How Xi sacrificed China’s future in pursuit of total power

The Telegraph

How Xi sacrificed China’s future in pursuit of total power

Szu Ping Chan – October 30, 2022

People watch a live broadcast of China's President Xi Jinping - STR/AFP
People watch a live broadcast of China’s President Xi Jinping – STR/AFP

They called it the Shanghai diet. Every morning during the two-month lockdown in China’s most populous city, Maggie found herself in a bidding war for spinach and pak choi.

At 8am, supermarkets would update apps with what was available on their virtual shelves that day. A rush to snap everything up would ensue.

“It was like a competition,” the marketing executive says from her Shanghai apartment. “Most of the food would be gone within seconds.”

While she was rarely left empty-handed, rationing meant most of her meals during the 70-day enforced confinement were either missing meat, vegetables or sometimes both. Maggie and her husband often did without. But they wanted to ensure their three-year-old son had enough to eat during the spring lockdown. “I actually lost a few kilograms,” she says jokingly.

The lockdown created an atmosphere of fear. “Everyone felt scared. Not of the virus. But about being sent to these makeshift Covid hospitals,” says Maggie, who didn’t want her surname to be used.

“You didn’t know where you’d be taken to, or how long you’d be there. Some people had their flats broken into in the middle of the night and were taken away. Or their homes were ‘sanitised’ when they were in quarantine and a lot of their belongings were ruined. I didn’t believe this would happen in Shanghai.”

But she believes she’s lucky. A white-collar job meant she could work from home. Others haven’t been so fortunate.

The world’s strictest lockdown has destroyed both lives and livelihoods – and there is no guarantee it won’t come back. But its architect has just become China’s most powerful ruler since chairman Mao.

New Politburo Standing Committee members Xi Jinping, Li Qiang, Zhao Leji, Wang Huning, Cai Qi, Ding Xuexiang and Li Xi meet the media following the 20th National Congress of the Communist Party of China - TINGSHU WANG /REUTERS
New Politburo Standing Committee members Xi Jinping, Li Qiang, Zhao Leji, Wang Huning, Cai Qi, Ding Xuexiang and Li Xi meet the media following the 20th National Congress of the Communist Party of China – TINGSHU WANG /REUTERS
Total control

Handed an unprecedented third term in office earlier this month, his political position unassailable and his every utterance carefully studied by adoring supporters, Xi Jinping is in total control of his country.

His power, and the sense that he is determined to enforce China’s cultural and military dominance even at the expense of prosperity, has sent a chill through domestic investors and the world order alike.

Proof of Xi’s apparent lack of interest in the economic consequences of his actions can be seen in the Communist leader’s choice for his second in command.

Striding out behind President Xi Jinping at the country’s recently ended Communist Party Congress last weekend, Li Qiang has become a symbol of China’s future.

A man with no central government experience, Li and other members of the Politburo Standing Committee – equivalent to the presidential cabinet – all owe their careers to Xi.

Li Keqiang, the market-orientated premier, has been sidelined. As have central bank governor Yi Gang and China’s top trade negotiator Liu He. Technocrats are out. Loyalists are in.

“China has paid a high price economically in order to maintain low Covid infection,” says Vera Yuen, a lecturer in economics at the Hong Kong University Business School.

“That zero-Covid policy is likely to continue. That will affect China’s connectivity with the rest of the world.”

The emphasis at the congress on security, science and technology over economic growth and reforms also frightened investors. Not only was Xi unrepentant about lockdowns, but his tighter grip on power has paved the way for him to rule for life.

Ken Rogoff, former chief economist at the International Monetary Fund (IMF), says this will put China on a path of slower growth and greater isolation.

“If you take the post-financial crisis period running to 2020, the IMF says China contributed more than a quarter of global growth,” he says.

“That’s phenomenal. But when China slows down, it’s going to have huge ripple effects. In Europe for example, which is very dependent on selling industrial and luxury goods to China.”

