Did China miss its chance to fix its economy?

This is an audio transcript of the Behind the Money podcast episode: ‘Did China miss its chance to fix its economy?’

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Michela Tindera
On Sunday, China’s leader for the last decade, Xi Jinping, strode into the Great Hall of the People, a building on the western edge of Tiananmen Square in Beijing to a lot of fanfare.

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You can hear the music and everyone in the hall clapping in unison. And there’s Xi giving his opening remarks.

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[Xi Jinping speaking in Chinese]

Michela Tindera
He’s speaking at this event known as the Communist party’s congress. It happens every five years, and its purpose is to unveil both China’s next leaders and key policy changes. But the FT’s China correspondent, Ed White, says that this one is particularly important.

Edward White
Now, there are political events in China and then there are political events. And this one is considered the most important in about a decade. And that’s because, very simply, Xi Jinping, China’s president, but also the head of the Chinese Communist party and the leader of its Central Military Commission, he is about to take a third term, continuing his leadership of the party. So that means Xi Jinping is gonna be in a position where he can potentially rule China for the rest of his life.

Michela Tindera
But as Xi prepares to begin his unprecedented third term, there is an uncomfortable reality facing him in China. After decades of booming economic expansion, the country’s growth is slowing down. According to the World Bank, 2022 is the first year since the early 1990s that China’s economic output will fall behind the rest of Asia.

Edward White
The property sector slowdown, as well as the fallout from Xi Jinping’s zero-Covid policy, have basically meant that China is having to deal with these problems in a much more urgent rate.

Michela Tindera
For years, China’s economic growth has been following a playbook. And once, not even that long ago, the country seemed poised to usher in that next phase of growth. But now that isn’t happening. And if Chinese citizens’ quality of life gets worse, it could spell trouble for Xi Jinping and the Communist party.

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I’m Michela Tindera from the Financial Times. On this week’s episode of Behind the Money: as Xi Jinping readies for an unprecedented third term as China’s leader, the country’s economy is slowing down. But has Xi already missed his chance to set things on the path for growth again?

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Hi, Ed. Thanks for being on the show.

Edward White
Oh, pleasure to be here.

Michela Tindera
To understand what’s happening in China’s economy today, we need to look back to the 1980s and early 1990s, to when the Communist party leader Deng Xiaoping was in power. So Ed, what happened then?

Edward White
He changed the way that China operates in several key areas. One of which was obviously, in his words, allowing some people to get rich. So that meant basically allowing capitalism and at the same time allowing private property markets, so people to buy and sell homes. Now, these things enabled what then followed, which was the largest mass migration of humans in history from rural areas into urban areas.

Michela Tindera
So how did the economy develop from those important changes?

Edward White
We’ve seen a huge amount of investment and that has been both central investment and private sector investment going into infrastructure, which obviously helps support that mass migration. But also property, and property development. Now at the same time there’s also been a huge era of export-led growth. That’s the transformation that people talk about when they think about, you know, the sleepy fishing village like Shenzhen being transformed in a matter of years to this, you know, technology-focused export hub that’s at the heart of the global tech supply chain in southern China. But where that’s left China is at a place where the country has actually grown and become richer over a longer period than many people thought possible.

Michela Tindera
OK. So Ed, there’s sort of this general playbook for how to sustain growth in a country with a developing economy the way China’s has been. You invest in infrastructure, grow the labour force, and then what happens next?

Edward White
In other developed economies, as these infrastructure periods and investment and property, these sorts of periods have finished, once there is a large labour force, governments have typically found ways to build in large social safety nets, which has meant that people are actually able to not worry too much about the future. They’re comfortable that if they retire, they’ll have a pension. If they get sick, they might be able to get national healthcare. And so people are basically free to spend their savings. But what’s happening with China is that that transition hasn’t happened.

Michela Tindera
So why hasn’t that shift happened in China yet?

Edward White
In China, none of those things have been sort of substantially provided by the government, which means that while there are all of those services existing, none of them are there to the extent that people feel comfortable relying on the government for them. So they save at higher rates than almost any other country of similar standing. And basically, you have this huge amount of money that’s locked down as savings, which in any other country would be, you know, part of the consumer engine, which would then have this kind of cycle of greater consumption, leading to greater kind of incentives for entrepreneurs and for business. Instead, they’re stuck in this cycle where people invest in property and the property companies have been taking on debt to obviously grow that industry. And it goes round and round. But in the meantime, the country is just underutilising its core population.

Michela Tindera
Ed, you interviewed someone named Rio Liu, whose own personal experiences match what you’ve been describing here. Can you tell me more about him?

Edward White
The guy that I interviewed Rio Liu, he is a Beijing native. He works in the liquor industry and he basically is a, you know, well-educated guy, works for a good company, has a good wage, has a young family, an aspirational middle class, that kind of person. And about five or six years ago, he had a bit of a shock because his mother suddenly required a hip replacement. They went to the hospital and was, were told that this was gonna cost about $30,000, in US dollars. All of a sudden he realised that the government wasn’t gonna cover this stuff. He was suddenly thinking, wow, I’m gonna have to pay for this stuff for my parents, I’m gonna have to pay for this for my children, for my wife, siblings, that kind of thing. And all of a sudden, he stopped wanting to spend money because he thought, I need to have a huge amount of cash and, or assets that can be transferred to cash really quickly because uncertainties are going to happen.

