The state set to tighten its grip in China post-ceremony

The state set to tighten its grip in China post-ceremony
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On Wednesday, China will observe the 19th Party Congress held every five years in Beijing. The event holds great symbolic value as China’s current President Xi Jinping will be reappointed by the body politic for another five-year term.

As one of the most anticipated events of the year, the highly choreographed ritual surrounding the event befits the appointment of China’s supreme leader. Streets will be swept, the sky will be clear and soldiers will stand erect as the event will be broadcast to the entire nation and the rest of the world.

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Once the lights dim and the music fades, President Xi and the party leadership will face a number of challenges, both at home and abroad.

 

On the domestic front, President Xi will have to deal with a slowing economy and the potentially destabilizing overhang of debt. China’s double-digit growth rates over the past 15 years have come by way of manufacturing-led export growth as well as directed investment in domestic infrastructure and construction.

High levels of manufacturing productivity coupled with relatively low labor costs supercharged China’s export machine, enabling it to account for 13.8 percent of the world’s exports. The sustainability of China’s export momentum is coming under question as manufacturing productivity within China peaked in 2008 and has since plateaued. 

The other half of China’s growth miracle came by way of investment. Investment in infrastructure, construction, real estate and the like was the leading driver of growth from 2008 onward. While the rest of the world encountered recession, China hardly missed a beat as it amplified its spending on construction and infrastructure development.

The good thing about infrastructure investment and related investment in capital projects is that it can put a large number of people to work. The bad thing about such investment is that it does not come for free and is accompanied by a rise in debt.

China’s current debt-to-GDP ratio is in excess of 250 percent. The debt figure is largely attributed to borrowings incurred by private sector entities as well as government entities. The International Monetary Fund (IMF) and Moody’s have signaled their concern not only on the absolute amount of debt in proportion to GDP but the rapid rate at which the debt accumulated.

Another point of contention within China’s economy is the growing divide between private enterprise and state-sponsored enterprise. The reforms initiated by former President Deng Xiaoping in the 1980s unleashed the animal spirits of Chinese entrepreneurs, enabling the private sector to lead the way in both employment growth and the creation of wealth.

The lumbering state-owned sector, by comparison, was the proverbial turtle in a race against the hare. Burdened by legacy assets, the state-owned sector is tasked with the responsibility of supporting itself while turning a profit.

In reality, this is becoming increasingly difficult to achieve as many state-owned companies carry as much as four times the number of employees on payroll and have to provide for a host of social benefits for both active employees and retirees.

In addition, some of the most capital-intensive sectors of the Chinese economy are governed by state-owned enterprises in sectors such as telecom, steel, aluminum, agriculture, chemicals, transportation, construction and finance.

Preferential policies and easy access to low-cost capital has led to massive overcapacity across all of these industries. Any economist will tell you that excess capacity is never good for any industry as it will lead to excessive supply, increased competition and ultimately lower prices. 

The private-state balancing act that China’s leaders maintained since the dawn of the reform era enabled China to benefit from the best of both worlds: the dynamism and growth that entrepreneurs and private-sector enterprise can deliver combined with broad authority over the commanding heights of the larger economy through state ownership and control.

If the divergence between the private sector and state sector in China were purely an economic matter, such divergence would be far easier to manage. As in all things China, it is never that simple. For President Xi, the economic agenda is inextricably tied to the political agenda.

An ideological divide between the private sector and the Chinese Communist Party has been simmering not far below the surface. The self-made class has grown confidant, supported by the prestige that wealth can provide.

Party leadership has grown increasingly weary of the independence of voice and thought among China’s self-made elites. Moreover, the self-made class has thrived because the government left it alone and those individuals have come to resent some of the strictures imposed by the party and the state.

Tied to this sentiment is the recognition that however successful one may be, such success and the wealth attached to it may be taken away by the state at any given moment. Such insecurity breeds tension and creativity directed toward self-preservation.

Witness the massive outflow of wealth from China to foreign destinations. Cities around the world — New York, Los Angeles, San Francisco, Hong Kong, London, Singapore, Sidney and Vancouver — have all witnessed significant inflows of Chinese wealth and investment. 

To keep the periphery from spinning away from the center, President Xi will embark on the reassertion of party control over the economy. To elevate the prominence of the party, preference will be given to the state-owned sector.

Through a carefully constructed set of rewards and punishments, the CCP will reassert itself as the only authority in China and crowd-out discordant voices and potential challengers to single party rule.

As President Xi comes to grasp the many challenges that China will face in the next five years, uniformity of thought and action will be foremost among them.

Arthur Dong is a professor at Georgetown University's McDonough School of Business. He specializes in legal and business engagements between China and the United States.