Economic struggles

The IMF warned this month that repeated lockdowns meant the Chinese economy would grow by just 3.2pc this year because of strict Covid controls. An ongoing property crisis has also triggered a wave of debt defaults.

Rogoff, now a Harvard economics professor, said that the economy will struggle to hit 3pc growth for many years. If he is right, the economy will struggle to overtake the US in nominal terms in the next few decades – a task that will become increasingly difficult as its population gets older.

Economic growth isn’t everything. But pulling back from the rest of the world is also likely to accelerate China’s slowdown.

Rogoff says Xi’s “Made in China 2025” initiative, which is designed to reduce Beijing’s dependence on foreign technology, will also struggle.

“China’s talking about catching up in technology. President Xi talked about that a lot. But it’s hard to see how that’s going to work when you’re cracking down on entrepreneurs. State-owned enterprises are not going to be making technological breakthroughs.”

They’re the basic building blocks inside all modern technology. Smartphones, laptops, televisions. Aircraft, cars, cruise missiles. All are powered by tiny chips that make it all possible: semiconductors.

There’s only one dominant manufacturer. And it’s based in Taiwan.

The island, which drives just 1pc of global economic output, punches well above its weight because it’s cornered a large share of the market. Just under 40pc of the world’s processor chip manufacturing capacity is Taiwanese, while its high-end dominance is even greater. Ninety-two per cent of the most advanced semiconductors are made by Taiwan Semiconductor Manufacturing Company (TSMC).

While TSMC’s boss recently warned that advances in the technology are slowing down, nowhere else has been able to catch up yet. China has tried. But after a decade, it’s largely failed. Its global share of the market for semiconductors remains stuck below 20pc, according to Capital Economics.

“It hasn’t increased at all, despite all the money Beijing has spent trying to lure Taiwanese engineers to come over to China to help them,” says Gareth Leather, senior Asia economist at the consultancy.

“I think it just proves how difficult it is for others to replicate what Taiwan has done since it gained this comparative advantage,” he adds.

A decade behind Taiwan

It will take a long time to change this reliance. Precision engineering means building a semiconductor factory takes between two and three years, suggesting the rest of the world is at least another decade behind Taiwan.

Rogoff says it will take this long for the US to catch up, and even longer for China.

“It is remarkable what the Chinese have done,” he says.

“There are certain areas in technology where they are pretty easily on par with the United States. But in terms of private sector commercial activity, they’re behind and cutting themselves off. It’s not a recipe for growth. It’s very worrisome.”

The US is also doing its best to slow China down. It introduced strict export controls on semiconductors made with US technology in October, and also limited exports of manufacturing tools and advanced technology.

Chips for use in artificial intelligence and supercomputers can now only be sold to Beijing with a hard-to-obtain licence. Washington also introduced tough vetting standards for US citizens who want to work with Chinese chip producers. The aim is to stop China looking under the bonnet and stealing America’s intellectual property.

These developments mean the world will rely on Taiwanese semiconductors for longer, which also raises the stakes if geopolitical tensions boil over.

China’s Communist Party knows this. Beijing enshrined opposition to Taiwanese independence in its constitution last weekend, in another thinly veiled threat towards an island that has been governed independently since 1949.

Analysts fear a Chinese attack on Taiwan risks drawing the US into a war.

“If there was a war between Taiwan and China, you could potentially see a complete decoupling of trade between China and the US,” says Leather.

This would put $600 billion (£518 billion) of annual trade between the countries at risk. China is still by far America’s largest goods trading partner, with $559.2 billion sent to US shores in 2020, with machinery, toys, furniture and clothes the biggest imports.

Catastrophic consequences

And this has severe consequences for the rest of the world. “If you think about all the goods that we import from China, suddenly cutting them off would have quite catastrophic consequences for the global economy,” Leather says.

He believes a full-blown war is unlikely. “It is possible to imagine another scenario, for example, where China might, for example, want to have a blockade around Taiwan,” he says.

You’d assume that in this scenario, basic trade between the US and China would continue. But a semiconductor shortage would become apparent quite quickly.

