Commentary on Political Economy

Tuesday 21 May 2024



‘Are You Better Off?’ Asking Reagan’s Question in Xi’s China

Unlike his reform-era predecessors, Xi Jinping can’t count on rapid gains in prosperity to underpin support for Communist Party rule.

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China’s economic miracle is ending, leaving President Xi Jinping with a challenge none of his predecessors faced: how to govern after the boom.

For four decades, China’s 1.4 billion population experienced unparalleled gains in income and wealth. But recently the blows have just kept coming. Real estate collapse, trade war with the US, a crackdown on entrepreneurs, and extended Covid lockdowns have stalled the prosperity engine.

Chinese incomes are still rising, but under Xi gains have been the slowest since the late 1980s. The property crisis is hammering household wealth. And the cautious opening-up of China’s society has gone into reverse too. For many people across the country, it feels like a different world.

Take for example Mr. Hu, a factory worker in Shanghai. For almost a decade after moving from his hometown, Hu was upwardly mobile. He earned enough to buy a car, drove passengers at the weekend to top up the family income, and in 2020 bought a big-city apartment. Hu felt good about the future. Now he feels “desperate.”

His home has lost almost a quarter of its value and demand for ride-shares has slumped. Chatting with his remaining passengers, the 37-year-old has noticed something: “Most of them are struggling, and complaining about the ineffective leadership.”

From Surge to Slowdown

Under Xi, average incomes are growing at a much slower pace

Source: Bloomberg Economics

Hu, like most of the people who shared their experiences for this article, asked to be identified only by his surname for fear of possible repercussions for speaking publicly.

In a democracy, the gloomy mood he described would spell trouble for the leader. US presidential candidates since Ronald Reagan in 1980 have posed a simple question to voters: Are you better off today than you were four years ago? When the answer is “no,” it’s time for the White House incumbent to pack their bags.

China doesn’t have elections, but it does have politics. One reason the political landscape has remained so stable is the long boom in living standards. It’s often described as one side of an unstated bargain: The Chinese people tolerate having little say in how they’re governed, as long as they keep getting richer under Communist Party rule.

There have been breakdowns — like in 1989, which saw surging inflation and a bloody crackdown on protesters in Tiananmen Square. But broadly speaking, for more than four decades since the Third Plenum summit in 1978 — when Deng Xiaoping launched China’s reform and opening — the deal has held up. Under Xi, it’s fraying.

The official data shows average incomes still rising, at a healthy pace by global standards. But the gains under Xi have been slower than any other reform-era leader, and momentum is fading.

Almost a third of office workers saw their salaries fall last year according to recruitment platform Zhaopin. From property to technology and finance, white-collar Chinese have taken a hit from the government’s campaign to rein in excesses.

Wage Gloom

Share of white-collar workers surveyed who reported their salaries:

Sources: Zhaopin Ltd., Bloomberg

Business surveys show factories and offices more focused on redundancies than recruitment, and numbers from the People’s Bank of China show the public is pessimistic about future earnings.

On household wealth the picture is even bleaker. The bulk of it is held in real estate, and property markets have been in a slow-motion collapse, with apartments in some cities losing half of their value since the 2021 peak. Chinese stocks are down more than a third over the same period.

“Xi is constrained by the context that he inherited,” said Yuen Yuen Ang, a professor of political economy at Johns Hopkins University.

A real estate bubble, overcapacity in industries, high debt and a low fertility rate are all major imbalances that China’s current leadership didn’t cause but are now forced to confront.

Xi’s goal is a more sustainable expansion that isn’t driven by frenzied speculation in real estate — even if that means sacrificing some speed. The idea is that high-tech industries will ultimately play a bigger role in driving gains. The government is targeting 5% gross domestic product growth this year, and first-quarter data suggests it should come close.

More stimulus is on the way. The government is issuing a trillion yuan in bonds to pay for more spending, mortgage rates are being cut, and there’s talk of a new scheme to buy unsold homes. The long-awaited Third Plenum — the next round of the leadership summit where Deng launched China's reforms in 1978 — will be held in July.

