Last year, President Xi Jinping seemed all but invincible. Now, his push to steer China away from capitalism and the West has thrown the Chinese economy into uncertainty and exposed faint cracks in his hold on power.
Chinese policy makers became alarmed at the end of last year by how sharply growth had slowed after Mr. Xi tightened controls on private businesses, from tech giants to property developers. Meanwhile, China’s stringent Covid lockdowns, part of Mr. Xi’s approach to handling the crisis, have ramped up again as Covid cases surge, hurting both consumer spending and factory output.
Add to that a pact with Russia in early February, just weeks ahead of its invasion of Ukraine, that has widened a gulf between China and the West and underlined how high the costs could be for China of implementing Mr. Xi’s agenda at home and in foreign policy.
As Beijing works to manage the entente with Mr. Putin while preventing a collapse in its relationship with the West, underpinning the disquiet is the plunge in economic growth to 4% in the fourth quarter from 18.3% at the beginning of 2021. Officials are now speaking of a “course correction” to mitigate some of the effects of Mr. Xi’s policies.
The maneuverings come as Mr. Xi sets the stage to extend his rule, which began in late 2012, for a third term. Party insiders said there is little doubt that he will prevail at a Communist Party conclave later this year—for one thing, there is no potential successor candidate.
But other voices in the party have recently suggested a measure of skepticism over whether now is the right time to pursue Mr. Xi’s vision of remaking China in the spirit of Mao Zedong.
“The Ukraine crisis has made Xi’s domestic economic challenge harder at a time when he craves stability,” said Diana Choyleva, chief economist at Enodo Economics, a London-based risk forecaster.
Both the pact with Russia and the economic downturn at home grew out of Mr. Xi’s drive to stand up to the U.S. and mark some distance from Deng Xiaoping’s policy of opening China to the Western world. Paired with an increasingly hard stance toward China in Washington, relations with the U.S. and its allies have sunk to their lowest level in decades.
Whenever Mr. Xi has had an opportunity to challenge the U.S.-led world order, he has taken it, prioritizing political goals over economic ones.
Last year, a ban on Australian coal, after Canberra angered Mr. Xi by edging closer to the U.S., worsened a power shortage that forced manufacturers to temporarily close factories.
Shortly before Russia invaded Ukraine, Beijing agreed to purchase oil and gas from Russia valued at an estimated $117.5 billion. China may be able to renegotiate terms or get discounts as it becomes harder for Russia to sell its gas and oil, but some Chinese officials have questioned whether it made sense to get locked into such contracts when energy prices are high.
During China’s annual legislative sessions in early March, Mr. Xi sought to inject confidence in his policies. “The game between major powers is becoming more and more fierce,” he told a group of delegates on March 6. “China’s development still has many strategic advantages.”
The same day, Premier Li Keqiang spoke in more somber tones about the risks China is facing. “This year, the external environment has become more complex and severe,” Mr. Li said on the sidelines of the sessions, referring to pressure on China from the outside world. “Domestic development difficulties and challenges have increased.”
Around that time, Hu Wei, a senior adviser to the State Council, stirred up online discussion with an article about Mr. Xi’s pro-Russia policy. “China can’t be tied to Putin and the ties need to be cut off as soon as possible,” Mr. Hu wrote in the piece, which has been taken down by Beijing’s censors. “Cutting off from Putin,” he added, “will help build China’s international image and ease its relations with the U.S. and the West.”
In a country where leaders often try to present a united front, such different messages betray tensions within the top echelon of the party around Mr. Xi’s policies, party insiders say.
By the end of the year, developers’ sales were plunging more sharply than during the global financial crisis. Big tech firms, long a draw for the young and bright in China with their Silicon Valley vibes, were laying off droves of staffers.
China’s top government body, the State Council, was startled by the economic assessment, according to people with knowledge of the council’s economic surveys of major cities.
The leadership had anticipated hits on certain sectors, said an economic adviser in Beijing, but “the speed of the slowdown was a surprise.”
A year-end high-level political meeting all but acknowledged that Mr. Xi’s economic campaign had gone too far.
In recent months, China has scrambled to dial back some of last year’s efforts, policy announcements and interviews with people close to decision-making show.
Financial regulators are loosening restrictions on banks to lend to developers and home buyers. Various government agencies are affirming support for tech firms. Local officials are shifting attention away from wealth redistribution to how to prop up businesses.
The course correction, as some officials describe the recent policy shift, has created openings for other party figures to play a more visible role in what has long been a solo act.
One of them is Mr. Li, the premier. Long sidelined by Mr. Xi, Mr. Li could leverage the economic pressure on Mr. Xi to install more members of his faction in key posts, party insiders said. They said that even though Mr. Li’s term as premier will soon end, he is likely to stay on in a different leadership position.
