International Finance
Economy Magazine

Chinese economy suffocates under draconian lockdowns

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Can an autocratic nation continue to be innovative & prosperous?

China has embraced authoritarian capitalist policies since Mao’s death. Deng Xiaoping, the architect of modern China, applied far-reaching economic reforms to set China on the track to modernization. The country has expanded for 79 out of 80 quarters in the last 20 years. The Chinese economic miracle not only uplifted 1.5 billion people from poverty but also was a reliable source of growth for the world economy, contributing to a quarter of the rise in global GDP.

Perhaps China’s streak is ending as their zero-covid campaign has the economy spiraling down. Just a handful of cases can shut down an entire city in China. If these policies persist, they will grow slowly and haphazardly, with consequences for the dragon and the world.

Shanghai’s two-month lockdown is finally easing, but there are fresh outbreaks in Beijing and Tianjin. Over 200 mn have restricted mobility, and the economy is struggling.

Retail sales have dipped by 11% from the previous year, and the fast-food and automobile businesses are weak. Many laborers sleep on factory floors, and export volumes with industrial output have slumped. For the first time in nearly three decades, China may struggle to grow faster than America. It is ominous for President Xi, who wants to keep the presidency for the third time when leaders usually bow out after two.

Experts blame Xi for the economic blizzard that sweeps through China and the world. Firstly, his Zero-Covid policy enforced for 28 months consecutively has created an environment of unpredictability. Such erratic shutdowns and openings made investors and businesses risk-averse leading to further economic slumping. The CCP fears opening the economy would start an exit wave that could kill millions. Though experts agree with the Chinese diagnosis and prediction, they do not think the Chinese policies will be effective in the long run.

A 100 Mn people in China over 60 aren’t triple-jabbed. The government also refused to import western mRNA vaccines citing national security. There are talks about pushing the lockdown and zero-covid policy well into next year. The Asian Cup, a football contest China was to host in 2023, has been canceled. Since Omicron is more contagious, experts predict constant lockdowns across the country. The zero-covid policy has become closely associated with Xi’s image as a capable decision-maker. Criticism of these extreme measures is seen as a criticism of party leadership and is silenced immediately.

The second policy issue in China arises from the Sino-American split and China’s urge to outperform its rival. A series of fines, regulations, and purges have stagnated the tech industry contributing 8% of their GDP. Crackdowns on real estate, which makes up for a fifth of GDP, have caused property sales to fall 47% in April compared with the previous year.

However, the CCP hopes a large stimulus package in planning will help their economy hit the targeted growth rate of 5.5% in 2022. It is also politically motivated as the next congress is nigh. Li Keqiang, the prime minister, has asked officials to act decisively and stimulate growth. He has also urged the Central bank to cut mortgage rates. Tech companies are being reassured, and a sizeable bond-financed government infrastructure program is in the pipeline.

No stimulus package and expanding skylines will help negate the effects of these draconian lockdowns or make Xi’s economic model any less risky. China’s economic model depends on empowering the least productive part of an economy- the government sector. Economists praise China for its successful industrial policy. A great example would be the country’s rise to the top of the advanced batteries industry globally. However, the same experts overlook the countless failures from rust-belt to microchips.

While the government is expanding the most productive part of the economy, the private sector is hurt. The financial markets have seen incredible outflows and the cost of capital rise. Chinese shares are 45% cheaper than American ones, almost a new record gap. Many investors fear that the financial growth of any business might be capped by The Communist Party, which by its very nature is suspicious of private wealth and power. Many venture capitalists report that they bet on the biggest subsidies and not the best ideas. For the first time in four decades, there are no liberalization reforms in the Chinese economy, an ominous sign for economic growth.

A stimulus could spike demand, but the start-stop pandemic model might spiral the global economy into recession. MNCs will not stop business in China. It is the largest country by population and has a very sophisticated economy with immense potential. However, the supply chain disruptions will force big corporations to look for other options, at least temporarily. Companies like Apple have already begun operations in countries like Vietnam. Chinese companies might be industry leaders in some segments in the 2030s, but the West has become a cautious importer of Chinese goods. A constrained private sector might mean the Chinese presence globally will be more political and state-led.

Ideology vs prosperity
China posed a unique problem to the West and conventional powers. Unlike its former adversary, the USSR, Communist China embraced market reform. It liberalized consistently and expanded so rapidly that it attracted investors and companies from across the globe. China’s State Capitalism is closer to Western Capitalism than Stalin’s or Mao’s Communism. This difference made China’s rise more palatable to the West. Some economists and political scientists even forecasted that China would eventually adopt a westernized political system like Hong Kong, built on the foundation of human rights and democracy.

However, China has been notorious for its human rights violations in Xinjiang and occupation of Tibet. It constantly clashes with pro-democracy supporters in Hong Kong, hoping to model the island after China rather than the other way around. It disrespects ‘the one nation, two systems ‘policy in Hong Kong and has western spectators anxious.

Its microchip production and technology war with Taiwan is an example of market competition leading to innovation. But the Chinese insistence on Taiwan as its sovereign territory has many people dreading imperialism and war replacing diplomacy and trade. Experts say that the Chinese neutrality to the Russian invasion of Ukraine is perhaps a prelude to a planned occupation of Taiwan.

Some political analysts believed that the draconian laws and lockdowns would begin unrest in the streets of Shanghai and other major cities. They hoped such unrest would topple the Communist government.

There were protests in Shanghai during the two-month lockdown. However, most of the anger was towards individuals and mismanagement rather than the system or the ideology.

China is competing with the West by adopting capitalist principles while discarding the democratic values that usually accompany it. The success of China could signal to the autocrats, dictators, and theocrats that a nation can be prosperous without democratic rights or individualism. The US and its allies fear that this could set a dangerous precedent and will be a blow to global democracy.

China’s current moves all seem to spell peril. But it is unwise to count the dragon out. Deng Xiaoping once said, “Hide your strength and bide your time.” This has been the foundation of Chinese foreign policy, which always seems weaker. Chinese growth was possible and happened under the radar of NATO because of this approach. It is an intelligent stance to believe that China has many more tricks up its sleeve.

The dangers of autocracy
Contrary to Western beliefs, there is overwhelming support for Chinese Collectivism and State Capitalism within the country. Some people vented against lockdowns and lost jobs, but it never gained momentum because of state surveillance, propaganda, and people’s overwhelming support for the CCP and its ideologies.

President Xi, now 68, is unrivaled in party politics. He is likely to hold power till 2027, and no politician, technocrat, or billionaire dare challenge him. The one-man rule has helped the nation take strides, but power without checks corrupts and falters eventually. Putin is a fine example of unchecked power leading to individualistic decisions in State affairs and plunging the world into war, and the Russian people into poverty. Democracy and dialogue might be slow, but they offer different perspectives and solutions to choose from. The public support that the CCP and Xi garner is partly due to the endless growth China has witnessed for the last four decades. But how will the largest population in the world react when that growth plateaus or contracts during a recession?

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