Capital Economics says shortages will push up prices of everything from cars to computers around the world, as they did during the pandemic. It estimates that a 50pc rise in semiconductor prices would add around 2.5 percentage points to global inflation at a time when prices are already in danger of spinning out of control.

Countries such as the Czech Republic, Hungary and Germany, which are key carmaking hubs, will suffer most from shortages, alongside Taiwan and South Korea.

Leather adds: “Without ready access to the fastest chips, innovation in areas such as artificial intelligence will slow.”

China may have sent missiles over Taiwan in August to send a message, but Leather believes it will maintain a cautious approach because the leadership has seen how a war can leave a country ostracised.

“Given how badly the war in Ukraine has gone for Russia, I think it will make the Chinese think very, very carefully about what they’re going to do with Taiwan,” he says.

“All the sanctions that the US has introduced has made China realise how difficult it could be.”

Creeping control
shanghai zero covid policy - ALEX PLAVEVSKI/EPA-EFE/Shutterstock
shanghai zero covid policy – ALEX PLAVEVSKI/EPA-EFE/Shutterstock

If there’s any doubt over Beijing’s desire to control citizens’ lives, look no further than the city’s Weather Modification Office. Officials here literally try to make it rain. And they’ve succeeded. There were clear skies during the July 1 Communist Party centenary celebrations thanks to a “cloud-seeding operation” that sprayed chemicals in the sky to bring downpours forward.

This idea of creeping control has also spread to Beijing’s grip on Hong Kong.

A security law introduced two years ago changed the lives of many Hong Kongers, and left a profound impact on the rule of law in the former British colony.

Thousands of international businesses have left or are considering leaving the city, while more than 100,000 Hong Kongers have been granted visas to the UK through a new scheme introduced last year.

Beijing has noticed the brain drain. Hong Kong’s new chief executive John Lee has been given access to a $3.8 billion fund to lure big business and top talent back to the city, but many have grown weary of repeated lockdowns and the uncertain political climate.

His plans largely failed to reassure investors. The Hang Seng share index is down almost 40pc this year alone. The Shanghai Composite index is down 20pc.

“Talent is leaving Hong Kong, mainly due to the stringent Covid-19 policy,” says Vera Yuen.

“This means its economic growth is more dependent on the Chinese economy than ever. More diversification and internationalisation will be needed for the city to continue to shine.”

Those left are also feeling the impact of slower global growth.

“Business hasn’t been that great,” says Herbert Lun, managing director of Wing Sang Electrical, which makes hair dryers and curling irons that are mostly sent to the US. Lun is based in the city and he also employs 500 people at a factory in Shenzhen.

“Traditionally, manufacturing in China would peak at around June, July, August for the Christmas season. And the rush would run through to September,” he says.

“This year, we haven’t actually seen a peak. Since about May a lot of our suppliers and competitors have seen a lot of cutbacks and slowdowns. Everybody’s buying just enough to cling on.”

Lun has been forced to cut his prices to remain competitive, even as the cost of production has gone up sharply.

He says more Chinese businesses are looking to branch out overseas, where pay is lower and workers more abundant.
He even considered it himself.

“It used to be all ‘made in China’,” he says. “Now it’s made everywhere. And so we have to make decisions that are best for our companies. And we have been focusing more on automation to essentially that labour shortage out of our equation.”

Rising rates

Rising global interest rates also make it harder to do business. Hong Kong’s monetary policy runs in lockstep with the US Federal Reserve because of a peg that keeps its currency in a tight range of 7.75-7.85 per US dollar.

“I think that’s going to depress a lot of investment going forward. If we look at past experience, where we had drastic rate increases, that always led to some sort of financial crisis in the rest of the world,” says Rogoff.

“Everyone is being a little bit more careful about taking on debt going forward and doing a little bit less investment. All of this is going to have a chilling effect on the economy. And I think that’s where the biggest uncertainty is going to be. How long is this rate hike cycle going to last? And how high will interest rates go?”

