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CNN business
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When Xi Jinping came to power a decade ago, China had just overtaken Japan to become the world’s second largest economy.
Since then it has grown at a phenomenal pace. With a compound annual growth rate of 6.7% since 2012, China has experienced one of the fastest sustained expansions for any major economy in history. In 2021, its GDP reached nearly $18 trillion, accounting for 18.4% of the global economy according to the World Bank.
China’s rapid technological advances have also made it a strategic threat to the United States and its allies. It’s steady ousting American competitors from longstanding leadership positions in sectors ranging from 5G technology to artificial intelligence.
Until recently, some economists predicted that China would become the world’s largest economy by 2030, surpassing the United States. Now the situation looks much less promising.
As Xi prepares for his second decade in power, he faces mounting economic challenges, including a disaffected middle class. If it fails to get the economy back on track, China faces a slowdown in innovation and productivity and rising social discontent.
“For 30 years, China has been on a path that gave people great hope,” said Doug Guthrie, director of China Initiatives at Arizona State University’s Thunderbird School of Global Management. Add to that the country is “currently in deep trouble”.
While Xi is one of the most powerful leaders China and its ruling Communist Party have ever seen, some experts say he can claim no credit for the country’s staggering advances.
“Xi’s leadership is not at the root of China’s economic rise,” said Sonja Opper, a professor at Bocconi University in Italy who studies China’s economy. “Xi has benefited from a sustained entrepreneurial movement and the rapid development of a private company [sector] economies that previous leaders had unleashed,” she added.
Rather, Xi’s politics have increased in recent years caused massive headaches in China.
A sweeping crackdown by Beijing on the country’s private sector, which began in late 2020, and its unwavering commitment to a zero-Covid policy have hit the economy and jobs hard.
“If anything, Xi’s leadership may have dampened some of the country’s growth momentum,” Opper said.
More than $1 trillion has been stripped from the market value of Alibaba and Tencent – the crown jewels of China’s tech industry – over the past two years. Revenue growth in the industry has slowed and tens of thousands of workers have been laid off, leading to record high youth unemployment.
The real estate sector was also hit hard, hitting some of the country’s largest developers. The collapse of the housing market – accounting for up to 30% of GDP – has been widespread and rare dissent in the middle class.
Thousands of disgruntled homebuyers refused to pay their mortgages on stalled projects, raising fears of systemic financial risk and forcing authorities to pressure banks and developers to defuse the unrest. That wasn’t the only demonstration of dissatisfaction this year.
In July, Chinese authorities violently dispersed a peaceful protest by hundreds of depositors demanding their lifetime savings from rural banks that had frozen millions of dollars in deposits. The banking scandal not only threatened the livelihoods of hundreds of thousands of customers, but also highlighted the deteriorating financial health of China’s smaller banks.
“Many middle-class people are disappointed with recent economic performance and disillusioned with Xi’s rule,” said David Dollar, senior fellow at the Brookings Institution’s John L. Thornton China Center.
According to analysts, the Financial system vulnerabilities are a result of the country’s unchecked debt-fuelled expansion over the past decade, and the model must change.
“China’s growth during Xi’s decade in power is largely due to the overall economic approach of his predecessors, which focused on rapid expansion through investment, manufacturing and trade,” said Neil Thomas, senior analyst for China and Northeast Asia at Eurasia group .
“But this model had reached a point where returns were falling significantly and economic inequality, financial debt and environmental damage were increasing,” he said.
While Xi is trying to change that model, he’s not doing it right, experts said, risking the future of China’s companies with tighter government controls.
The 69-year-old leader launched his crackdown to curb the “disorderly” private corporations that were becoming too powerful. He also wants to redistribute the wealth in society under his goal of “shared prosperity”.
Xi hopes for a “new normal” in which consumption and services will become more important drivers of expansion than investment and exports.
But so far these measures have plunged the Chinese economy into one of the worst economic crises in four decades.
The International Monetary Fund recently lowered its forecast for China’s growth this year to 3.2%, a sharp slowdown from 8.1% in 2021. That would the country’s second-lowest growth rate in 46 years, only better than 2020, when the first outbreak of the coronavirus hit the economy.
Under Xi, China has not only become more insular, but has also seen US-China relations fray. His refusal to condemn Moscow’s invasion of Ukraine and China’s recent aggression against Taiwan may even alienate the country further away from Washington and its allies.
Analysts say the current troubles do not yet pose a major threat to Xi’s rule. He is expected to secure an unprecedented third term in power at the Communist Party Congress that begins Sunday. The priorities presented at the Congress will also determine China’s course for the next five years or even longer.
“It would probably take an economic catastrophe on the scale of the Great Depression to generate social discontent and popular protests that could pose a threat to Communist Party rule,” said Eurasia Group’s Thomas.
“Furthermore, growth is not the only source of legitimacy and support for the Communist Party, and Xi has increasingly polished the Communist Party’s nationalist credentials to appeal to both patriotism and purse strings,” he added.
But to bring China back to high growth and innovation, Xi may need to reintroduce market-oriented reforms.
“If he were smart, he would liberalize things quickly in his third term,” Guthrie said.
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