In Yuxinzhuang village, a warren of narrow streets on Beijing’s outskirts known for its vibrant community of migrant workers, Zhou wolfs down noodles in a tiny Muslim restaurant.

The 30-year-old father of one has a job setting up shell companies with fake cash flow for struggling small business owners, who then use them to raise new loans to pay off their previous creditors.

But even this dubious line of business, which should thrive in a downturn, is suffering from China’s economic slowdown. Last month, Zhou’s income fell to a fraction of last year’s levels. Zhou, who did not want to give his full name, now plans to return to his family farm in the poorer central province of Henan and sell organic eggs.

“I don’t know who to blame for the economic downturn but all I know is that this year the economy is really bad,” he says. “Lay-offs everywhere.”

As China’s economic growth slows, stories such as Zhou’s abound. The country’s 296mn migrant workers are facing slowing wage growth, its new university graduates are struggling to find jobs, the urban middle class has lost money in a policy-induced property meltdown and the rich are reeling from Beijing’s crackdowns on the internet, finance and health sectors.

National security regulations are worrying foreign companies, many of which have stopped investing. Only those working in some areas of the government or sectors deemed strategic, such as semiconductors, are being spared.

Xi Jinping, China’s most powerful leader since Mao Zedong who embarked on an unprecedented third term in March, claims everything is going to plan. The country is marching towards “national rejuvenation” and “high-quality development” as the party’s “common prosperity” policy reduces inequality.

But beneath the triumphant rhetoric, many observers wonder whether policymaking is adrift. The Communist party used to allow its people abundant economic opportunity in exchange for heavy restrictions on their political freedom. Now the so-called social contract is no longer clear. In the place of growth and opportunity are vague promises of security and “a better life”. But with about 600mn people struggling to get by on less than $140 a month, will that be enough? A once optimistic society now worries about the future.

“The old contract was a pretty simple one which is: ‘We’ll stay out of politics, we won’t express sensitive opinions, provided we can expect to be prosperous in the future’,” says George Magnus, author of Red Flags: Why Xi’s China is in Jeopardy, and a research associate at the University of Oxford’s China Centre.

That “has been undermined and not just by the fact that China’s old development model is not really working anymore but also by the government’s own culpability for not addressing the issues,” he says. “Fundamentally, it’s an issue of trust.”

The promise of common prosperity

After securing his second term as party secretary at the 19th party congress in 2017, Xi signalled a “new deal” for China, according to a paper at the time by Evan Feigenbaum, of the Carnegie Endowment for Peace.

Chinese Marxists think in terms of contradictions — the dialectical opposition of different forces or influences, Feigenbaum wrote. During the reform and opening up period that followed the end of the Mao era, the party concentrated on economic growth, or resolving the “contradiction” between the people’s “ever-growing material” needs and the country’s “backward social production”, according to an account of Xi’s comments at the congress in state media.

But Xi declared China was facing a new challenge. After decades of rapid growth, he said the “principal contradiction” was “between unbalanced and inadequate development and the people’s ever-growing needs for a better life”.

These “needs”, he said, included “demands for democracy, rule of law, fairness and justice, security, and a better environment”.

Security was the keyword, analysts say. When Xi became party leader in 2012, the organisation was concerned that the growing private sector was empowering entrepreneurs and eclipsing the apparatchiks. In 2013, the party circulated an internal memo, Document Number Nine, attacking western constitutional democracy and other ideas, such as universal human rights and ardently pro-market “neoliberalism”.

In the ensuing years, Xi has rooted out dissent and enforced party discipline through endless anti-corruption campaigns while pursuing a more assertive foreign policy, alienating large trading partners such as the US.

“The so-called anti-corruption campaign is just . . . an instrument [the Communist party] wants to use to purge everyone who is not loyal,” says Xu Chenggang, senior research scholar at Stanford University’s Center on China’s Economy and Institutions.

The tragedy of Xi’s economic policy is he has identified some problems China needs to fix but has gone about it the wrong way

This tightening of control is pervasive, from limits on the publication of economic data and investigations of foreign consultancies under data and anti-espionage laws, to the detention of a million Uyghurs in Xinjiang and the sinicisation of religion and culture, analysts say.

