Break­down of the social con­tract

Pres­id­ent Xi prom­ised a new era of ‘com­mon prosper­ity’ and a bet­ter life for cit­izens. Now, as eco­nomic growth slows, a once optim­istic soci­ety is wor­ry­ing about the future.

By Sun Yu and Joe Leahy Data visu­al­isa­tion by Keith Fray

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In Yux­in­zhuang, a vil­lage 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. 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 star­ted 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”, he adds, “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.”

A new deal

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 speech at the con­gress in state media.

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

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.

This tight­en­ing of con­trol ranges 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 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 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 zero­Covid 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, youth unem­ploy­ment rates hit 21.3 per cent, a likely byproduct of the shrink­ing of the inter­net sec­tor that was a big employer of 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 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. 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 argue if the gov­ern­ment is ser­i­ous about 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 got Rmb77,804. The aver­age annual health­care pay­ments for urban res­id­ents in 2021 was 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 is 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.”

Grow­ing frus­tra­tions

In the rural east­ern province of Anhui, a woman mourn­ing China’s former premier Li Keqi­ang, who died sud­denly last week, 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. “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.

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, vis­ibly emo­tional.

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 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 the policy 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 adds.

Most ana­lysts say the gov­ern­ment has tem­por­ar­ily softened its crack­down on the private sec­tor as it tries to sta­bil­ise the eco­nomy. The third plenum, an import­ant party meet­ing that occurs one year after a new lead­er­ship takes office, which is expec­ted to be held before the end of this year, will hold clues to the gov­ern­ment’s broader plans for the eco­nomy. “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.

More likely is a loss of China’s former optim­ism that will be chal­len­ging to reignite, says Xu. 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.”