Rogoff believes the policy pivot will also transform the economy. “We’ve hit peak China,” he says.

“Historically China’s priority has always been giving people growth. And if you give people growth, they accept intrusion into other parts of their lives. But now growth is going to play second fiddle.”

Rogoff has led warnings about the dangers of a widespread collapse in Chinese property prices. While much attention has been focused on the country’s biggest cities, he says the smaller so-called “tier 3” cities, which account for more than three quarters of China’s housing stock and 60pc of economic output, have suffered from the biggest rates of overbuilding.

Any house price crash will most certainly begin here.

Against a gloomy global backdrop, all this suggests China may no longer be the powerhouse it was.

For decades, it served as the engine behind 90pc of economic growth in East Asia and the Pacific. But analysts at the World Bank now believe the economy will expand by just 2.8pc this year. Growth in the rest of the region is expected to average 5.3pc.

This puts China’s growth rate behind its neighbours for the first time since 1990.

While India continues to expand at a rapid pace, overtaking the UK as the world’s fifth largest economy this year, its trade links are far less established than its eastern neighbour. This leaves no obvious contender to pick up China’s mantle.

Either way, China’s fortunes will continue to be intertwined with the rest of the world.

Unsustainable situations

Economists at Axa believe a “crash-landing” scenario, where the world is plunged into a deep recession like the global financial crisis, will push China’s exports down by 20pc and result in a 3.5pc hit to the economy.

Unlike 2008, Beijing won’t be there to spend the world out of trouble.

But economists like Rogoff have warned about China’s troubles and its Great Wall of debt before. They were wrong then.

More than two decades after it joined the World Trade Organisation, China remains the world’s factory and a leader in payments technology. Rogoff concedes this, but adds that while a downturn may not be imminent, it is inevitable.

“There’s a famous saying from my thesis adviser, Rudi Dornbusch, that unsustainable situations go on for longer than you think,” he says.

“And when they collapse, that happens faster and harder than you think. It’s very hard to call the timing of these things. And China has seen remarkable growth. Their infrastructure is better than in almost any advanced economy. But you can’t keep the economy growing by just building more and more of it.”

Vaccines and lockdowns remain a crucial factor going forward. “Outbreaks have continued to flare up and mobility control has persisted,” says Wei Yao, an economist at Societe Generale.

“We think China needs much more preparation for a smooth exit, especially a much higher vaccination rate among the vulnerable. Currently, the three-dose vaccination rate for people aged over 60 remains insufficient and has been stagnant since summer.”

Commuters wearing face masks ride bicycles along a street in the central business district in Beijing - Mark Schiefelbein/AP
Commuters wearing face masks ride bicycles along a street in the central business district in Beijing – Mark Schiefelbein/AP

The shops and schools are back open in Shanghai, but many believe the city is far from open for business.

More than half of the Chinese companies surveyed by the US Chamber of Commerce in Shanghai believe the country’s economic management is in decline. Its poll last week showed a fifth are cutting back on investment as a direct result of its zero-Covid policy.

For Maggie, who was confined to her apartment yet again last week as part of the city’s aggressive contact tracing policy, nothing will ever be the same again.

“It has changed my life completely,” she says. “I can’t plan any more. I live with uncertainty every day. I worry my son will be taken away on his own to a quarantine hospital.”

She reflects on the future: “In our society, being obedient is very important. For your career, or to get ahead. It’s not about doing the right thing for other people, it’s about following the rules.

“But many people in Shanghai have completely lost their trust and faith in the authorities now. I always believed that Shanghai, my city, would get better. I thought we had better transparency, more justice and less corruption. I’ve lost this belief now.”

Author: John Hanno

Born and raised in Chicago, Illinois. Bogan High School. Worked in Alaska after the earthquake. Joined U.S. Army at 17. Sergeant, B Battery, 3rd Battalion, 84th Artillery, 7th Army. Member of 12 different unions, including 4 different locals of the I.B.E.W. Worked for fortune 50, 100 and 200 companies as an industrial electrician, electrical/electronic technician.