“Security is a requisite for development. That’s been a pretty clear part of the social contract under Xi Jinping,” says Drew Thompson, a China expert at the Lee Kuan Yew School of Public Policy at the National University of Singapore.

But it was in 2021, as the economy was recovering from the first shock of the onset of Covid-19, that Xi launched one of his most decisive campaigns yet to meet the people’s aspirations for a “better life” — what he called “common prosperity”.

Beijing cracked down on the internet empire of billionaire Jack Ma, leading him to largely disappear from public, and the country’s other important internet groups, shutting down overnight the whole industry of online tutoring and restricting online gaming for children.

In a speech on common prosperity at the party’s central committee for financial and economic affairs in August 2021, Xi expounded on the policy’s deeper aims. Cadres must “resolutely oppose the unlimited sprawl of capital” and “uphold the dominant role of the public sector”, he said, while also somehow mobilising “the zeal of entrepreneurs”.

Tellingly, this was not a call for a European-style social welfare state. The party was pursuing its long-term strategic objectives of building China “into a great modern socialist country”, he said, but it must not “fall into the trap of ‘welfarism’ that encourages laziness”.

The result of the top-down attempt to re-engineer society was disastrous for investment sentiment, especially when it coincided with increasing geopolitical tensions with the US, Beijing’s zero-Covid policy and the “three red lines” — a scheme to force deleveraging in the over-indebted property sector.

China’s tech stocks listed in the US have fallen 70 per cent between February 2021 and today. While some of that is due to external factors, domestic policy has not helped.

In June, the youth unemployment rates hit 21.3 per cent before the government stopped releasing the figures, a likely byproduct of the shrinking of the internet sector that was a big employer of young graduates. Official data for average primary market housing prices shows them drifting lower in September.

“The tragedy of Xi Jinping’s economic policy is he has identified some problems China needs to fix but has gone about it the wrong way,” says Neil Thomas, a fellow at the Asia Society Policy Institute’s Center for China Analysis.

A burden on rural communities

Back in Yuxinzhuang village, a woman surveys the destruction outside her small grocery shop. The flats across the road are being torn down because they were constructed years ago on former village land without the correct zoning, she says.

Some migrant worker residents suspect the real purpose is to drive them out of Beijing. The capital is one of China’s “first tier” cities, where most migrant workers do not have the money or qualifications to qualify for hukou, the household registration stamp that would give them full access to public services such as health and education.

“It’s had a huge impact on us,” says the woman, who is from eastern Shandong province, of the demolitions. Sales have plunged as people leave the area, she adds.

For most economists, the structural challenges facing China’s economy have been apparent for more than a decade — especially its reliance on debt-fuelled investment in infrastructure and property and the relatively low share of domestic consumption in gross domestic product.

With property no longer a driver, many are wondering what will replace it. An electric vehicle boom is one bright spot. But high-end manufacturing, though favoured by Beijing, will not generate enough jobs.

Even as total debt — household, corporate and government — hit 281.5 per cent of GDP in the second quarter, according to calculations by Bloomberg, productivity advances have slowed and the demographic outlook has worsened, with the population officially declining for the first time last year. The government has set a target for growth in GDP this year of 5 per cent, its lowest in decades. The IMF estimates this could fall below 4 per cent in the years to come.

Economists point to a list of reforms that could turn the situation around. Bert Hofman, a former Beijing-based country director for China at the World Bank, in a blog post titled “Diminishing Expectations” lists sweeping fiscal, financial, retirement age and pension, state-owned enterprise and hukou reforms.

“None of these reforms are easy, and each one cuts into the interest of some groups in society . . . but the package as a whole should increase the pie for all,” he says.

Others say if the government is serious about really implementing “common prosperity”, it would have ended hukou, which they say has turned rural and migrant workers into “second-class” citizens.

While there has been some reform of the system, abolishing it could increase urbanisation, revive property demand and increase people’s average incomes, analysts say. Hofman writes that about 65 per cent of the population lives in urban areas but about 20 percentage points of this are migrant workers. About 25 per cent of the labour force still works in agriculture.

