Putting Chinese Anti-Lockdown Protests Into the Broader Context
When it comes to China, recently investors’ eyes were focused on whether or not the strict ‘Zero-Covid’ policy would actually be lifted by the Chinese Communist Party (CCP) in the near future. Vast majority of the mainstream media covering of China has been focused on the Zero-Covid policy, lockdown protests and recently - the easing of the restrictions which apparently started to take place.
No doubt, the Chinese lockdown policy is an issue bearing significant implications for the global macroeconomic outlook. Yet, in order to understand the direction in which the Chinese economy is heading, and why the protests happened in the first place, it may be helpful to consider that what is recently happening in China may be a complex, fundamental change. A change that should be considered in terms of years - instead of months - and not only regarding the economic policy but the whole CCP’s guiding philosophy.
This deep-dive article will outline the principles behind Deng Xiaoping‘s technocratic reforms, and the resulting approach that has guided the Chinese economy for the past couple of decades and allowed the country to capitalize on the rapid globalization that the world was experiencing at the time. Furthermore, it will investigate the changes which took place in the Chinese economical and political narrative after Xi Jinping took over the CCP leadership in 2012 and the process of directing the Chinese economic policy during the following CCP congresses. Finally, it will try to put the recent anti-lockdown protests in the broader context, outline the possible outcomes for the Chinese economic policy, and the implications for the analysis of the global macroeconomic situation.
Historical Background - Expansionary Deng’s Heritage
In 1992, Deng Xiaoping performed his “Southern Tour” using Chinese Special Economic Zones (SEZ). SEZs were the experimental zones with more free market laws, created in 1979 to attract Foreign Direct Investment. After decades of Mao Zedong’s individualist approach to policy making resulting in–among others–the Great Leap Forward, which was a massive failure to make China prosperous in a way mimicking the Leninist approach in the USSR. The Chinese officials were trying to adjust their version of socialism, in order to avoid the mistakes made by the Soviets which had led to the collapse of the USSR.
The tour resulted in the decision to revive and empower the 1978 idea of economic reform (gaige) and opening the economy for trade and foreign capital (kaifang). What was particularly important in this approach, was the acknowledgment that in order to create a prosperous, socialist society, China first needs to gain economic power and create wealth. So that later, the labor and the capital will be distributed more equally, according to the socialist principles. This approach, called pragmatic by the researchers, assumed that in order to achieve a long-term goal of socialist prosperity, the country can, although carefully and under CCP’s control, allow for various forms of entrepreneurship and can engage in trade, even if it results in a byproduct of personal welfare - so much denounced by the communist ideology.
The third generation of Chinese Leadership, represented by Jiang Zemin and Zhu Rongji, have pushed the quasi-market solutions only further. Zhu Rongji’s economic reforms yielded indisputable success in capturing the wave of globalization. During the period of his leadership, first as vice premier and from 1998 onwards as a premier, the annual FDI inflows experienced a 12-fold increase, while the GDP tripled. On the other hand, Jiang Zemin established a theory of Three Represents, a description of the CCP’s relationship with the people. According to the theory, CCP should equally:
1) Represent the development trend of China’s advanced productive forces - i.e. flirting with quasi-capitalist policies, but ONLY as a mean for creating a wealthy, industrialized (socialist) society
2) Represent the Chinese culture - i.e. not becoming “westernized” by the free market policies
3) Represent the interest of the majority of the Chinese population - This representation is a bit more complex, as it refers to the Marxist idea that when the society will industrialize and build enough welfare and capital, it will be transformed into a socialist rule of the majority - the idea of political reform, in the past mentioned even by the Xi Jinping himself. Yet until the reform, the party has to act as a ruler acting on behalf of Chinese society.
The Three Represents created a handy ideological tool for the CCP. It allowed for, and formalized its relationship with Chinese capitalists, while providing the party with grounds for its authoritarian power. By building a wealthy society, the party de facto acts on behalf of the majority, as the increase in one’s standard of life is clearly in one’s interest.
The Structure of Power in post-Deng China
A crucial aspect of post-Deng China is the composition of power within the communist party. Deng Xiaoping recognized that China cannot allow itself to repeat the mistake of consolidating power in the hands of one person, as it took place under Mao’s regime. Instead, Chinese officials shaped the idea of Chinese Meritocracy. Out of all of its principles, two are notably worth emphasizing. Firstly, there was a fixed period of two terms, during which the Chinese leader could be in power. This restraint has, however, been removed by Xi Jinping in 2018. Moreover, among Chinese officials, there is an unspoken rule about the upper age limit. Positions of power are reserved for officials below the age of 68. When this age is reached, Chinese politicians are expected to immediately retire and completely step down from the political stage.
