When Xi Jinping came to power ten years ago, China had just overtaken Japan to become the world’s second largest economy.
It has grown at a phenomenal rate since then. With an average annual growth rate of 6.7% since 2012, China has experienced one of the fastest sustained expansions for a major economy in history. In 2021, its GDP reached nearly $18 trillion, or 18.4% of the global economy, according to the World Bank.
China’s rapid technological advancements have also made it a strategic threat to the United States and its allies. It is regularly pushing US rivals out of longstanding leadership positions in sectors ranging from 5G technology to artificial intelligence.
Until recently, some economists predicted that China would become the largest economy in the world by 2030, overthrowing the United States. Now the situation looks much less promising.
As Xi prepares for his second decade in power, he faces growing economic challenges, including a disgruntled middle class. If he is unable to get the economy back on track, China faces slowing innovation and productivity, as well as growing social discontent.
“For 30 years, China was on a path that gave people a lot of hope,” said Doug Guthrie, director of China Initiatives at Arizona State University’s Thunderbird School of Global Management. to add that the country is “in great difficulty at the moment”.
While Xi is one of the most powerful leaders China and its ruling Communist Party have seen, some experts say he cannot claim credit for the country’s astonishing progress.
“Xi’s leadership is not a cause of China’s economic rise,” said Sonja Opper, a professor at Bocconi University in Italy who studies the Chinese economy. “Xi was able to capitalize on an ongoing entrepreneurial movement and the rapid development of a private sector [sector] previous economic leaders had unleashed,” she added.
On the contrary, in recent years Xi’s policies have caused massive headaches in China.
Beijing’s sweeping crackdown on the country’s private sector, which began in late 2020, and its unwavering commitment to a zero Covid policy, have hit the economy and labor market hard.
“On the contrary, Xi’s leadership may have held back some of the country’s growth momentum,” Opper said.
More than $1 trillion has been wiped from the market value of Alibaba and Tencent – the crown jewels of China’s tech industry – in the past two years. Sales growth in the sector has slowed and tens of thousands of employees have been laid off, leading to record youth unemployment.
The real estate sector has also been pummeled, hitting some of the country’s biggest property developers. The housing slump – which accounts for up to 30% of GDP – has triggered dissent within the middle class.
Thousands of angry buyers have refused to pay their mortgages on stalled projects, stoking fears of systemic financial risks and forcing authorities to pressure banks and developers to defuse unrest. This was not the only manifestation of discontent this year.
In July, Chinese authorities violently broke up a peaceful protest by hundreds of depositors, who demanded the return of their savings to rural banks that had frozen millions of dollars in deposits. The banking scandal not only threatened the livelihoods of hundreds of thousands of customers, but also highlighted the deteriorating financial health of China’s smaller banks.
“Many middle-class people are disappointed with recent economic performance and disillusioned with Xi’s rule,” said David Dollar, senior fellow at the John L. Thornton China Center at the Brookings Institution.
According to analysts, the financial system vulnerabilities are the result of the country’s unfettered debt-fueled expansion over the past decade, and the the model must change.
“China’s growth during Xi’s decade in power is mainly attributable to the general economic approach adopted by his predecessors, which focused on rapid expansion through investment, manufacturing and trade,” said Neil Thomas. , principal analyst for China and Northeast Asia at Eurasia Group. .
“But this model had reached a point of dramatically diminishing returns and increasing economic inequality, financial debt and environmental damage,” he said.
As Xi tries to change that pattern, he is doing it the wrong way, experts said, and is risking the future of Chinese companies with tougher state controls.
The 69-year-old leader launched his crackdown to rein in “messy” private companies that were becoming too powerful. He also wants to redistribute wealth in society, as part of his goal of “common prosperity”.
Xi hopes for a “new normal”, where consumption and services will become more important drivers of expansion than investment and exports.
But, so far, these measures have plunged the Chinese economy into one of its worst economic crises in four decades.
The International Monetary Fund recently lowered its forecast for China’s growth to 3.2% this year, a sharp slowdown from 8.1% in 2021. That would be the second lowest growth rate in the country in 46 years, better only than 2020 when the first coronavirus outbreak hit the economy.
Under Xi, China has not only become more insular, but has also seen the fraying of US-China relations. His refusal to condemn Moscow’s invasion of Ukraine and China’s recent aggression against Taiwan may even alienate the country away from Washington and its allies.
Analysts say the current issues do not yet pose a major threat to Xi’s regime. He is expected to secure an unprecedented third term in power at the Communist Party Congress which begins on Sunday. The priorities presented at the congress will also define China’s trajectory for the next five years or more.
“It would probably take an economic catastrophe on the scale of the Great Depression to create levels of social discontent and popular protest that could pose a threat to Communist Party rule,” said Thomas of the Eurasia Group.
“Moreover, growth is not the only source of legitimacy and support for the Communist Party, and Xi has increasingly gilded the Communist Party’s nationalist credentials to appeal to patriotism as well as wallets,” he said. he added.
But to bring China back to high growth and innovation, Xi may need to bring back market-oriented reforms.
“If he was smart, he would liberalize things quickly in his third term,” Guthrie said.