Commentary on Political Economy

Friday 12 August 2022

The Chinese Communist Party Needs Its Bourgeoisie

What if we all woke up tomorrow morning and decided we simply didn’t care about China anymore? That sounds like a preposterous hypothetical to ask about the world’s second-largest economy and a growing military power. Yet Xi Jinping could make it more of a reality than anyone realizes.

Recent developments point to surprising ways China’s relevance to the rest of the world is changing. To cite two: China’s trade surplus surged to a record of $101 billion in July, the latest in a string of trade-surplus records China has set since 2020. Meanwhile, a German think tank this week estimated that a trade war with China would be six times as costly for German business as Britain’s departure from the European Union has been.

Neither of these facts signals Chinese strength, though they may appear to at first glance. Take that trade surplus, long an obsession of mercantilists in the U.S. and Europe. It is happening now because, as economist Michael Pettis has observed, the Chinese economy otherwise is stalling. Covid lockdowns and a policy crackdown on real-estate investment in particular are suppressing consumer spending. The trade surplus is expanding because exporting has become the only option available to Beijing to bolster its anemic economic growth.

And what a disaster this is for Beijing’s international influence. Developed nations’ main reason integrate China into the global trading system—and cater to its Communist Party’s political neuroses on human rights, Taiwan or anything else—wasn’t to turn the country into the world’s factory. Quite the opposite: Countries wanted to open China to trade because of its population of more than 1.4 billion consumers. Their ascent into the global middle class, buying U.S. and European goods and services along the way, was the great prize to be won.


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All signs are that Beijing isn’t living up to its side of this bargain. The Chinese government is making it harder for citizens to reach the middle class and undercutting those who already did. Any correction in the property market, which accounts for roughly one-third of gross domestic product, necessarily would wipe out some considerable portion of middle-class household wealth given the tendency to treat property as the middle class’s primary investment outlet.

Mr. Xi’s ambition to consolidate more of the economy in state hands, meanwhile, may economically benefit a new cadre class of Communist Party members. But this will come at the expense of a much larger middle class that depends on the productive private economy for its prosperity.

Hence that study from the German think tank, Ifo Institute, describing substantial economic links between Germany and China and calculating substantial costs for severing those ties. The most important question to ask about such a report is why anyone would bother to write it in the first place. The answer is that Germany is in the middle of a major debate about its economic dependence or otherwise on China.

Very real costs would arise from a tariff-heavy trade war. But looming over the political debate about Germany’s relationships with the world’s autocrats is a dawning commercial realization: German companies are finding the sales aren’t there.

For the 40 largest German companies included in the benchmark Dax stock-market index, 8.2% of their revenue comes from mainland China, according to data from FactSet, compared with 28% from Western Europe and 21% from the U.S. Among France’s largest listed companies, China accounts for only 6.7% of revenue, compared with 21% from the U.S. China furnishes 7.9% of revenue for American companies included in the S&P 500.

Of course, these Chinese earnings would be painful to lose, and these numbers don’t account for revenue companies would sacrifice if they were no longer able to produce goods in China that they sell elsewhere. It’s nonetheless true that China makes a disproportionately low contribution to Western firms’ bottom lines relative to its population and potential. Beijing’s nationalist economic policies exacerbate this by making it harder for Western firms to expand there.

Other countries can be found to serve as “factories to the world” with sufficient time and investment. What is irreplaceable and would be a great source of Beijing’s global influence is its people—if they’re allowed to join the consuming global middle class. But Mr. Xi doesn’t seem prepared to do that, and the danger for him is that this diminishes China’s sway in the rest of the world.

There’s a lot of ruin in an empire, including an empire that has never achieved its full potential. Still, it’s becoming clearer that an important political fact of the coming years will be China’s failure to live up to the high hopes Western trading partners once harbored for its economy—and how this failure will free those partners to reconfigure their relationships with Beijing. We may never wake up not caring at all about China, but we could very well find we start caring less or differently.

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