All of that is a reminder that there's a limit to how bad the government will allow things to get. None of it changes the big picture, as demographics, debt, and overcapacity drag China’s long-term prospects down.

A deserted playground in front of residential buildings at the Legend of Sea project, co-developed by Country Garden Holdings Co. in Ningbo, China in August 2023.
A deserted playground in front of residential buildings at the Legend of Sea project, co-developed by Country Garden Holdings Co. in Ningbo, China in August 2023. Photographer: Qilai Shen/Bloomberg

Across the country, from up and down the income ladder, Chinese entrepreneurs and workers see their horizons narrowing.

For Mr. Huang, a commodity trader who supplies power to export factories in Guangdong province, the years before Covid were good times. Fat commissions paid for a Tesla Model X and the down payment on an apartment in Shenzhen’s pricey Nanshan district.

Now business has never been so bad. With sales weak and the future uncertain, manufacturers are reluctant to lock in long-term power contracts. Clients are bargaining harder for discounts — haggling over differences of 0.001 yuan per kilowatt-hour.

Huang says 2023 was tougher for local businesses than the pandemic’s worst years. He knows lots of people stuck in a debt trap paying expensive mortgages, and some who’ve been forced to hand their homes over to banks. Huang’s own firm has already laid off five workers. He jokes about being a ruan fan nan — a man who lives off his wife’s income.

China’s rising entrepreneurs were welcomed into the Communist Party at the end of Jiang Zemin’s presidency in the early 2000s. It was part of the cautious shift toward a more open society that accompanied rising prosperity in those years.

Under his successor Hu Jintao, there was greater emphasis on social stability — or “harmony” as Hu put it. But civil rights lawyers, labor organizers and land-rights activists could still make their voice heard in the political system.

All of that is in reverse now. Businesses are under more pressure to train employees in Xi Jinping Thought, private companies are making room on their organizational charts for a Communist Party cell and civil society is under ever-closer surveillance.

Beijing has increasingly prioritized national security since Xi began his precedent-breaking third term. With almost one closed-circuit camera for every two people, China’s cities are under the world’s most intensive surveillance, according to research firm Comparitech. Minxin Pei, the author of The Sentinel State — a recent book on China’s security architecture — and a contributor to Bloomberg Opinion, estimates that as many as 12.7 million Chinese individuals are under regular police surveillance.

In short, Xi is doubling down on control. Many things have changed since the poverty and disorder of the Mao Zedong era: China today is much richer, and with much higher standards of governance. Still, combining data on growth with a measure of freedom from the Varieties of Democracy dataset suggests in two important respects China is moving full circle — from low growth and low freedom in the pre-reform era back toward something similar today.

Full Circle

China is moving back toward the low growth and limits on freedom seen in the pre-reform era

Note: * Five year average
Sources: Bloomberg Economics, IMF, V-Dem

There are also efforts — spearheaded by Xi’s Common Prosperity agenda — to share a slower-growing pie more equitably. For some — like gig economy workers struggling to get by — government intervention has delivered benefits. For others, the focus is more on the costs.

A government crackdown on consumer-tech giants like Alibaba Group Holding Ltd. has hit some of China’s top employers and earners — as has a campaign targeting lavish pay in the finance industry, which has led banks to slash salaries.

Mr. Chen, a 37-year-old research analyst at a state-owned mutual fund, says he’s taken a pay cut of around 40%. Five years ago he was rich enough to pay for regular overseas holidays, meals at expensive restaurants and designer handbags for his wife.

Those luxuries are now a thing of the past. Chen blames the “absurdities” of China’s Covid controls, and the government’s crackdowns on various industries. For him and his peers, the “main priority is simply holding onto our jobs” he says.

China’s manufacturing drive is a bid to offset the slump in property, which once drove about one-third of China’s economy. Some half a million real-estate professionals have already lost their jobs, casting a wider chill over labor markets.