“It gives the lie to common prosperity,” John Burns, an honorary professor of politics and public administration at the University of Hong Kong, says of hukou. “Rural people have paid the price for all this prosperity in the cities.”

China’s average annual pension per head for urban residents was Rmb50,763 ($6,936) in 2021, about 22 times the rural equivalent, while civil servants received Rmb77,804. The average annual healthcare disbursements for urban residents in 2021 totalled Rmb4,166, about 4.4 times the rural equivalent.

But today’s economic malaise reaches beyond the rural and urban poor. Upper-middle-class people talk of losing millions of renminbi in property and failed wealth management plans, while the wealthy elites complain about a lack of investment opportunities and increasing government interference.

One mining company owner in southern Guangdong province says local authorities kept borrowing money from him with no intention of paying it back, giving him cheap land instead. This had little value given the property crisis so he ended up investing his money in a chicken farm out of reach of the officials.

“There has been a lot of talk about the government supporting the private sector,” he says. “In reality we are under pressure to bail out cash-strapped local governments.”

‘A sense of drift’

In the rural eastern province of Anhui, a woman mourning China’s former premier Li Keqiang, who died suddenly on Friday, captures the complexity of people’s feelings about China’s leaders.

The government’s focus on security — Beijing has constructed one of the world’s most extensive surveillance states — has meant far less crime in her local area, says the woman. “Thanks to the surveillance system, I can now hop on a public bus without worrying about being pickpocketed,” she says, after placing flowers at Li’s ancestral home in Jiuzi village.

Mourners outside the childhood home of the late Li Keqiang. Seen as a pro-market reformer, the former premier was once considered a contender for the presidency © Andrea Verdelli/Bloomberg

But she, like many of the mourners, betrays a yearning for a leadership more sympathetic to her daily struggles. Many saw that in Li, who until March was Xi’s number-two official, saying he spoke out for the poor.

“He was a great premier,” she says, choking with emotion.

Unlike Xi and many other senior leaders, Li grew up in a modest neighbourhood, where traditional Anhui beef noodle shops still ply their trade.

Seen as a pro-market reformer who was supported by former president Hu Jintao, Li was once believed to be a contender for the presidency but the party chose Xi, who took it in a more austere direction.

“Some senior leaders wanted to build a strong nation at the expense of ordinary people’s wealth and opportunities,” says a second mourner at Li’s former childhood home in the nearby provincial capital of Hefei. “Premier Li wanted to make ordinary people rich first and then create a strong nation.”

Some political scientists argue that the party’s emphasis on social issues and common prosperity rather than growth has been a power play aimed at rolling back the private sector, which grew too powerful under previous presidents, providing 80 per cent of China’s employment.

Stanford’s Xu says common prosperity created a convenient platform to blame entrepreneurs for the troubles of the poor while undermining their influence. The problem was that it got mixed in with a slowdown brought on by the zero-Covid policy and property woes.

“If we put all of this together, now the Chinese economy is in deep trouble,” Xu says.

Most analysts argue the government has temporarily softened its crackdown on the private sector as it tries to stabilise the economy.

Many economists are now looking to the third plenum, an important party meeting that occurs one year after a new leadership takes office and which is expected to be held before the end of this year, for signs of the government’s broader plans for the economy, though few are optimistic on the prospect for deeper reforms.

“The fact that there is maybe this sense of drift or lack of confidence in the future, I think, is a corrosive phenomenon that we’re not used to seeing in China and, politically, I should think that the government ought to be worried about it,” says Oxford’s Magnus.

Few think that growing frustration with the economy will imminently lead to social unrest, however. Thompson points out that it took the “grossest violations of civil liberties” during China’s extended Covid lockdowns to spark the so-called “white paper protests” in November 2022, when people in many cities, including Beijing and Shanghai, held blank sheets of paper symbolising everything they could not say.

But more likely is a loss of China’s former optimism that will be challenging to reignite or, says Xu, a slow slide into passive cynicism. The second Li mourner, in Hefei, who works for a real estate company and soon expects to lose his job, speaks to the uncertainty being felt in communities across China: “We just don’t know what tomorrow will bring.”

Source: November 1, 2023 | By Sun Yu