Garvan Walshe is a former National and International Security Policy Adviser to the Conservative Party.
No government confident in its economy stops collecting youth unemployment statistics. Their suppression by the Chinese authorities shows quite how deep its economic rot has gone. Its domestic troubles are the fault of Xi Jinping’s return to totalitarian rule at home and international troubles caused by his sabre-rattling abroad.
As The big risk now is that he reinforces his already strong nationalist instincts to ramp up military spending in an effort to meet growth targets – just as Taiwan faces elections in January 2024.
When Deng Xiaoping began opening China in the late 1970s, it wasn’t yet clear how the revolution he led would evolve. Its definitive character was only settled by suppressing the democratic uprising through the Tiananmen square massacre. Deng and his successors gave the Chinese a bargain: stay out of politics, and we’ll let you get rich.
It’s becoming increasingly clear that phase ended with Xi Jinping’s accession to supreme power in 2012. During the last ten years, he has given himself absolute power over the party (crushing his rival Bo Xilai) and economic affairs: independent centres of economic power, whether in Hong Kong, or in China itself, such as Jack Ma’s Ant group have been snuffed out. The Party is back firmly in charge of everything.
The first half decade of Chinese growth was industrial and export-led. China produced and sold goods of ever-increasing sophistication, and the profit were reinvested in expanding production, and building infrastructure to support further production increases.
That model began to run out of steam in the 2010s, as labour costs grew and China began to produce more sophisticated manufactures that derived greater parts of their value from design, marketing, financing arrangements and after-sales care that are more properly classified as services.
Moving from a manufacturing-led to a service-led economy is difficult, perhaps because services-led growth requires the wide dispersion of educational skills, creativity and social trust that are hard to develop without the rule of law and democratic institutions (or, conversely, whose presence makes the maintenance of social control by authoritarian regimes difficult).
North African states addressed this dilemma by improving education and employing their educated populations in the state administration, which was not an unqualified success. Xi’s China instead doubled down on heavy infrastructure, building vast quantities of roads high speed rail, and even entire new cities.
This essentially Keynesian policy kept official growth rates high, and produced useful infrastructure, but is proving increasingly wasteful. The high rates of youth unemployment, in a population where there are few young people thanks to the one child policy, suggests China has run out of useful things for its people to do.
Adam Posen, a former Monetary Policy Committee member, argues that the wild swings in Covid policy (moving from systematic repression to keep Covid in check to allowing the disease to spread through the population) have left consumers too nervous to spend. This has been worsened by the collapse of property financing, which government intervention has no longer been able to conceal. Households are saving because they expect further shocks, and the government can’t stimulate public demand any more – even if it can force banks, many of which it owns, to lend to it for this purpose.
At the same time, Xi’s aggressive foreign policy is limiting the scope for export-led growth, as the US and EU take coordinated measures to “de risk” their economic involvement in China by cutting off Chinese access to advanced technology, limiting the ability of Chinese firms to buy Western ones, and even introduce curbs on Western investment in the Chinese economy.
This will be particularly tough for European industrial businesses (US businesses don’t do as much goods trade with China), and the German car sector is especially nervous. However, squeals from German car-manufacturers won’t make things better for Beijing and areas where China currently has an advantage, including solar cells and battery making, are vulnerable to technological changes from which China could be cut out.
The one remaining area in which China can stimulate demand is military spending, where the government is the ultimate consumer of the private sector’s output, and whose officials can be ordered to spend money in ways that even in China households cannot. Military orders constitute demand, and add to GDP. Workers in the military sector may be willing to spend at least some of their earnings, further increasing output. Though this particular “multiplier” effect is relatively weak, it is better than nothing, and can be used to keep GDP growth going, at the cost of a defence expenditure taking up an ever increasing share of output.
The task is to make people feel that military spending is as worthwhile as consumer spending is to them now – a mission to which China’s propaganda apparatus is already contributing. It is not difficult to see how dangerous this is. High military spending, justified by invoking a threat to the nation, risks creating a demand that all this military equipment be used for something more kinetic than merely deterring foreign enemies.
Disputed territory in the South China Sea, to say nothing of Taiwan itself, are both tempting targets for such “Keynesian” aggression. Taiwan holds elections next January, and current polls point to a landslide by the pro-independence (and anti-Chinese) DPP over the relatively pro-Beijing Kuomintang (originally the Chinese Nationalist party, once led by Chiang Kai-Shek, who was defeated by Mao in the Chinese civil war that ended in 1949). Further Chinese sabre-rattling will only reinforce Taiwanese hostility to Beijing, and requests for help from the United States.
While China would be mad to deliberately provoke war with the US, political instability in America related to the legal cases against Donald Trump is the kind of phenomenon that a nation unfamiliar with democracy can misconstrue as weakness. It is from miscalculations like these that major wars spring.