Michela Tindera
So Ed, China, you know, as we’ve discussed, has had this really successful run economically that’s lasted for pretty much most of the 21st century so far. So why wasn’t this social safety net set up any earlier?

Edward White
Economists don’t really seem to have a clear answer on this. And people that I’ve interviewed, they’re very senior Chinese officials, they haven’t received satisfactory answers, you know. China wasn’t rich during its early years. It was a developing economy and in some ways has still been until very recently. And so, you know, developing economies can’t do all of the things that developed economies can. Xi Jinping’s advisers have talked about being that you don’t wanna disincentivise labour, so they’re worried about structuring social services in a way that provides too much welfare and that that becomes a problem. But studies I think, or examples from the West have shown that you have to be very, very, very generous before that becomes a problem. And outside of that, there isn’t a clear answer as to why they haven’t done this. Perhaps they took their eye off the ball, so to speak. They certainly missed an opportunity while they had the opportunity in recent years. What is clear is that they have a long way to go to getting it to a level that people will feel confident enough to change the way they save and spend money.

Michela Tindera
Now Ed, you reported that all the way back in 2013 — so just a year after Xi Jinping first came to power — he came up with this 60-point plan. And in this plan, it was supposed to, if implemented, shift China’s economy into this more consumer-led growth era. And, you know, that essentially means that a greater share of the country’s GDP would be made up of spending on goods and services rather than on investment in property and infrastructure. So tell me about that plan.

Edward White
Yeah, this has been a fascinating part of reporting for the last few weeks, as I’ve actually been going back really ten years, looking at the political conditions when Xi Jinping came to power in 2012, but also the economic conditions and what people at the time thought was gonna happen. And, you know, Xi Jinping, I mean, compared to how he’s thought of in the West now, is quite remarkable. He was seen as someone who was potentially gonna be this great reformer. He was pushing forward this sort of striking programme of reforms that, if they had all been done, would have rebalanced or gone a long way to rebalancing the economy. And that was things including greater pensions, property tax, which would have removed some of the incentives around property development.

Michela Tindera
Then what happened to it? Why didn’t those reforms happen?

Edward White
There have been trials. There have been sort of, for example, there’s been a couple of cities, including Shanghai, with very small-scale property taxes being put in place, but nothing of the sort of the kind of national level that people were hoping for. And when you talk to experts and economists, people are a bit puzzled. But it just goes back to the thing that the investment levels drove growth at a level that the Chinese Communist party were happy with. People’s lives seemed to be improving under Xi Jinping from an economic point of view, and this is something that was reflected in the interviews that we did. They missed a really amazing window of opportunity where not just good economic conditions existed locally, but also on the foreign policy and on the international front, compared to where things are at now, where China is in a much more difficult position and it faces real headwinds in terms of its access to technology internationally.

Michela Tindera
And as you said, you know, Xi Jinping had this plan laid out quite clearly almost a decade ago. And, of course, you know, the world has changed so much since then. But, you know, how easy or difficult do you think it would be for the government to make this kind of shift today?

Edward White
One of the key problems they face is that the Communist party and its focus on control means that basically it puts a cap, I think, on the level of creativity that they will allow from companies once they get to a certain size. And so we’ve seen this with, for instance, Jack Ma’s Ant Financial group, which had essentially revolutionised payments in China. But they had, in doing that, become really larger than most of China’s banks. And so they were operating without the kind of regulatory oversight that banks have. And so on top of that, Jack Ma had started to challenge the Chinese regulators. But in China, you just can’t challenge the Communist party’s authority and face no repercussions. So that to me is where the picture gets very blurry into the future for China because there is a pathway for them to move from the low-hanging fruit that they’ve been able to gain from three to four decades now of infrastructure growth, of an export-led economy and of investment into the property sector development. They could transition fairly seamlessly to this consumer model and to having greater productivity and to unleashing what people call the kind of animal spirit of the consumer economy. And yet the political system seems to be creating even at this very early stage, all of challenges in doing that and unlocking the kind of growth potential that would be far more sustainable than the property scene development we’ve seen so far.

Michela Tindera
So what would you say is at stake for China and its economy at this, you know, pretty pivotal symbolic moment happening now with the congress? And what happens if changes aren’t made?

Edward White
So the near-term question coming out of the congress is can they find some sort of mechanism that helps to deleverage the property sector and helps to deal with the debt problem, while at the same time not causing a massive amount of panic. There are some questions that we just don’t know the answers to in terms of the true levels of debt, the levels of contagion that may have already occurred in terms of the debts being transferred to other entities that we don’t know about.

Michela Tindera
Mm-hmm. And what about longer term?

Edward White
Longer term, it’s a much, much bigger problem. You’re talking about the legitimacy of the ruling Communist party, which for years has been based on the idea that they are the ones who will always improve the lives of ordinary Chinese people. If growth really slows and if they can’t find a new growth model and they are left having to redistribute the pie that they’ve created now, that is going to, I think, really ask some tough questions of the leadership and not just Xi Jinping, but everyone around him. And that’s a really, really massive change because you’re talking about, you know, generations of Chinese that only know growth. And if they start to see their lives becoming worse, not just improving at a slow rate, but actually things getting tougher, well, it would be pretty natural in my mind that you start asking questions of the leadership.

Michela Tindera
Well, Ed, thanks very much for sharing your reporting.

Edward White
Sure.

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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. This episode was edited by John Buckley. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Special thanks to Eli Meixler and Fiona Symon. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.