China is in crisis

Since January, when elections in Taiwan returned the independence-leaning Lai Ching-te as president, the Chinese Communist Party (CCP) in Beijing has been very quiet. But we shouldn’t mistake the relative silence for calm. Beneath the surface, the CCP is clearly experiencing quite a bit of turmoil at the moment.

Take its armed wing, the two-million strong People’s Liberation Army (PLA). At the end of last year, President Xi fired nine of his top generals, several of whom oversaw China’s nuclear deterrent. The word is that one or more were guilty of fiddling the books around weapons procurement.

Yet there is more to the latest firings than meets the eye. China’s spending on weapons and armed services has more than doubled since Xi took power in 2012. It is set to rise by a further 7.2 per cent in 2024 alone. This is causing problems as the enormous scale of funds is tempting senior military people to skim something off the top. What’s more, China will have to divert yet more national resources to warfare if Beijing’s military budget, currently at $236 billion, is to get close to America’s, set for $850 billion in 2025.

Xi hasn’t just strengthened his hold over the military. He has also tightened his grip over all aspects of Chinese life. This means that political debate is more stifled than ever. And since 2021, when Alibaba co-founder and billionaire Jack Ma was forced to sell off many of his assets, Xi has sought greater control of the private sector, repeatedly clipping the wings of large private corporations.

Xi is clearly worried about political dissent. He won’t have forgotten how, in late 2022, large protests swept China over his Zero Covid lockdown policy and related deaths in a fire in Xinjiang’s capital of Urumqi. Just last week, China’s parliament, the National People’s Congress (NPC), passed new laws that further subordinated the State Council, China’s cabinet, to CCP control.

China’s economy is adding to Xi’s problems. While it continues to recover from the Covid pandemic, productivity growth has slowed. GDP growth will never go back to the incredible 14 per cent it enjoyed just before the financial crisis of 2007-8. Household, corporate and government debt all rose last year to hit 288 per cent of nominal GDP, more than 13 points higher than the year before. China’s overinvestment in property still dogs the national economy and local government. Earlier this year, China’s stock market suffered a rout.

A social crisis is also brewing. Youth unemployment rates are terrible. Not even revisions to the official figures have been able to massage this. Little wonder that dropping out of society – or ‘lying flat’ – has become fashionable. A significant number of young people are rejecting social pressure to work long hours, buy overpriced houses and marry and have children. Unsurprisingly perhaps, in 2022, China’s population of 1.4 billion fell for the first time in 60 years.

The West likes to see China as on the point either of collapse or of taking over the world. But it would be a mistake to paint the country’s current economic malaise and political drift as in any way terminal.

Exports, for instance, are buoyant, having risen by 7.1 per cent over the past year, fuelled partly by the big ‘new three’ commodities – electric vehicles (EVs), lithium-ion batteries and solar panels – that are all key products for the so-called green transition.

Importantly, the direction of China’s trade has changed, too. In 2019, China’s trade with Southeast Asia overtook the business it did with the US. Since 2022, China has traded more with emerging economies than with advanced ones. Today, Russia is a bigger trade partner to China than Germany.

But the warning signs are there for the Chinese economy. Inbound foreign-direct investment is at the lowest level since the 1990s. Top figures in China are concerned about falling behind America in AI. And imports of crude oil and natural gas are at record levels.

Ironically, perhaps the biggest dangers for China surround the ‘new three’ commodities. According to the Centre for Research on Energy and Clean Air, ‘clean’ energy was the main contributor to GDP growth in China last year. But the West isn’t happy about the subsidies involved. China has been accused of ‘dumping’ cheap EVs in Europe and America. Whether this is fair or not, retaliation is on the cards. Concern has now extended from China’s EVs and solar panels to its state-backed wind-turbine companies.

Betting China’s future on the green transition is certainly a high-risk strategy. Not much more would need to go wrong for major turbulence to break out. Still, whether success or failure comes his way, Xi Jinping appears intent on tightening his grip.

James Woudhuysen is visiting professor of forecasting and innovation at London South Bank University.