Chinese President Xi Jinping , chairman of the Chinese Communist Party , hears what he wants to hear and is told by his underlings what they think he wants to hear.
China needs dramatic economic reforms today. Its economy is weighed down by a model which no longer works. The real estate bubble has burst. The banking sector is arguably bankrupt. Its demographic trajectory is disastrous and likely cannot be changed. The Chinese people are not optimistic about their future. They save because there is no social security safety net. Couples do not have children because the education system is expensive and rigged against the typical household. The economy is in long-term decline because the CCP’s economic model has failed. Put simply, China must change course immediately and dramatically.
The CCP just held its Third Plenum, a gathering of elites to discuss economic reforms. But this Third Plenum did not focus on reform, it focused on failure. Xi believes that Marxism is superior to capitalism. He is wrong. But Xi is a dictator and an old man with absolute power. He believes that he is omniscient.
The CCP will continue to push the State Owned Enterprises model of economic growth. The data is clear. SOEs generate dramatically lower economic returns than the private sector. SOEs command more resources and are expanding while they destroy capital. The private sector is more efficient. The private sector does more with less. But Xi demands absolute obedience. Xi is distrustful of the private sector which answers to the market, not the CCP.
Xi believes China can grow through exports. He is wrong. Already both the United States and the European Union are defending their domestic vehicle industries against Chinese imports. The U.S. and the EU will no longer tolerate dumping of subsidized excess production. A global trade war is looming. Former President Donald Trump is the strong favorite to be elected president in November. Trump is committed to raising tax revenues through tariffs on all imports. Such a tariff policy would hit China hard. China’s policy of generating growth through exports will fail.
To escape the middle-income trap, China must reform its economy by focusing on domestic consumption, encouraging households to consume more and save less. But Chinese households are not cooperating. Consumption is stagnant. The Chinese people see a steep climb for themselves and the economy. China’s efforts to stimulate consumption are failing. Top line: China’s people are not confident in their future.
True, China is correctly focusing on technology as a path to national prosperity. The problem? Xi’s paranoia about domestic security hamstrings the technology sector. Entrepreneurship is fading. Innovators are afraid of the knock on the door at midnight. The best and brightest are fleeing China. After many years of strong foreign direct investment, international capital is turning away from China. Investing in China is a good way to lose money.
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Artificial intelligence offers an opportunity to jumpstart moribund productivity growth. A second Biden or Trump administration would put the power of the federal government behind AI. In China, it is different. China could be a leader in AI, but domestic security concerns are throttling China’s efforts to deploy and advance AI innovation requires an open society. All-powerful Xi rejects openness and creative destruction. He chooses stability and an all-powerful CCP over a growing economy with shared prosperity for all.
But his extreme authoritarianism is a dead end.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society.
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