China’s economic slump holds lessons on development

Also, this month, Li Shangfu, China’s defence minister, disappeared. The government has made no comment on his whereabouts. But as with the disappearance of the country’s then foreign minister Qin Gang in June, Beijing says nothing about even high-profile sackings. In Qin’s case, his name was removed from relevant government websites, a 21st century equivalent of being declared a non-person, but then put back as a former foreign minister.

Only Shakespeare’s tales of regicide and perhaps Agatha Christie novels have plot twists that resemble what came next. On Tuesday, the Financial Times lifted the veil on what might have been the reason for the disappearance of Qin, once a protégé of President Xi Jinping. It alleged Qin had had an affair with a well-known TV presenter of a show on world affairs. The newspaper cited conversations with six people close to the foreign policy establishment and Fu Xiaotian, the TV host. When Qin was appointed foreign minister, he appears to have reduced contact with Fu, prompting her to leave a drip-feed of not-so-subtle hints about their relationship on social media. “When Qin was appointed state councillor (in March), she posted a picture of the baby raising his hand, adding a caption, “A victorious conclusion," the FT reported.

This mostly behind-the-scenes drama is playing out against the slowing of China’s economy. It grew by a seasonally adjusted 0.8% in the second quarter, down from the previous quarter’s 2.2% growth. Property and construction have slowed dramatically this year and the economy still bears the scarring effects of unusually harsh lockdowns during the pandemic. It will be six years next month since the 19th party Congress, when Beijing observed that “houses were for living in, not speculation," which came to be seen as a rallying cry of Xi’s new economic policy. A plethora of regulations followed, governing such aspects as higher down payments for mortgages for second homes. Xi has wisely argued repeatedly that he wants a more equitable distribution of wealth in China, but attacking both the dynamic tech sector and property market in succession has slammed the brakes on the economy and damaged confidence.

By one estimate, China has excess stock to cover housing demand for the next seven years. Even this may be an underestimate, as many in its middle class own two properties or more. Most have no experience of a deflating property bubble. After decades of overbuilding and overinvesting in property, it is hard to estimate what the real level of demand is. UBS estimates that property sales and construction could settle at 50-60% of its pre-pandemic peak. Construction has long contributed a disproportionate share of GDP growth in China.

For the past two decades, economists have said that households and state-owned corporations save too much. Household consumption is only 40% of China’s GDP. By comparison, private consumption is 68% of GDP in the US and almost 60% of nominal GDP in India. Beijing could increase social security benefits such as unemployment payouts and health insurance and use an economic stimulus. A country with among the best highways, high-speed rail links and airports in the world does not need more infrastructure investment.

Instead, in the last decade, welfare payments have been restricted to the very old or severely disabled and in any case range from less than ₹6,000 per month in cities to half that in villages. The problem, as The New York Times observed in an article last month, is that Xi told a Communist Party meeting in 2021 that China “must not go overboard with social security, and steer clear of the idleness-breeding trap of welfarism." By contrast, ‘Made in China,’ announced in 2015, led the world in industrial subsidies and favours reducing dependence on foreign technology and promoting China’s own. Huawei’s breakthrough in making an advanced chip for its Mate 60 Pro phone shows significant success, but, as with all industrial policy, the overall ledger is likely to show the economy and Beijing net losers as a result of these subsidies.

China’s spectacular rise as an economy has arguably been misunderstood for years. A seemingly omniscient autocracy has been a handicap for the country, even if it speeds up policy decisions and glitzy urban projects. Its high growth years since the 1980s were the result of a transfer of know-how and entrepreneurial energy from Taiwan and Hong Kong, which benefitted from a well-educated workforce in China. A property and construction boom helped, but boosting private consumption is still not on Beijing’s agenda. With the economy slowing, while the rest of the world’s G20 leaders were in New Delhi early this month, President Xi travelled instead to an old industrial belt in northeastern China. He reiterated his message that robots need to be used in car factories and that China needs more state-led investment to upgrade manufacturing.