Deteriorating Chinese Growth
When Xi Jinping took over the leadership, one problem was already there. After the Great Financial Crisis, Chinese growth stopped being as organic as before. Yet with the help of Keynesian-like fiscal stimulus programs, the Chinese managed to push the growth of the economy a bit further. Foreign reserves held by the People’s Bank of China (PBOC) illustrate those developments quite clearly - until the GFC, the capital was flowing into China rapidly and consistently. After the crisis, a few rounds of stimulus helped revive the economy for a while and prop up the Chinese reserves to an impressive level of 4 Trillion USD. Yet, since the peak reserves in 2014, the PBOC seems to not be able to accumulate more capital. Something in the economy has changed, and even in the face of post-2014 stimulus rounds, the foreign capital stopped flowing to China on such a rapid basis as before.
While Chinese foreign reserves show a clear outflow of capital from China, it is easy to argue that they do not represent overall economic activity in the country. Yet, slow but steady deterioration is visible across many metrics – among others, retail sales. This metric is one of the “big three” data, next to industrial production and fixed asset investment, which are of particular usefulness in analyzing the Chinese economy.
The retail sales represent the internal part of Chinese economic strength, the domestic demand to which Xi jinping is often referring in his speeches. He wants to build the Chinese strength not focusing completely on trade anymore, but also on strong Chinese consumer. This is Xi’s concept of “assertive” China, with economic power not completely dependent on the buyers of Chinese exports. At the same time, the trend visible in Chinese retail sales seems to put the feasibility of this concept in question.
Retail sales’ deterioration has started, as in the case of almost every economic metric, after the GFC. Yet, in contrast to the foreign reserves, the stimulus programs had a little elevating effect on Chinese retail sales. They are in a multi-year declining trend and no stimulating policy seems to be working. If Xi really wants to build Chinese strength on the domestic demand, he first needs to find a solution to this problem - and given that no previous solution worked, it may be quite a challenge.
Talking about stimulus programs, it is worth mentioning how they worked and what their effects (and side effects) were. From GFC on, Chinese fiscal policies focused mostly on infrastructure spending. Initially, they were achieving their goal. As the economy was expanding at an acceptable pace, sometimes even spilling over to other countries. Yet, each next one of them achieved less and less growth. At the same time, a different thing started to grow – namely, the housing bubble fueled by rapid credit expansion and massive spending.
The real estate developers were incentivized to build more and more – to the point in which the extensive use of leverage in the market started to threaten its stability and the sector requires serious deleveraging. Having 70% of the household wealth allocated to real estate, Chinese society looks for such a move with little enthusiasm. Yet, the CCP under Xi’s leadership signals that they do not want to support the bubble’s growth. This causes a great deal of dissatisfaction across Chinese society and should be considered one of the most important factors influencing the recent social unrest.
Is Xi Turning his Back on Deng?
One of the two centenaries (goals for the century) defined by Xi Jinping at an 18th party congress is for China to become a strong, democratic, civilized, harmonious, and modern socialist country by October 1st, 2049 – that is, a 100th anniversary of founding the People’s Republic of China by Mao Zedong. Now, further and further into Xi’s leadership, his methods do not seem in line with those of his technocratic predecessors. Rather, he has his own approach, hidden under his understanding of Chinese “Common Prosperity”. We can get the cues on what he means by that from, among others, his words regarding real estate: Houses are for living in, not for speculation. It is quite clear that Xi wants to take measures for bigger equality in Chinese society. In contrast to his predecessors, however, he wants to level the wealth down. This creates implications not only for the economy but also for the tools of political authority used by him.
When he removed the two-term ruling limit in 2018, it was known that Xi’s ambitions are larger than the usual, ten-year ruling period. Being 69 years old, he does not seem to be bothered by the age limit, previously tightly held as a standard for officials’ retirement. All of those cues seem to suggest that Xi is regressing Chinese political philosophy towards the “one-man rule”, which Deng Xiaoping was so afraid of. To understand China's possible future in a global macro context, it seems proper to ask: why is he doing that?
