Ghost cities, fleeing millionaires: China’s rudderless economy
If economic growth was measured by the output of empty slogans, then China would surely be booming again. There will be “high-quality development” and “innovation vitality” to “comprehensibly deepen reform” and achieve “national rejuvenation on all fronts”, the Chinese Communist Party (CCP) declared at the end of a key meeting last week aimed at rebooting the country’s ailing economy.
All this under the leadership of “supreme reformer” Xi Jinping, who was hailed as the heir to a modernising predecessor, Deng Xiaoping — even though his principal achievement since coming to power in 2013, 16 years after Deng’s death, has been to put “reform and opening” sharply into reverse.
That era of change is over and the economy is rudderless and beyond reform — and Xi is the biggest obstacle to change.
As the grey men (and they are overwhelmingly men) of the CCP’s central committee gathered, economic sentiment was dismal. The five-yearly meeting — the “third plenum”, in party speak — was delayed from last year, amid rumoured wrangling over how to tackle mounting economic problems. It coincided with figures showing a sharp slowdown in growth and continued falls in property sales and prices. Soaring youth unemployment, plunging levels of inward investment and widespread signs of social stress, including a spike in protests, all added to the gloom.
China’s National Bureau of Statistics cancelled a news conference that usually accompanies new data — perhaps wary of warnings from the Ministry of State Security, the country’s main spy agency, that gloom about the economy is a foreign smear and that “false theories about “China’s deterioration” are being circulated to attack its “unique socialist system”.
It is not as though Chinese officials do not see the problems with the country’s economic model — “unco-ordinated and unsustainable”, in the words of China’s last premier, Li Keqiang. This model, and the heady rates of growth that used to accompany it, was heavily reliant on cheap exports and on massive and wasteful state-led investment in property and infrastructure, which sent debt soaring amid diminishing returns.
A building frenzy has left China littered with ghost cities containing 60 million to 100 million empty or incomplete homes. Property accounts for up to a third of the economy, and CCP efforts to reinflate the bubble have fallen flat. A recently announced $42 billion (£32 billion) fund to buy up empty apartments is a fraction of the $533 billion that developers estimate is needed to finish housing they have sold to buyers and then failed to complete. Companies accounting for 40 per cent of China’s home sales have defaulted — an army of zombified firms that will not be put out of their misery for fear of social unrest.
Local governments, which depended on land sales to developers for a substantial share of their income, have run up debts of more than 66 trillion yuan (£7 trillion), equivalent to half of China’s GDP. They have resorted to desperate measures to boost their coffers: almost all traffic fines issued in Hebei province in northern China in 2023 were exposed as bogus, while a local government in the southwestern province of Guizhou had a local contractor arrested after she demanded the full payment of an invoice for building schools.
It’s widely agreed that Chinese consumers need to spend more, since private consumption accounts for just 39 per cent of the economy — extremely low by world standards (the figure in the US is 68 per cent). But with 80 per cent of family wealth tied up in property and no meaningful social safety net, they are reluctant to splash out.
Officials also talk of creating a self-sustaining innovation economy to turn China into the world leader in cutting-edge technologies. They want to move from an economy based on copying and applying western technology — re-innovation, as it has been dubbed — to one driven by home-grown tech. Ever since Deng launched China’s reforms in the late 1970s, obtaining foreign know-how by all available means has been central to modernising the economy and military, spawning industrial-scale cyber-espionage and the forced transfer of technology as a routine price for doing business in China.
This strategy is no longer so easy, amid growing western restrictions on technology transfers and heightened wariness over Beijing’s espionage and high-tech tie-ups in business and academia.
Yet the most effective way of encouraging domestic innovation — giving more sway to the market and to private companies — has been thwarted by Xi’s obsession with security and party control. He has hobbled China’s most innovative technology companies, which have faced tightening restrictions. Leading entrepreneurs have been forced out of the companies they founded; many, including Bao Fan, one of China’s most famous and respected financiers of tech deals, have simply disappeared amid vague accusations of corruption.
Last year, China led the world in the number of millionaires leaving the country, according to the Henley Private Wealth Migration Report. The party’s tightening grip, increasingly in every boardroom, lab and classroom, hardly seems conducive to innovation or reliable science.
In the medium term, Xi hopes that renewable-energy tech can replace property as a new motor of growth, and mouthwatering subsidies have been thrown at industries ranging from solar panels to electric vehicles (EVs) and batteries, leading to massive overcapacity and vicious price wars. Between 2009 and 2023, China spent $230.8 billion supporting its EV industry alone, according to estimates from America’s Center for Strategic and International Studies.
Yet the benign international environment that accompanied China’s earlier export splurges has gone; both the US and EU have imposed hefty tariffs on Chinese EVs that, they allege, are being dumped at below cost.
Meanwhile, China has become a hostile place for overseas businesses. Last year, direct foreign investment into the country fell to a 23-year low. Even China’s most enthusiastic corporate cheerleaders in the West appear to be having doubts; Apple, for instance, is quietly diversifying its supply chains away from China. “Resilience” has become the watchword in western boardrooms, with the Ukraine war exposing the danger of over-dependence on autocrats with hostile ambitions. Foreign companies have never enjoyed a level playing field, and the days when they would put up with almost any indignity for a share of the mythical China market are fast disappearing.
Top western business leaders are due in Beijing this week to meet officials in an effort to understand what the latest pronouncements mean. Good luck with that. The loosening of political control necessary for real economic reform to take root is contrary to everything Xi stands for. Under his leadership, the use of trade, investment and market access as weapons of coercion has become routine, belying the platitudes of reassurance from the third plenum — a meeting that can best be seen as a requiem for the era of reform and opening.
Ian Williams’s new book, Vampire State: The Rise and Fall of the Chinese Economy, is to be published by Birlinn on September 5
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