China’s economy is in bad shape. The post-pandemic recovery has been much smaller and shorter than the Chinese government had expected. The official growth rate for 2023 was 5.2%, a respectable, albeit slower, but the reality may have been lower, with some analysts predicting growth of only 1-2%. Some indicators showed some improvement in the first few months of 2024, but the economy still looks sluggish, with growth heavily dependent on exports.
The economic slowdown has led to a collapse of confidence in China’s trajectory both at home and abroad. Quantitative data shows that consumer and producer confidence plummeted in the spring of 2022 after the Shanghai lockdown. Consumer outlook improved temporarily when the zero-COVID policy ended in late 2022, but has remained at record lows since then. Various indicators of domestic business have recently shown a gradual recovery, but numbers are still far from all-time highs.
This data may underestimate the depth and breadth of anxiety Chinese people have about the country’s current situation and future, concerns I heard firsthand during an extended research trip this spring.
While the sluggish economy and collapsing real estate sector are the biggest issues, I also heard surprisingly frank complaints about zero-Covid and a chaotic Brexit, protracted attacks on private technology companies, an increased focus on ideology, an unrealistic pursuit of technological independence, and rising tensions with the West. These fears are leading to weakening consumer demand, stifling business investment, and efforts to relocate wealth and families overseas.
A question that has been asked oft is why the leadership isn’t doing more to revitalize the economy and restore confidence. And by leadership, many actually mean implicitly one person: Xi Jinping. The end of term limits, the transfer of governance to Communist Party institutions under Xi’s control, and the extraordinary attention given to Xi by the official media have given the Chinese public (and the rest of the world) the impression that Xi is totally in charge.
The Chinese government has not been sitting idly by: it has expanded credit, rolled out a multi-point plan to reassure the private sector and foreign business community, relaxed restrictions on second home purchases, and toned down its wolf warrior rhetoric, but a significant number of people I met (not a scientific sample) were unimpressed and felt these measures were still too little, too late.
There are four commonly cited arguments as to why Xi Jinping and other top leaders do not take a different approach, or what we might call the “four no’s” in Chinese politics. The first is “he doesn’t know.” Some speculate that Xi Jinping is not being told about the economic downturn. Senior officials do not want to give him bad news for fear of being blamed for delivering the bad news. The thinking is that they are therefore only giving him polished, positive reports.
One source said he had heard that working-level officials at Zhongnanhai were instructing outside researchers to submit only positive reports. Another source said that the officials who control the flow of documents to Xi Jinping are aligned with the security and propaganda agencies, and that the documents Xi reads reflect their biases. But others I spoke to strongly disagreed that Xi Jinping and other leaders are not well informed. One expert who has submitted research to the party and government said he was instructed to submit unvarnished analysis because the leadership wants to receive opposing views.
The second, “he doesn’t know what to do,” is based on the premise that Xi Jinping and other top leaders are well informed but face a range of problems that are not easy to solve. The list is long: the real estate crisis, ballooning local government debt, plummeting birth rates, widening inequality, discontent in Hong Kong, rising tensions with the West and most of China’s neighbors, and more.
Moreover, the leadership is currently made up of a “B team,” many of whom have limited experience in central government, and policymaking is centralized in the Chinese Communist Party, making coordination across the bureaucracy and between Beijing and the regions more difficult, not easier.
Aides said they have heard that on some issues, the leadership has had lengthy discussions about how to solve the problem, delaying decisions or the introduction of new policies. For example, the leadership appeared to recognize stock market weakness as a problem in the summer of 2023, but no new measures were introduced until the leadership of the China Securities Regulatory Commission changed in early 2024. Even harder is figuring out how to address one issue in a way that doesn’t exacerbate others, or devising an overall plan that finds a balanced approach.
Resolving real estate issues and economic imbalances may be a classic example, as it is clear how difficult it is to find a policy path that effectively reconciles the conflicting interests of all stakeholders, including the central government, local governments, developers, homeowners, financial institutions, and other economic sectors. Similarly, the Third Plenum was reportedly postponed from January to the summer of 2024 due to a lack of consensus.
Some sources have compared Li Qiang negatively to his predecessor, Li Keqiang, who died suddenly last fall, and highlighted the declining quality of senior officials. Vice Premier He Lifeng, who is in charge of the economy, is seen as less capable than his predecessor Liu He.
The third option, “He doesn’t care,” is rooted in the assumption that Xi Jinping’s top priority is strengthening the Chinese Communist Party’s monopoly on power and his own political dominance. While media reports show Xi visiting factories and holding forums on a range of economic issues, Xi Jinping’s own daily schedule may not be dominated by the economy, but by managing security and political issues, including personnel decisions.
