The domestic fault lines of China’s transformation

Sanjay Ruparelia is the Jarislowsky Democracy Chair at Ryerson University.

The 2008 Olympics signalled the welcome arrival of China on the world stage. The 2022 Winter Games, in contrast, prompt grave concerns in many quarters. Today, China is undoubtedly a great power. Yet its political regime and economic model reveal dangerous fault lines, while its strategic ambitions and aggressive rhetoric stoke growing resistance.

The 2008 financial crisis undermined the traditional hierarchy of the global political economy. The intervention of the Group of 20, whose co-operation prevented another worldwide depression, signalled a new era. Yet its members chose divergent paths. The EU imposed austerity, causing persistent stagnation and rising inequality. The U.S. adopted a more Keynesian approach, but the size and duration of its stimulus proved inadequate. Populist reaction grew.

China turned on the taps. Extraordinarily high levels of investment maintained a construction boom that, alongside rising exports, sustained annual economic growth rates exceeding 6 per cent for more than a decade. By 2013, its economy was the largest in the world, measured by purchasing power parity. In 2015 Beijing launched its Made in China initiative, with the goal of achieving global dominance in 10 critical sectors, from robotics and electric vehicles to artificial intelligence, by 2025. By 2018, the middle class had grown from fewer than 40 million to more than 700 million. By 2020, China’s per capita income had increased 120 per cent since the crash, while its US$15-trillion economy accounted for 45 per cent of the growth in world GDP over the same period. By 2021, China had created more than 1,000 billionaires, surpassing the U.S.

Many believed the elevation of Xi Jinping to the presidency could herald liberalization. Instead, his tenure has personalized political power, resurrected the Communist Party’s hegemony over state and society and cemented the dominance of the state in the economy.

The new administration cracked down on rights lawyers, independent media and civic organizations, imprisoning many dissidents. Its sweeping anti-corruption drive, to catch “tigers and flies,” quickly ensnared political rivals. Mr. Xi soon concentrated power in his own hands, orchestrating an end to the presidential two-term limit and reversing key reforms introduced by Deng Xiaoping. The wave of repression led more than 100,000 citizens to seek asylum overseas. But thousands have come back, either through campaigns of intimidation or forced returns. The severe crackdown in Hong Kong and mass internment camps established in Xinjiang over the past few years epitomize a wider ruling strategy.

Yet the accumulation of power by Mr. Xi has created its own problems. Deploying severe coercion to achieve political objectives reveals limited social consent. The decline of informal power-sharing norms in the party, previously riven with corruption, might consolidate political authority in the short run. Yet uncertainties over when and how power will change hands generates instability. Historically, elite machinations have toppled previous leaders. Veteran observers attribute Mr. Xi’s decision to skip the COP26 climate conference in Glasgow last November to his fear of just that.

The sustainability of China’s developmental model has come into question too. Its debt-to-GDP ratio doubled from roughly 140 per cent in 2008 to 280 per cent in 2020. The corporate sector owes more than half. Chinese companies filed more patents than their U.S. counterparts in 2019, while its awards from the European Patent Office grew 10 per cent in 2020, faster than any large economy. But returns on investment have fallen. State-owned enterprises continue to receive preferential access to public banks and capital markets, crowding out small and medium-size enterprises, which account for 80 per cent of non-government jobs.

Beijing has managed its growing debt burden so far. Recent moves to rein in overdrawn real estate companies and curb the overheated property market demonstrate resolve. Yet whether the party can steer the transitions without depleting local government revenues and damaging household wealth is a real dilemma.

Indeed, the social costs and demographic tensions of China’s growth strategy are rising. Urban economic inequalities have exploded, while economic growth has slowed, over the past decade. Many people struggle to get their foot on the property ladder. The fall in China’s working-age population since 2011, a consequence of its old one-child policy, may bolster relative wages in the short run. But its ramifications in the long run are serious. The welfare burden on future generations, anticipating higher taxes and greater responsibilities for social care, will increase significantly as society ages. The recent decision to allow families to have three children has predictably failed to reverse the trend. Indeed, the punishing grind and pervasive anxiety felt by many workers in a hypercompetitive economy has engendered a growing anti-consumerist backlash among millennials, who prefer “lying flat” to working “996” (from 9 a.m. to 9 p.m., six days a week). Such passive dissent could jeopardize national ambitions.

Thus last summer Mr. Xi declared the need “to regulate excessively high incomes,” to ensure “common prosperity for all.” Early moves include charging well-known celebrities with tax violations, imposing curbs on private tutoring and extending the government’s crackdown of foreign public listings by major tech companies. Leading entrepreneurs have pledged billions to social welfare programs in return. Many believe Mr. Xi is using populist rhetoric to mobilize mass support and displace potential threats to his rule. His major goal is for China to become a high-income economy by 2049. Yet the risk that it will get old before it gets rich is real.