Analysis: Xi Jinping expected to take over China with slower economy and multiple crises

Xi Jinping is due to be reappointed for a third five-year term in the midst of several crises: Covid, the Ukrainian War, trade conflicts with the US, a slowdown in the local real estate market and a global increase in inflation.

The 20th Congress of the Chinese Communist Party began on Sunday (16). While in recent congresses the climate was one of optimism (and even a certain megalomania with the country’s economic success), in this one, the determination of economic and political guidelines has a character of urgency. How will President Xi Jinping’s third term deal with all the world changes that have occurred since he was reappointed in 2017?

At the last congress, in 2017, 2,280 delegates represented the party’s approximately 89 million members. During the event, they introduced Xi Jinping’s thinking on socialism with Chinese characteristics into the party’s constitution and set out several concrete timelines for achieving development goals.

In August 2021, Xi Jinping introduced the concept of “common prosperity”, implying that the focus of his third term would be to greatly reduce Chinese income inequality, which is quite high by Asian standards. Some of the immediate consequences were the educational reform, which limited the “colsinhos”, the introduction of property taxes and an increase in the social security contribution of those who earn higher wages. But today, the focus has shifted.

The Chinese economy, for the first time in decades, will grow less (2.5%) than other Asian developing countries (5%). It is good to remember that for many countries, a growth of 2.5% is not that low, but this is not the case for the Asian giant. In China, more than 500 million people still officially live in rural areas. The moment someone moves to a city or the city moves to the countryside (urbanization today is much more a process of transforming rural areas into cities than expanding urban centers), their productivity triples. So urbanization alone pretty much guarantees that China will grow at 2% or 3% a year for the next 10 to 20 years. In other words, except for the natural growth of urban transformations, the Chinese economy should walk sideways this year.

Much of the reason for this is choice. The sanitary cord remains standing and the objective of local authorities remains to minimize the transmission of Covid across the country. The almost daily testing of much of the population is expected to cost $100 billion in 2022, or 0.5% of GDP. But the biggest costs are indirect: the drop in activity due to the decrease in the movement of people across the country and the limitation of several services by the specific lockdowns where cases of Covid pop up.

For example, a friend has his bar in Xuhui, central Shanghai, closed since the beginning of the year, as local authorities still consider it safer to keep small businesses closed. It is good to remember that decisions about the pandemic are very decentralized in the country and even in the city most bars in Shanghai only closed during the city lockdown that ended in early June).

But the tendency of the sanitary cord is to loosen. The quarantine, which was 14 days in a hotel plus seven days of monitoring, is now 7+3. Before, trips to China had to be made on direct flights, if there was any provision for these; today, it is possible to make stopovers. In other words, the country should slowly reopen its borders, but it is moving towards it inexorably. The main obstacles to Xi Jinping’s third term do not include the virus.

Internally, the housing crisis will take time to be swallowed by the economic system, even if there is no risk of a financial crisis. And externally, the decoupling process between the US and China continues in full swing, especially after the new round of sanctions imposed by the Americans.

In a rapidly urbanizing country, the destabilization of the real estate system reverberates in several sectors. For example, about 20% of local authority revenues come from public land sales for residential and commercial construction. But in this term, the revenue from these auctions is expected to drop 30% compared to last year, in which the total was already lower than in 2020. Even so, as the Chinese financial system is isolated from the world (there are strong controls of capital and private banks can hardly operate in the country), there is no risk to the stability of the system.

If there are signs of recovery, there is no lack of room for domestic consumption to come back strong. Savings rates in the country, for example, are very high. The IMF estimates that if Chinese households consumed their income in the same way as in Brazil, Chinese aggregate consumption would more than double.

But the big apprehension for the rest of the world comes from the course of the US-China trade war. On Friday, two days before the CCP congress, the Americans announced the latest and greatest target in the trade war against the Asian giant. Basically, the US has banned the export of any component or equipment that enables semiconductor production in China unless the producers have special government authorization. Furthermore, the US government has banned US citizens from working with Chinese companies in the industry. Dozens of executives have already had to resign.

With all these problems, the mood at the CCP congress is not one of optimism. The president has already announced that “turbulent times” are coming. This includes, for example, increasing food security, a concern since the great famine of the late 1950s, but which became a priority after the pandemic and the War in Ukraine. That means increased military spending and intervention in the economy. The reforms promised at the 19th congress are unlikely to materialize.

The government is betting on a “great rejuvenation”, in which local industries would be enough to supply Chinese development. But they are not. China was one of the great beneficiaries of the globalization process, which was basically reversed with the election of Donald Trump. Deep down, Xi Jinping’s government is at a crossroads. The economy is much bigger than when he took power, as is China’s geopolitical role.

Although the economic process has not been exhausted, the US position as an assumed adversary and internal problems limit the government’s range of actions. More than the Party congress announcements, the government’s actions in the coming months matter. How will the Chinese government react to US sanctions? Will the process of loosening the sanitary cord continue? Will China mediate peace between Russia and Ukraine or will it continue to abstain from the process?

Basically, we overestimate China in the short term and underestimate it in the long term. A country with 1.4 billion people and enormous economic potential can still be the engine of world growth. But what appeared to be manifest destiny became much more difficult. President Xi Jinping’s third term does not begin with few obstacles. Let’s see how he handles them.