There are two main ways in which the rule in authoritarian states may be conserved. The first one is a strong economic expansion and creating welfare for citizens. This was utilized in China for the past few decades, by introducing more and more free-market policies. As introduced earlier, the CCP was executing this approach by aligning its narrative with Jiang Zemin’s Three Represents. This approach has worked reasonably well, but only with strong growth of the economy being its prerequisite. Yet, the Chinese economy started to deteriorate, and Xi Jinping realized that there is little he can do about this. Instead, he turned to the second method, which is conserving power by the use of force and oppression. From this perspective, zero-covid lockdowns are simply a demonstration of power and a symbol of absolute control which Xi aims to retain over Chinese society. These lockdowns send a very clear signal to Chinese citizens: You won’t like the new approach when it comes to housing and personal wealth. But you can do nothing about it because we (the CCP) are the ones having the power.
As often is the case in China, such a pivot in guiding policy is also signalized by non-verbal cues. Those cues can be found even in such a peculiar area of expression as fashion - the Chinese leader revived the so-called Mao Suit, a Chinese tunic suit usually associated with Mao Zedong. Yet, one of the most powerful messages Xi has sent by far was an almost theatrical act of removing Hu Jintao, former CCP leader, from the 20th Party Congress. Even though Chinese authorities claim that he was escorted because of not feeling well, everyone knows that it should rather be considered as a non-verbal statement about the direction of Chinese policy. Those cues create a really strong statement: the era of stimulus and Chinese millionaires is finished, and from now on, Xi is going to get things done in his way.
What Hu’s removal from the congress also illustrates, is that this new approach of Xi hasn’t gone through without any resistance from the members of the Party itself. There is a clear conflict between the previous, technocratic generation of politicians and the current power under Xi’s leadership. While such things are not directly available for analysis, as the Chinese political discourse is under a rather strict control of the ones directly in power, once again - there are cues to be found.
Earlier this year, the CCP reportedly warned the retired members that criticizing the current leadership will meet with the disciplinary reaction of the Party. Just before the 20th party congress a video by Song Ping was released, in which he stated that political reform is a necessary step to achieve the Chinese Dream. Two things are notable here - Song Ping is the oldest, 105 years old Chinese politician, who started his career still under Deng’s leadership. He played a critical role in shaping the Chinese political landscape, acting as a mentor for Hu Jintao and Wen Jibao - the fourth generation of Chinese leaders. Song’s influence, due to his age and political achievements, is really significant. But what is even more significant, is that the words about political reform are Xi’s own words. He used those in his speech during the previous party congress, yet repeated rarely ever after - especially since he switched to his own set of economic policies from ones of his technocratic predecessors’.
Song’s statement can be considered as one big symbol. It is a question from technocrats to Xi: If you’re done with the first represent, then what are you going to do with the third one? Yet, from what has been illustrated in this article by far, Xi has his own set of policies, not in line with previous way of doing things in China.
Coming Back to Lockdowns
With such extensive background knowledge, the Chinese protests may be looked upon from a substantially different perspective. It is worth having in mind that the protests themselves are not a completely new thing – they are happening on a regular basis, yet rarely in such a synchronized manner across the whole country. It is a visible signal that Chinese people are really unhappy with what is happening in the country, both from an economic and social perspective.
Economically, Xi knows that he cannot (and certainly does not want to) allow for more full-blown stimulus policies in the usual, Keynesian-like infrastructure spending manner. Taking a look at the history of Chinese stimulus, it is quite safe to assume that they would not achieve the goal of a complete revival of the Chinese economy - especially given that it is the domestic demand which Xi wants to make a new foundation of Chinese economic power. On the other hand, they would fuel the bubble in the property sector to an even more extent, making developers and financiers–so denounced by Xi–even richer. That is an unacceptable outcome on his side, especially taking into consideration his nationalist, egalitarian (Marxist?) views.
The Chinese leader knows that this shift in approach will not receive a warm welcome from society. In order to prevent any sort of resistance, he turned to lockdowns to demonstrate what the party apparatus is capable of. This is a pure exhibition of new political rhetoric on the side of CCP – one that resembles the Maoist policies, rather than technocratic, globalizing China.
Implications for the Global Macro Analysis
As you might have noticed by now, the situation with China is far from being as simple as it is often described in mainstream media outlets. Instead of being glued to the screens in expectation of yet another lockdown opening news, it would be wise for investors to start considering whether the Chinese opening will meet the world's expectations – which, from the macro perspective, are huge.
Even with China's current attempts on easing the lockdown policy, a much bigger question remains in place. This question is: will the Chinese reopening be able to lift the global economy from a substantial slowdown? This, I think, is much overlooked and taken for granted by the investors. Xi does not seem to support this view in any metric – and a lot depends on whether he does.