The Dragon's Economic Paradox

From Booming Growth to Uncertain Futures

Having lived and engaged in business within China for over 30 years, I've witnessed the nation's incredible transformation. From a rural economy to a high-tech giant, I can recall the bursting growth without even imagining what level it could have reached.

China's Economic Boom and the Recent Slowdown:

For over three decades, China has been the poster child for economic miracles. Excluding the pandemic-ridden 2020, the nation grew at a rate surpassing 5%, ascending to the stature of a global superpower. However, recent indicators suggest that this meteoric rise might be slowing down. Major international banks have even revised their growth forecasts for China's GDP in 2023, hinting at a rate below the 5% target set by President Xi Jinping.

The Real Estate Crisis:

In 2008, when the financial crisis hit, the government pumped large sums of money into the economy to protect jobs. They invest in infrastructure projects such as airports and railways. They also piled up a mountain of debt, sending local governments off the balance sheet, who then began selling state-owned land to pay off the debt.

The same land was converted into countless skyscrapers with initially affordable prices for the masses with the illusion that the same housing would gain value with unprecedented records. This created a massive real estate bubble.

The bursting of the real estate bubble is an important sign of the challenges ahead. Giants like Evergrande and Country Garden are now crumbling under the weight of their debts, accumulated during the years of urban development. The demand for housing has plummeted, driven by a combination of declining birth rates, reduced disposable income, and a general lack of confidence in the future. With the real estate sector accounting for over a quarter of the economy, its downfall could have cascading effects on China's financial landscape.

Demographic Challenges:

China's demographic shift is another cause for concern. Last year, official statistics showed that China's population experienced a decline for the first time in six decades. This downturn is not just a mere statistical blip but a reflection of deeper societal changes. The one-child policy, although now revoked, has left an indelible mark, leading to an aging population with fewer young people to support the elderly.

Compounding this demographic challenge is the surge in youth unemployment. The younger generation, despite being more educated and tech-savvy than their predecessors, is finding it increasingly difficult to secure stable employment. This not only dampens consumer confidence but also poses long-term risks to social stability and economic growth.

On the international front, China's once-thriving export sector is feeling the heat. Geopolitical tensions, especially with Western nations, have led to trade restrictions and reduced demand for Chinese goods.

Despite the rapid modernization and opening up of the Chinese economy over the past few decades, the state continues to play a dominant role. State-owned enterprises and government-controlled sectors still account for a significant chunk of the economy. As a result, private consumption, a key driver of economic growth in most developed nations, constitutes only 38% of China's economic activity.?

Xi's Decisions and the Global Stage:

Is China's economic growth set to fall behind the rest of Asia for the first time since 1990?

Between 1978 and 2017, China averaged almost 10% annual GDP growth, transforming from a closed, centrally planned economy to a global economic powerhouse that could rival the United States.

Over the last decade, Chinese President Xi Jinping has been moving the country away from the pro-investment policies of his predecessors and back to its socialist roots by reigning in China's private sector and building resiliency from the West into its domestic economy. Xi's vision is one of strong state control where businesses conform to the goals of the Chinese Communist Party, not the other way around.

Beijing's regulatory power has cracked down on everything from tech and finance to gaming and entertainment. China's harsh, zero-COVID policy ground its economy to a halt and led to the most widespread anti-government protests in decades, mostly among China's newly emerged middle class. Now youth unemployment is surging, threatening the social pact that gives the Chinese Communist Party legitimacy and widespread support.

President Xi Jinping's recent policies have been a double-edged sword. On the one hand, they aim to support the real estate sector by removing some of the world's strictest home-buying restrictions and granting builders access to commercial bank credit. On the other, the West views these moves with skepticism. Many analysts believe that without substantial fiscal stimulus, akin to measures adopted by the U.S. and Europe, China's economic revival might remain a distant dream. So maybe the real limits to the party's goals won't come from the West at all, but instead from within.

Can Communist ideology mix with capitalist ambition and sustain growth into the future? Is President Xi setting up China for another four decades of economic success??

Behind the Great Wall:

Since I moved to China in 1988, I have always been positively optimistic about the real growth potential of the country as well as witnessing the “jungle” within.

A real game of survival where the early bird gets the worm, and thus the first to profit. I admired the courageous (disheveled) approach of the Chinese businessmen trying to achieve at any cost their unique goal: “getting rich”.

I also learned to understand or, at least, tried to justify the unreasonable “logic” behind the design of products, the logic of applications, the user interfaces, and the locations of businesses and or housing constructions.

They made no sense to me at all but, in the end, they were right: there was a market!

I learned to expect the unpredictable and to foresee the unexpected. I learned to adapt.

However, I have recently changed my point of view and, since 2022 with the Shanghai lockdowns, I have adopted a more cautious standpoint.

There are 3 main reasons for this change:

1. The lasting psychological impact of the COVID-19 lockdown.
2. International political tensions (especially with the United States).
3. Internal political pressure.

While China commendably maintained an average of 10% GDP growth for 40 years, many believe their zero-Covid Policy could have been executed more effectively. A lot of people, mainly in Shanghai, suffered the most during those restrictions and they lost faith in the government feeling a move toward a more strict socialist state.

With regards to the internal political pressure, instead, there is a widespread fear that China is not pro-business anymore like it’s been for the last decades.

Jack Ma no longer being in charge of Alibaba, the internet giant company, and actually forced to step down and now split the company into six different ones, was a strong message.?

Ironies and Realities:

It's almost ironic that a nation that once championed the phrase "To get rich is patriotic" now finds itself grappling with concerns about wealth disparity and a potential shift towards socialism. The crackdown on private enterprises, especially in the tech sector, has sent ripples across the business community. The case of Jack Ma and Alibaba stands out as a stark reminder of the changing winds. Ma, once a beacon of entrepreneurial success in China, now finds himself and his empire under intense scrutiny.

Yet, this can be seen in a different light. Just as a prudent family patriarch might step in to temper the arrogance and unchecked influence of a successful son, the Chinese government's actions towards Alibaba can be viewed as a necessary intervention. Alibaba, with its vast reach and influence, had grown to a point where it could potentially overshadow the state's authority and control. By taking decisive action, China is essentially ensuring that no single entity, regardless of its success, can wield disproportionate power or influence over the nation's socioeconomic fabric.

My conclusions:

While the world may perceive China's actions as a crackdown on entrepreneurial spirit, it can also be seen as a protective measure, ensuring that the balance of power remains in check. Just as a family's harmony is preserved by ensuring no single member becomes too dominant, a nation must also ensure that its corporate giants don't overshadow its sovereign authority.

Yet, the aggressive foreign policy stance of the U.S., often riddled with false allegations, has undoubtedly exacerbated China's predicaments. Without this external pressure, perhaps the Dragon would still be soaring high, unthreatened.