Mr. Li, a 50-year-old window-cleaner in Shanghai, has a homely way of putting it. With more Chinese seeking work, he says, “You get more people to share the same bun. So everyone will get a smaller slice.”

Li is feeling the pinch himself. For 30 years — through jobs as mechanic, grocer, and driver for a hog-breeding business — he enjoyed a steady rise in pay. As a window-cleaner, he was making 6,000 yuan ($830) a month before the bust, but that fell to 4,000 yuan for stretches of the last couple of years. “It’s harder to make money now,” Li says. “People are generally more conservative when it comes to spending.”

Li isn’t too downbeat: he reckons the bad times won’t last. But so far there’s little in Chinese data or policy signals to dispel the gloom. And in economics, gloom can be self-fulfilling.

Lack of confidence in the future leaves entrepreneurs reluctant to invest in new businesses and workers less eager to acquire new skills. That’s one reason private sector investment is flatlining. Foreign investment, crucial for upgrading China’s technology, has contracted 26% so far this year, and the latest central bank data shows credit shrinking — the first time that’s happened in close to twenty years.

Pessimism sometimes spills into public anger. Protests on the economy, especially the housing crash, have become more frequent, according to Freedom House's China Dissent Monitor. They made up some 80% of the 2,891 public expressions of dissent recorded by researchers in 2023.

Even if demonstrations usually get quashed, they can also get results. The “White Paper” movement in 2022 — where protestors held up blank sheets of paper in an act of opposition to Covid controls — brought lockdowns to a rapid end.

A local official speaks with a demonstrator holding a blank sign during a protest in Beijing in November 2022.
A local official speaks with a demonstrator holding a blank sign during a protest in Beijing in November 2022. Source: Bloomberg

“I’ve never seen or heard such a high level of frustration and annoyance” among China’s middle class, said Anthony Saich, a professor of Chinese government at Harvard University who has been visiting the country since 1976.

Juliet Zhou, a professor of psychology in Beijing, notes that many previously successful entrepreneurs in particular have had “a very difficult time” in recent years, and sees a “significant uptick in people who are suffering from mental health problems.” Zhou says her own status in society as a health care professional has actually risen, along with her income, though she does worry about the declining value of her apartment in the capital.

Rumblings of discontent have reached the ears of China hawks in the US, emboldening some to speculate about regime change. For now, any organized challenge to Communist Party rule exists more in Washington imaginations than on the streets of China — where people who’d got used to more prosperity and less control are having to put up with the opposite.

The good times can’t come back soon enough for Mr. Zhao, a researcher at a state-owned energy firm. At work, there’s a freeze on headcount and less cash to go round. Zhao sold his car and now tops up his salary by renting out his Shanghai license plate — a scarce and valued commodity — for more than 10,000 yuan a year.

At home, the property crash has derailed his plans. Five years ago, he bought an apartment at one end of one of the world’s longest subway lines. It’s actually nearer to the city of Suzhou, in a neighboring province, than Shanghai, entailing a three-hour daily commute. The bet was that the area would attract more incomers and prices would rise. Instead, they’ve plunged.

Zhao’s five-year-old daughter is about to start school and he’d like to move somewhere nearer work, with better educational choices. It’s the kind of aspiration that came within reach for many in China’s golden growth decades. Now, for ordinary people, it feels like a luxury, Zhao says. “Changing house for a better life is not something we can afford.”

Graphics and visuals by Adrian Leung and Jane Pong
Edited by Ben Holland
With assistance from 
Emily Cadman, Allen Wan, Chien-Hua Wan, Eric Zhu, Jennifer Welch and Nick Hallmark

Photography: Daniel Dorko/Hans Lucas/AFP/Getty Images, Eric Feferberg/AFP, Nathan Laine/Bloomberg, David Paul Morris/Bloomberg, Tomohiro Ohsumi/Bloomberg, Xaume Olleros/Bloomberg, Chris Ratcliffe/Getty Images, Xinhua News Agency/AFP/Getty Images

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