see a repeat of what took down the US economy in the Big Short dynamics of 2008 and beyond:
It began to burst in 2020 and 2021, when stricter rules started to be put on these real estate developers who were taking big deposits from many families and using that money not to build the building that they promised for the deposits, but to finish the previous building they’d promised somebody else.
It was becoming, in some ways, even a Ponzi scheme.
The similarities to America's Great Recession abound:
The real estate collapse has been devastating for families across China. In fact, people don’t even really want to talk about it, it’s so painful for them.
Been there, suffered that.
And, when things got tough, Xi predictably went back to the well:
The government’s response has been to shift the priority of government lending away from real estate and towards building lots of factories. The government’s goal is to create a lot more jobs, which they want to offset the loss of jobs in the construction sector. And their hope is that if people have well-paid jobs in the factories, they will begin to have the confidence to spend again.
Everything old is new again, except the world, this time around, is pushing back on China’s strategy, with Western countries desperate to rebalance trade and the Global South increasingly accusing China of blocking their own replication of its rise by refusing to move up the production ladder and leave those nations to move into that manufacturing-heavy development zone.
Bradsher’s summary judgement:
In many ways, it looks as though [China has] replaced a housing bubble with a factory bubble.
Again, that’s what the Trump administration thinks — with some solid logic — is China’s Achilles heel right now in any trade fight with the US.
So why is Xi so reticent to embrace consumerism at home? Because he certainly has the power to make it happen if he so wanted. The answer is ideological in nature: Xi sees in mass consumerism the inevitable erosion of the Party’s grip on power in China.
Xi has consistently associated consumerism with social instability, corruption, and the erosion of party discipline. Early in his tenure, he launched campaigns against what he called the “four bad habits” (formalism, bureaucracy, hedonism, and extravagance) — habits that he saw as threats to the Communist Party’s integrity and the nation’s firm social order.
This is where China’s economic development model dead-ends because it cannot accept the political consequences of mass consumerism, which Xi associates — correctly — with rising public expectations of self-rule. Xi can only go so far with shoving exports down the throat of the global economy while demanding more discipline and ideological purity back home.
Thus, so long as Xi remains in power with this strategic approach, China is certain to face more trade tensions with the rest of the world while being unable to pivot toward domestic-consumption-led economic growth. Over time, those twin tensions lead to more public unhappiness and — in reply — more stringent efforts by the state to enforce party discipline.
It is a vicious cycle that will only be broken when Xi is somehow removed from power — thus the seminal and damaging effects of his 2018 decision to make himself Leader for Life.
So many analysts in the West have viewed Xi’s consolidation of power as being both threatening to the wider world and impressive, when, in truth, it was and remains a sign of internal weakness and a lack of true national leadership. Xi’s decision to remain in power indefinitely is, in many ways, the biggest threat to China’s continued rise. Indeed, I consider it a fatal flaw that will inevitably lead to the Chinese Communist Party’s downfall.