This was an overwhelmingly unpopular option among Chinese interlocutors, but those who supported it believed it fervently. Their core impression was that Xi Jinping seemed willing to sacrifice the economy for nationalism and Communist Party control. Moreover, Xi is not alone; he was chosen to replace Hu Jintao “so as not to become Mikhail Gorbachev,” one said, not to promote rapid growth. Strikingly, proponents of this view tended to be older (over 60 years old), and they highlighted the obvious similarities between Xi Jinping and Mao’s personalities, as well as the similarities between the two eras in their shared emphasis on ideological purity and class struggle, which led to great social and inter-elite tensions.
The last answer, “He doesn’t agree,” infers that the problem is not Xi Jinping’s ill-informed, indecisive, incompetent, or uninterested, but rather that he and his advisers disagree with critics who believe the current policy course is wrong and unmet the challenges. Indeed, their view may be that, given the loss of reliable access to Western technology, markets, and capital, China has no choice but to prioritize the development of domestic technologies and gain as much influence as possible over global supply chains.
More importantly, Chinese leaders can point to some evidence that their country’s plans are working, including its electric vehicle and battery advantages, the world’s longest high-speed rail system, the C919 single-aisle commercial jet, a series of hugely popular internet platforms and the Beidou satellite system.
The majority of our informants chose this last option. They believe that Xi Jinping has strong views about the importance of managing advanced technologies for both China’s economic and strategic needs, and is enthusiastically executing this vision. Hence the shift in investment from real estate to advanced manufacturing, and the focused party and state support for emerging technologies that could spur growth and strengthen the country’s security. Where others see ignorance, incompetence, or apathy, they see clarity of purpose and decisiveness.
But the “he disagrees” argument is split into two camps. Most who choose this option believe that the Chinese leadership made a strategic mistake by going in an overtly nationalistic direction with its large-scale industrial policy and betting too hard on controlling future technologies. In this view, moving away from liberalization and not paying enough attention to household finances and consumption means lower productivity, higher debt, slower growth and even greater tensions with other developed countries.
Those who have made this choice have responded in the opposite way: They actually agree with the Chinese leadership’s approach and believe that critics are inherently neoliberal ideologues who oppose an active state and are unfairly ignoring major signs of technological progress. Perhaps not surprisingly, some (though not all) of those in the latter camp whom I’ve spoken to working in government research labs think this way.
These beliefs are important. If either of the first two options, “he doesn’t know” or “he doesn’t know what to do,” is correct, then the current path is the product of unintentional mistakes, and all that’s needed to create change is to provide the leadership with better information and a more effective plan for dealing with the country’s economic problems. How people outside China see this will determine how they should approach China on other issues. This would support the view of some officials in Washington that it would be important for President Joe Biden to meet face-to-face with Xi Jinping to ensure he understands exactly what U.S. foreign policy is on issues like Ukraine and Taiwan.
But if Xi Jinping and other top leaders don’t care about the economy and disagree with the critics, then the current trajectory is the result of deliberate planning, and new data and policy reports with alternative strategies are unlikely to bring about much change.
The leadership could prove its critics wrong, but if not, there are two sources of change. The first is a major economic crisis that generates a political cleansing. Either the current leadership admits its mistakes and changes course, or another elite faction emerges to replace the current team, or, least likely, the public could protest and try to oust the Chinese Communist Party altogether. There may be more going on under the surface that is invisible to outsiders, but none of these scenarios seem feasible in the short to medium term.
A second source of change would be for the Chinese leadership to find a much more benign international environment in which the United States, and the West more generally, could provide credible assurances that China would return to being a reliable supplier of technology, markets, and capital, would recognize the unconditional legitimacy of the Chinese Communist Party’s authoritarian regime, and would accept Beijing’s sovereign claims over the South China Sea and Taiwan. But the chances of this change are even smaller than either of the domestically driven scenarios.
One reason the West is unlikely to accommodate is that in surveys both inside and outside China, foreign business executives and government officials typically say, “He doesn’t agree.” From boardrooms and capitals abroad, Xi appears to be in full political control and determined to press ahead with this strategy. The adjustments are merely small tactical shifts to appease critics at home and abroad to a minimum. As a result, they believe they must become more determined to stick to their guns, not less.
While far from scientific, this informal survey suggests a widening divide between parts of Chinese society and the leadership, and between Beijing and the rest of the capital. This means bold new action is unlikely, but the discrepancies between the leadership and competing views at home and abroad portend more tensions and conflicts to come.