Some party “elders,” or retired leaders who still have a say in political discourse, have recently spoken up against Mr. Xi’s desire to break with the established leadership-succession system, according to the insiders. They include former Premier Zhu Rongji, an elder statesman known as Boss Zhu in China and an economic reformer admired by the West. Mr. Zhu, who negotiated China’s 2001 entry into the World Trade Organization, privately has questioned Mr. Xi’s state-centered policy, the insiders said.
That Mr. Xi’s hold on power would be in any way questioned was unthinkable just a few months ago, although it is too early to tell how serious the challenge might be. China has a history of mobilizing to quickly overcome economic challenges. And previous powerful leaders Deng and Mao weathered setbacks only to re-establish firm control.
The Information Office of the State Council, which handles media inquiries for senior leaders, didn’t respond to questions.
Support for companies
Since the beginning of the year, various levels of government have shifted away from a near-blanket crackdown on private businesses.
The National Development and Reform Commission, China’s top economic-planning agency, led a group of government agencies in reaffirming support for companies forming the so-called platform economy, such as Alibaba Group Holding Ltd. , the e-commerce giant co-founded by billionaire Jack Ma ; conglomerate Tencent Holdings Ltd. ; and search-engine firm Baidu Inc., which all received stiff regulatory punishments last year for what authorities called anticompetitive behavior.
The effort, people close to the commission said, reflects a tacit admission among the leadership that looser controls are needed to let these companies continue to operate, especially in areas of digital innovation, while at the same time continuing to limit tech giants’ foray into financial areas, such as lending.
A buzzword Mr. Xi introduced last year, “common prosperity,” an aim to distribute wealth more equitably that had made business owners worried about being forced to hand over their fortunes, is barely mentioned any more.
Behind closed doors at a December conference to set the 2022 economic agenda, Mr. Xi even appeared to acknowledge that wealth redistribution is hard to do when growth is slowing. Common prosperity, he told officials, according to people briefed on the remarks, was about “making the cake bigger first,” and then dividing it more equally.
A few months later, Mr. Li mentioned Mr. Xi’s common-prosperity agenda exactly once when laying out the key economic goals for 2022 in his speech to China’s legislature.
Mr. Xi isn’t done fighting for his economic revamp, and the pressure on entrepreneurs hasn’t entirely gone away.
At home, stringent requirements on the tech sector’s data and investments remain in place. To adhere to those rules, Tencent has been divesting its vast portfolio, including by unloading shares in a Singaporean internet firm and in a Chinese e-commerce operator.
For now, the party urges caution on any new and potentially disruptive policies. Soon after the December meeting, Han Wenxiu, a senior adviser to Mr. Xi, summed up Beijing’s economic agenda for this year in an article in a party journal: “All parties must actively introduce policies that are conducive to economic stability.” It said policies that would lead to economic contraction should be introduced “prudently.”
Debate on ‘opening’
The remarks came as concerns have grown both inside and outside the party that Beijing is going too far in dialing back Deng’s “reform and opening.”
Li Yang, a senior member of the Chinese Academy of Social Sciences, a government think tank, noted in a January article that the party’s focus on building the economy brought China 40 years of rapid growth. That focus, he wrote, “has been rarely mentioned in recent years.”
While millions of posts on China’s tightly monitored social media voice support for Russia since it invaded Ukraine, some are expressing concerns over Beijing’s foreign-policy shift. One well-known blogger, Qin Quanyao, in a March 4 post rebuked the notion of what some nationalist commentators call a “new world led by China and Russia.”
“China has the unparalleled happiness brought by 40 years of reform and opening, and the infinite benefits brought by globalization,” Mr. Qin wrote, adding that the so-called new global order is “not suitable for China’s national conditions.”
Recently, an article by the late Wu Jianmin, a prominent Chinese diplomat, recirculated on China’s social media. It highlighted a decision facing the party leadership after the Sept. 11, 2001, terrorist attacks in the U.S.: Should Beijing stay quiet or voice support for the U.S.?
Then-leader Jiang Zemin, who watched the terrorist attacks unfold on TV, quickly convened a meeting of the top leadership. Five hours after the attacks, he spoke to President George W. Bush, condemning them and expressing deep condolences to the U.S. government and people. That decision, Mr. Wu argued in the article, helped bring U.S.-China relations to a new level and won China years of development.
Beijing hasn’t condemned Russia’s war in Ukraine and has refrained from using the term “invasion.”
Mr. Xi has stepped away from the collective decision-making model his predecessors have followed since the Deng era and made a challenge of the U.S. a centerpiece of his policies. Anyone in the party questioning that mission would risk being called a traitor, as it touches on issues Beijing considers “core.”
It is relatively safer for Mr. Xi’s fellow leaders to express concern around economic decisions, because they hinge less on ideology. In addition, a healthy economy is key to the party’s claim to legitimacy.
“The economy is one area where local officials can say, ‘I’m politically loyal and I support you, but some of the policies haven’t been going very well,’ ” says Joseph Fewsmith, a longtime observer of China’s elite politics at Boston University