Rewriting Past, For Future Perfect
Chinese President Xi Jinping will complete three months of being anointed to the epochal third five-year-term on January 22, 2023, by a twice-a-decade, week-long Congress of the ruling Chinese Communist Party (CCP) that cemented his status as the country’s most powerful figure in decades, extending his ironclad rule over the world’s second-largest economy and soon to be world’s second most populous country. As per the United Nations (UN), “India is expected to overtake China as the world’s most populous country even though its population growth has been slowing down.”
And what a coronation- Xi, 69, is now a colossus, confirmed for a third term as general secretary of the CCP, president of the country, and leader of the military, heading all- the state, military and the party.
Indubitably, with the new Politburo Standing Committee, the inner sanctum sanctorum of the power in China — now dominated and controlled by his protégés and followers, and with no viable successor in sight — Xi’s third term has already made him fireproof, a leader as formidable as Mao Zedong, the founder of the country’s Communist rule and Deng Xiaoping, the chief architect of its economic renaissance.
He truly owns the system and may continue to do so, possibly till 2035, when he dreams to actualise the dream of making China the biggest economy in the world, ahead of the US.
The Lofty Agenda
After assuming his third term, in his first remarks, Xi espoused lofty goals- self-revolution, reorienting the economy to high-quality development and positioning the Chinese positive leadership in global affairs. And what an exhortation he made– “The journey ahead is long and arduous, but with determined steps, we will reach our destination.”
The Uncomfortable Crown
But the groundbreaking third term as a leader is already proving to be an Achilles heel for Xi, an uncomfortable crown compounding a litany of crises hit in quick succession. After the initial surface calm, the storm has suddenly hit the nation and not much seems to be going Xi’s way as the Great Wall is finally crumbling in the wake of China reopening to the world this year, after nearly three years of self-imposed isolation, an event that The Economist predicted to be “2023’s biggest economic event.”
After the country finally ended its zero-Covid policy on December 7, the reopening of China was to be a major step for the country’s 1.4 billion people. Contrarily, China has suddenly met with an avalanche, hit by three ballistic missiles, each more deleterious to the health of the country than the other. Before I proceed further, I examine in detail the trinity of travails, the triple whammy — which at the end of the first three months — Xi Jinping suddenly must contend with.
The Seismic Shift
The first is the historic turning point, heralding a demographic crisis of the monumental order caused by the shrinking of China’s population in absolute terms in 2022.
As reported by China’s National Bureau of Statistics on Tuesday, the population of the country in 2022 dropped to 1.412 billion from 1.413 billion in 2021- 850,000 fewer than at the end of 2021. It is the first decline since early 1961, the final year of the Great Famine when China was devastated by the ‘The Great Leap Forward’, Mao Zedong’s failed economic experiment.
It is instructive to note that in 2022, China witnessed 9.56 million births, down from 10.62 million a year earlier, the lowest level since 1950. Equally worrying is the trend of the working-age population (16-59), which has shrunk from 70 percent to 62 percent within a decade, signifying a fast-ageing population. And the travesty with the demographic shift is that it was visible for a while, and experts opine it to be irreversible — very much like its Asian peers of Japan and South Korea. But the problem with China’s predicament is, it may grow old before it becomes rich.
This does not bode well for the country and has happened despite authorities in recent years trying to delay the inevitable by loosening the one-couple one-child norm and encouraging families to have more children. And now China stares at a long-term population shrinkage in tandem with a long-term increase in life expectancy- with the implication that the day may not be too far when China starts falling short of the working-age population. This highly probable scenario is pregnant with humongous grave implications for China, the world’s factory and the world at large.
