Economic slump: The ‘China Dream’ shattered
This year, for the first time since 1990, China did not announce a GDP growth target during the annual National People’s Congress in May. Prior to that, China’s National Bureau of Statistics announced on April 17 that the country’s economy had recorded a 6.8 percent contraction in the first quarter of 2020. It was the first time since 1976 that China acknowledged economic shrinkage.
China’s extraordinary growth for nearly a half-century has ended because of the COVID-19 pandemic, right? No, that’s not entirely correct.
The fact is that the fiscal condition of the world’s second-largest economy was in dire straits even before the pandemic struck. The novel coronavirus only made it worse. The glitz and the swank that the ruling Chinese Communist Party’s (CCP) propaganda machinery portrayed to the outside world was hollow and China’s economic superpower image was an illusion. In reality, the economy has been one of China’s major fault lines for some years now.
China’s GDP recorded impressive growth rates from 2003, peaking in 2007 at 14.2 percent, but since has been sliding downward. It stood at 6.6 percent in 2018, and the 6.1 percent of 2019 marked the slowest pace of growth since 1990. The reasons for this sluggishness are structural issues that have been building for years — including over-investment, low industrial productivity, high debt, modest consumer spending and demographic changes.
In the 1990s and early 2000s, China was building wealth in a way that was appropriate then. Factories that produced competitive products mushroomed, and miles of bridges and roads connecting cities and towns were built. These investments created job and income opportunities for the people, while expanding the productive capacity of the economy. Even now China is trying to build wealth, albeit the wrong way. It is pursuing investments that do not raise the country’s productive capacity or growth potential. It is building bridges and roads to nowhere. Productivity has dropped consistently over the past decade.
In addition to overspending on infrastructure, China is boosting consumer and industrial spending by expanding available credit. The country has been piling up massive amounts of debt — by consumers and local governments in particular. In 2019, China’s total corporate, household and government debt rose to US $40 trillion — around 300 percent of its GDP. It is an irony that the country that has been laying debt traps for smaller countries itself is under such massive debt.
How would China repay its debt? An effective means would be to move from investment-led growth to consumption-led growth. But is that even feasible, considering the unemployment rate and declining purchasing power of the people of China?
As the Chinese economy was going downhill, many industries and businesses closed, leading to massive layoffs and stunted wage growth. In mid-2019, the urban unemployment rate stood at 5.3 percent, the highest in two years. And in the post-COVID-19 scenario it has become worse, edging to unprecedented highs.
Consequently, the consumption capacity of the domestic Chinese market has been falling. A classic example is car sales, which were accustomed to a double-digit annual growth rate and accounted for 5 percent of China’s economic output. Car sales started slumping in 2018, along with real estate, indicating a fall in people’s purchasing power. Massive income disparity between the rich coastal areas and the country’s interior adds to the woes.
Premier Li Keqiang recently acknowledged that more than 600 million people in China have monthly income of barely US $140 — not enough to rent even a room in Chinese cities. If the leader of a communist state, which always strives to cover its flaws and shortcomings, makes such an admission, we can safely presume that the real situation is much more grim.
China’s demographics do not favor economic growth. The working-age population has been shrinking since around 2012 — an inevitable result of the one-child policy enacted in 1979. Estimates suggest that retirees could account for more than 40 percent of China’s population by 2050. That aging population will test the CCP’s ability to provide for its people.
The GDP growth target has been an indicator of the CCP’s economic confidence. Its absence this year is a clear signal that the economic environment is the most challenging that China has faced in decades.
The key to the communist regime’s legitimacy is the guarantee of quality of life, employment and stability. This year was meant to be a pivotal part of Xi Jinping’s “China Dream” grand plan — the year of realizing a well-to-do society for all of China. By 2020 China had targeted to eliminate absolute poverty and raise the living standard of its people.
But it appears the Dream has shattered — not just for Xi, but for billions of Chinese people who trust him and his administration’s ambitious plans. The economic crisis that China has experienced for some years now represents a huge failure on part of the CCP. Millions of young people may be deprived of achieving the success and prosperity that their parents’ generation enjoyed. Undoubtedly, they’ll have reasons to question the legitimacy and authority of the CCP leadership, and that poses a challenge to the social stability of the country.
Jianli Yang is founder and president of Citizen Power Initiatives for China, a Tiananmen Massacre survivor, and a former political prisoner in China.
Lianchao Han is vice president of Citizen Power Initiatives for China. After the Tiananmen Square Massacre in 1989, he was one of the founders of the Independent Federation of Chinese Students and Scholars. He worked in the U.S. Senate for 12 years, as legislative counsel and policy director for three senators.
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