Real-estate debt, crackdowns and COVID policies throw a spanner in China’s economy

Xi Jinping’s push to make China a technological superpower faces growing headwinds from an economy weighed down by debt and a stringent zero-COVID regime. The latter especially has left the nation isolated from the rest of the world

Updated - October 12, 2022 12:37 pm IST

Published - October 12, 2022 10:30 am IST

A man wears a protective mask as he rides by new nucleic acid testing booths placed on the side of a road   in Beijing, China.

A man wears a protective mask as he rides by new nucleic acid testing booths placed on the side of a road in Beijing, China. | Photo Credit: Getty Images

There are only a few workers today manning the whirring conveyor belts at the “intelligent logistics park” of the $100 billion Chinese e-commerce giant JD.com, which together with Alibaba dominates the world of Chinese online retail. If you receive a package in Beijing, chances are it passed through this massive sorting facility, where packages are arranged and indexed not by human workers but by robots.

JD’s recently accelerating push towards automation presents a snapshot of the state of China’s economy, as the country’s leadership pushes forward with ambitious plans to move up the value chain and establish China as a tech superpower, while at the same time reeling from headwinds such as a rapidly ageing population and a “zero-COVID” regime that is continuing for a third straight year. It is the perils of the latter two challenges that is driving the current thinking at JD.

In March 2022, supply chains in Shanghai came to near-total collapse as the city went into a chaotic and brutal full lockdown. Residents had to rely on sparse government handouts of vegetables to survive — a jarring reality for the financial centre of the world’s second-largest economy. “The lockdown in Shanghai was a good example of intensive pressure on supply chains”, explains Liu Hui, who heads JD’s in-house Consumption and Industry Development Research Institute. A crisis forced technological upgrades, as the company turned to big data — in which it is now investing millions — to decide how to funnel in supplies from its centres around the country into Shanghai. Meanwhile, workers in any Chinese factory are now only a moment’s notice away from being shipped into quarantine because of the vagaries of the “zero-COVID” regime, which still mandates mass testing and centralised quarantine. That’s a problem, JD’s team notes wryly, that you don’t have with robots.

End of its shelf-life

When Xi Jinping took over as General Secretary of the Communist Party in 2012, topmost of his economic priorities was dealing with an export-driven, state investment-addicted growth model that was nearing the end of its shelf-life — the model that had propelled China into becoming a lynchpin of global supply chains, the world’s largest trading nation, and the second-largest economy. “President Xi came to the conclusion, by observing trends of economic development, that the country had entered a new normal and we couldn’t continue to develop as per the past pattern,” says Han Baojiang, Director of the Department of Economics, at the Communist Party’s Central Party School.

Mr. Xi has emphasised a three-pronged campaign: what he has called “common prosperity” to tackle inequality as well as more strictly regulate sectors such as property and private tech firms; a “dual circulation” model that boosts consumption and the domestic economy (or internal circulation) while recalibrating China’s external relations (the other circulation); and most importantly, self-reliance in strategic industries. All three themes are expected to be given prominent attention at the once-in-five-year Party Congress, which opens on October 16 and will mark the start of Mr. Xi’s third term. The progress on all three fronts, as Mr. Xi completes a decade, is a mixed picture.

The Chinese economy, as Mr. Han notes, has grown from 53.9 trillion Yuan ($8.5 trillion) in 2012 to an impressive 114 trillion Yuan ($15.9 trillion) at the end of 2021. He flags the party’s declaration last year that it had ended extreme poverty, by lifting close to 100 million out of poverty in Mr. Xi’s tenure through a targeted campaign, as one of his signature legacies.

Regulations and interventions

The other significant legacy is the return of the state, which has, however, left a once-thriving private sector battered and bruised. China’s tech behemoths in particular, are licking their wounds after tighter regulation and investigations into alleged monopolistic practices targeting companies like Alibaba and Tencent wiped off close to $1 trillion in market value. In the view of some in the party, tech giants had gotten too big for the party’s comfort, particularly because of their amassing of data. Meanwhile, under the “common prosperity” campaign aimed at addressing social inequalities, a thriving private education industry was also kneecapped overnight.

Curbing what the party called “the disorderly expansion of capital” has been a focus for Mr. Xi, fuelling one regulatory intervention after another. China’s overleveraged property developers have seen the taps of easy loans switched off — a move that most economists in China would agree was long overdue, but one which has now plunged the real estate sector, a driving force for the Chinese economy, into a looming crisis. In many cities, homeowners have stopped paying mortgages as apartments lie unfinished. The real estate downturn will certainly weigh down on China’s growth, which fell to just 0.4% in the second quarter, threatening not only the 5.5% annual target but Beijing’s ascent to overtake the U.S. as the world’s largest economy — a landmark that its officials have placed much emphasis on.

One of the key objectives in a blueprint for China’s long-range objectives until 2035, released last year and pledging an annual 7% growth in R&D spending, is to establish China as a science and technology superpower. Self-sufficiency has been a key focus for Mr. Xi, who last year stressed the need to build “secure and reliable supply chains to safeguard China’s industrial security and national security” and to “tighten international production chains’ dependence on China”. This would give China leverage should countries threaten to limit access to key technologies, as the U.S. has recently done with semiconductors.

The zero-COVID policy

The biggest immediate question mark over China’s economic future, however, is Mr. Xi’s continuing zero-COVID policy, which has left business sentiment at the lowest in decades. Youth unemployment reached 20% in July, coinciding with spreading campaigns among young urban Chinese to opt out of the rat race and “lie flat”. Zero-COVID, which the Communist Party has pledged to continue, has also prompted countries to diversify their supply chain dependence on China, undercutting one of Mr. Xi’s prime objectives. Just as Beijing is looking to raise its global stakes, it has left China isolated from the world.

This is the second article of a three-part series looking at China’s changing politics, economy and diplomacy in the Xi decade.

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