The arrival of this historical demographic moment was in the making for some time. Before the inevitable happened, China’s birth rate had plummeted for the fifth consecutive year to hit a new record low in 2021. The Chinese officials had anticipated in 2021 that population shrinkage would commence by 2025 while in 2020, the Chinese Academy of Social Sciences had estimated the contraction to set in 2027. But it arrived sooner, for the comfort of the ruling elite and much before the calculations of demographers and statisticians. And once it has hit the street, China’s fertility rate has now gone down to such a lower level that now it is a sheer impossibility to assume that it will bounce back to the replacement rate, making the demographic crisis an irreversible trend. Labour shortages that will accompany China’s rapidly ageing population will also reduce tax revenue and contributions to a pension system that is already under enormous pressure.
It happened due to a combination of factors- a decrease in the number of childbearing age women, rapid decline in fertility, attitudinal changes towards having and rearing children, marriage delays and the high cost of raising children. And this has happened despite the Chinese government allowing couples since 2015 to have two children and in 2021 to have three children apart from incentives like cash handouts, real estate subsidies and extension of maternity leave.
But nothing mattered. Nothing worked. And the implications are grave. Nobel laureate Paul Krugman, in his most recent opinion piece in the New York Times, adduces two major problems of the declining population for economic management. One, a declining population also connoted an ageing population —with dependence on younger people to support older people. With a relatively underdeveloped social safety net and skyrocketing old-age dependency ratio, China faces an unenvious task of inflicting a lot of economic pain on its elderly, sharply raising taxes on younger citizens or both. This is as bad as it can get. Two, to maintain full employment, a society must keep overall spending high enough to keep up with the economy’s productive capacity. But a falling population — especially a falling working-age population — tends to reduce some important kinds of investment spending. As a result, a society with declining working-age population trends, other things equal, is bound to experience persistent economic weakness.
What has happened and is happening, does not bode well for China whose working-age population has been falling since 2015. The population contraction is more serious than the economic crisis for China, which is not yet a developed country and which holds the ambition to surpass the American economy by 2035. Moreover, China’s demographic headwind is a double whammy for the global economy-the former is not only the factory of the world but a great consuming nation and exporter of skilled manpower. A smaller Chinese workforce and reducing consumer base — both are bad news for the global order in the medium and long term.
The Grand Stumble
Tuesday brought another disastrous news for China. More about it a little later.
First, the grandstand dream of Xi Jinping for the Chinese economy to double its size by 2035- necessitating the economy to annually grow at the rate of 5 percent. A dream many economists consider impossible to achieve because, in the last three years, China’s rigid and cumbersome zero-Covid policy has severely stymied growth along with the high-handed approach of Xi towards private business, severely clamping down on entrepreneurial spirit critical for the growth of a nation and further spreading the tentacles of state in business, with giving larger than life role to the state-owned entities.
Let me begin with a postulate- 2022 was an incredibly bad year for the Chinese economy, and as the year progressed, it got worse. And the third term of Xi just had a hard belly landing.
And the cat is just out of the bag. In 2022, China’s economy stumbled grandly, bringing down the year’s growth to the second-lowest level in the last four decades.
How bad was 2022 for the Chinese economy?
As per data just released on Tuesday, 17 January, it was a catastrophic year, with the annual growth dragged down to 3 percent, the second worst in four decades, much less than that of 8.1 percent in 2021 and alarmingly short of Beijing’s own target of 5.5 percent.
Long story short, the 2022 economic slide of China, barring 2020, was the worst performance ever since 1976, the year Mao Zedong died- a year when the Chinese economy had declined by 1.6 percent.
Make no mistake, global headwind apart, the Chinese economy was mostly down owing to the three yearlong strict zero-Covid policy, punishing lockdowns and prolonged quarantines, leaving offices, factories and other productive spaces bereft of both- workers and customers. The factories of a nation that produced more manufactured goods than the United States, Germany and Japan combined, wore a deserted look for the better part of three years.
And what a contrast it has turned out to be. The Chinese economy, which in the decade leading to the pandemic had grown at the average rate of 7.7 percent per year, stumbled to 2.9 percent in 2022. And even this number is considered exaggerated by economists with some suggesting the growth rate to be as low as 0.5 percent in 2022. Not only production, but consumption too stumbled in 2022 with the government index of consumer confidence falling in December to the lowest level measured in more than three decades.
