Xi Jinping’s latest power grab is bad news for China’s economy

A lot on his plate.
A lot on his plate.
Image: Reuters/Jason Lee
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Since the heady days of Mao Zedong’s dictatorship, the president of China has never served more than two five-year terms. No longer. The Chinese Communist Party announced a proposal to scrap that rule Sunday, setting the stage for current president Xi Jinping to rule beyond the end of his second term in 2023.

In other words, China seems to be morphing from a one-party state to a one-man state. This change—which is accompanied by other constitutional revisions that strengthen Xi’s power—has been rumored for a while, but it’s still a radical move. The collective governance system that has kept China remarkably politically and economically stable since the early 1980s is out, replaced by Xi’s personal fiat.

Whether you view Xi’s dictatorial coming out as a net good or a net yikes for China’s economy depends somewhat on your diagnosis of its biggest challenges—and, in turn, whether overcoming those challenges requires more state power or less.

Most China experts agree that to sustain long-term growth, the Party must cede its control over the economy, allowing markets to determine prices, encouraging competition, and putting wasted assets to productive use. Without these reforms, the country will continue to amass debt and encourage capital outflow, leading ultimately to economic catastrophe (most likely in the form of a long period of slower growth).

But it’s not so easy to become a more free market—particularly because China’s growth model has warped its economic institutions.

The stunning pace of China’s development relied on amassing and deploying huge sums of wealth to fund industrialization. Pulling this off required sweeping state control over resources from savings deposits to mining rights to real estate. Party officials who happened to be granted bureaucratic control over that process also gained control over the resources. Extravagant rent-seeking resulted, building family dynasties entrenched by deeply rooted patronage networks.

The reforms needed to expand China’s productive capacity would also require elites to cede control of resources to markets. Unsurprisingly, they resist.

At the same time, the credit-fueled growth model that enriched these elites has produced ever-diminishing returns on investment. The slowing of household income growth has made starker the ill-gotten gains of the Party spoilage system. When Xi took office as president in 2013, the masses seethed with resentment toward “corrupt” officials, threatening the Party’s legitimacy.

Xi has positioned himself in opposition to those interests, launching a far-reaching crackdown on “corrupt” officials. At the same time, he touted the importance of market reforms and opening up China’s economy. And so his fans might see his power grab as a necessary move to break elite opposition. In addition, with limitless power, Xi buys time to push through market reforms that, though vital to the country’s long-term growth, will be painful in the short term as China writes down losses, recapitalizes its banks, and suffers slower—or even negative—growth.

Since this inevitable messiness ups the risk of political strife, pulling this off by 2023, when Xi’s term was previously slated to end, would be tricky, as Julian Evans-Pritchard and Mark Williams, economists at the research firm Capital Economics, note. Extending Xi’s window of time for forcing through these changes and leading the country through an economic slump makes it likelier that China might weather these changes without a political or social crisis, goes the logic.

That said, while Xi has paid market reforms plenty of lip service, he has yet to deliver on them, as noted by Victor Shih, a professor of political economy at the University of California-San Diego. “From everything we’ve seen, despite his rhetoric about reform and opening, Xi Jinping heavily favors a strong state sector,” says Shih. That raises another possibility: Perhaps China’s chief economic woes stem from Xi’s having too much power, rather than too little.

“Whatever biases he has will continue to be reflected in the Chinese government’s policies for the duration of his tenure, which now will likely stretch well into the next decade,” says Shih.

Xi has some good biases—for instance, his seeming commitment to cleaning up air pollution in northern China. But he also has a bias toward heavy state intervention into the economy, as is evident in his efforts to fix problems like dangerous debt levels and deflationary overcapacity—the latter via much-touted “supply-side reform.” During Xi’s tenure, the government took action to control the stock market, bond market, and foreign exchange markets, as well as the supply of coal, steel, and cement, Shih points out.

Now, without checks and balances on his power, Xi will command more personal authority over policy than any individual has since the chaotic reign of Mao Zedong. “For lower-level officials, it is now abundantly clear that there are no alternative centers of power to appeal to, and that waiting for Xi to pass from the scene is also not an option,” says Yanmei Xie, analyst at GaveKalDragonomics, a research firm, in a note. “To survive and thrive in the current political climate therefore requires demonstrating loyalty to Xi.”

And loyalty to Xi means loyalty to his policies and his targets. The thing is, those targets often reflect “inherently self-conflicting goals,” says Shih. For instance, officials who meet the goals of Xi’s deleveraging campaign will find themselves struggling to reach China’s growth target (which, when it’s announced next week, is expected to be “around 6.5%”). Thanks to this notorious GDP growth target—and the way China ignores losses in its GDP calculations—officials have long invested in projects that don’t make enough money to pay off interest on their loans, as Michael Pettis, a finance professor at Peking University, explains at length. As a result, a good deal of apparently new lending actually goes toward servicing interest payments—such that it takes increasing amounts of credit to create a yuan worth of GDP growth.

While the point of deleveraging is in part to dodge a crisis, it’s also, in theory at least, to halt this pattern. That entails shifting credit toward companies that will invest in profitable projects, and away from wasteful investments that plunge the country deeper into its cashflow hole.

Xi’s refusal to abandon GDP growth targets—now combined with personalization of such policies—directly counters this goal. So while Xi might be applauded for his commitment to curbing financial risk, the fact that cracking down on lending risks throttling GDP growth bodes ill for the results.

Of course, with loyalty measured in target-meeting, officials have every incentive to massage their reported numbers—which, as GaveKal’s Xie notes, could “lead to more rather than less falsification of data.” Distorted data will make it harder and harder for Xi and his experts to know how the economy is actually doing, amplifying the destructive magnitude of ill-thought policies.

This dynamic has plenty of precedent—most notoriously during Mao’s Great Leap Forward program of the late 1950s and early 1960s, aimed at rapidly collectivizing agriculture and industrializing the countryside. When one of his ministers criticized the plan, Mao purged him. Political incentives encouraged local officials to fudge their official crop yields. Grain shortages led to a famine that killed between 30 million and 50 million people.

Obviously this is an extreme case, adds UCSD’s Shih, and no one expects anything so catastrophic to happen today. Still, Mao’s intensely destructive Cultural Revolution, launched a few years after the Great Leap Forward, is a key reason his successor, Deng Xiaoping, instituted the term-limit rule in the first place, in 1982, deliberately to prevent the the future emergence of another Mao-style personality cult.

There are also foreboding economic implications for the constitutional fiddling for China’s already flimsy rule of law. The ease with which Xi has changed the Constitution will likely give investors pause as they realize rules can change with the party chairman’s whim, notes Shih.

The confidence problem goes for Chinese residents too. The announcement has sparked more of a popular outcry than the Party probably expected, based on social media response. It seems unlikely that nationalist propaganda will distract Chinese people from the glaring truth: Xi has dismantled the collective-rule system responsible for this unusually stable and prosperous period in China’s history.