And it does not augur well for Xi’s grand ambition of superseding the US economy by 2035 which requires an average of 5 percent annual growth. The International Monetary Fund, the World Bank and private sector forecasters peg the Chinese economic growth through the rest of the decade as no higher than 4 percent. China is way past its peak growth of 14.2 percent, after which it has been in a long-term downward spiral owing to ageing, shrinking workforce, declining productivity and sanction of the West.
The U-Turn and Long Shadow of Revenge
The third and potentially most deleterious to the global public health crisis is the abrupt abandonment by China, of not only the Zero-Covid policy (that often transformed China’s great metropolises into vast and unlivable prison colonies) but turning it into an unregulated laissez-faire post massive violent demonstration across Chinese cities, against the policies that haunted private businesses, foreign investors and ordinary citizens in China. The uprising was not only spontaneous but of a type not witnessed in China since the 1989 Tiananmen Square holdout.
Given the asymmetry of information and opaqueness, it is difficult to assess the exact number of Chinese citizens impacted by the most recent wave of Covid, and estimates vary wildly between 100-250 million. And Covid cases are likely to spike after the week-long Lunar New Year holiday, starting January 22. Experts fear the holiday could see a rise in cases in rural areas as many people from the cities travel home even though the official line is that Covid-19 is peaking in most areas.
The recent wave has not only tested Chinese public health facilities to the limit but has also sharply increased the officially reported death last week in the recent month to more than 60,000 and counting. And the travesty is that no one, not even the Chinese citizens or officials trust the veracity of the death numbers. Even Kang Yi, the commissioner of the National Bureau of Statistics, had on record said that the Covid death figures for December had not yet been incorporated into the overall death totals for 2022.
The speed with which Covid raced through the country in the past month has been an unmitigated public health disaster for China. Some analysts hope that high rates of infection, barring more outbreaks, could help move the economy forward by leaving the overall population more resilient to becoming seriously ill. But as we have often seen, herd immunity is a myth. And it is widely estimated that any recovery only happens after a painful few months and till then, Covid-19 shall sweep through China’s cities, towns and villages, disrupting daily life and economic activity.
Postscript- And there is more
Dr Bill Overholt, the great China watcher, who predicted the economic rise of China said in a seminar at Harvard University in November 2022 about the future growth trajectory of China- “What are the prospects for the Chinese economy? Slow, slow, slow after 2030. I’m not talking about the current property and Covid slowdown, which has precipitated a stampede of new pessimists. China will cope and partially bounce back – but, later, the real problems begin.”
Clearly, the government of Xi, in its third term and beyond, faces the critical challenge of maintaining economic growth and social stability, as China’s growth model of exports plus infrastructure investment, including unbridled real estate development (since collapsed), appears to have run its course, and consumer confidence wanes. Worse, the Chinese economy faces another type of headwind- ballooning debt. Overall public and private debt estimates run to 300 percent or more of the GDP. ‘Middle-class’ households’ single most valuable asset is real estate, and its value is eroding fast and shrinking by the day.
A China in crisis and a China beleaguered is bad news for the global order, whether for its ambitions for the unification of Taiwan by force, hegemony in the Asia Pacific, colonisation of the African continent or flexing muscles at the disputed and unresolved border with India. With time, China is likely to become more defiant. And whenever it is cornered with an internal crisis, China is expected to become more belligerent in its geo-strategic ambitions including creating trouble for India at the border and wooing India’s neighbouring countries to its area of influence.
A strong China has wider implications for global order. A weak China is worse. It is a Catch-21 situation for the world and India.
Akhileshwar Sahay is a Multidisciplinary Thought Leader and India based International Impact Consultant. He is a keen watcher of the changing international scenario. Sahay works as President, Advisory Services of consulting firm BARSYL. Views in the article are of the author, and do not represent the views of this publication or the organisation where he works.
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