The article is written by Maria Mazurek, a journalist and head of the business section "Next" at Gazeta.pl.
Maria Mazurek, Next.gazeta.pl: On Tuesday, after a week-long break in China due to the holiday known as the "Golden Week," Zheng Shanjie, Chairman of the National Development and Reform Commission, appeared at a press conference and delivered remarks that failed to spark much enthusiasm. We heard that China is "fully confident" that it will achieve its annual economic growth target of around five percent GDP growth. However, he also emphasized that the country faces many challenges. This vague, non-specific message was disappointing. So why did China decide to release it?
Dr. Michał Bogusz, analyst at the Centre for Eastern Studies: Because they have nothing more to offer. There won’t be a larger stimulus package because they have no way to create one. Secondly, the decision-makers were clearly frightened by the herd mentality on the stock markets, fearing that the inflated bubble might burst and spread. That probably won’t happen—nothing will collapse here—but the expectations were indeed wildly exaggerated, so it’s understandable that they were scared.
For a long time, Chinese authorities did nothing to boost the economy, which created expectations that they would eventually be forced to take radical action. This was supposed to be the moment, but the party is not ready for such drastic measures, so they basically repeated that they will try to do something. Such generalities had to be disappointing. Moreover, those who appeared at the conference are too low in the hierarchy to offer anything substantial. All the market enthusiasm that had been building in China over the past week - which was completely inexplicable to me—will fade within a few days, or at most, a week.
How do you assess the economic stimulus program announced last week? Is it a realistic plan that could help the recovery, especially in terms of boosting consumption, which seems to be what the Chinese want most?
Some Western commentators believe that Beijing is aiming to increase domestic demand and consumption. I don’t share that belief. In fact, since the beginning of its existence, the People’s Republic of China has exclusively pursued supply-side policies. It doesn’t stimulate demand, and I’m not even sure Beijing would know how to conduct such a policy. The obsession with stimulating supply is still evident in Xi Jinping and the broader ruling camp.
To increase demand, Chinese families would need a larger share of the country’s GDP for consumption. This share is currently very low, even by the standards of a developing country, let alone one aspiring to catch up with developed nations. It won’t increase because China essentially lacks a functioning social safety net. The level of social services is so low that it forces families to maintain a high savings rate. The Chinese must save for retirement, as pensions are minimal, for illness, as insurance covers only basic services, for children’s education, which is only theoretically free, and to help their children start adult life.
On a side note, it’s worth remembering that China is highly diverse internally. The economic situation in cities like Shanghai is drastically different from that in smaller towns. Shanghai, Beijing, and Guangzhou are first-tier economic centers. Most Chinese live in third- and fourth-tier cities, where incomes are relatively low compared to expenses.
I have to admit, I’m a bit surprised that China doesn’t seem too concerned about boosting domestic demand, as I had the impression that’s exactly what they wanted to do—build a second strong economic leg alongside the industrial and export sectors. Especially since the global situation is changing, protectionism is returning, international trade tensions remain high (or are even increasing), and globalization is somewhat retreating. Isn’t this what the Chinese authorities are talking about?
That’s just talk. Even if you listen to Xi Jinping, he doesn’t explicitly say that domestic consumption needs to increase. He says, "Let’s increase domestic demand," but immediately adds that it’s about renewing machinery, supporting the replacement of commercial fleets, and so on—it’s about creating demand among businesses, not the population.
So how does China intend to rebound economically if it keeps relying on the same methods while the environment has changed?
In my opinion, they don’t have a clear plan for recovery. Most economists and officials understand what needs to be done: stimulate consumer demand among the population and stop transferring resources from people to the industrial sector. In other words, completely reverse the logic of how China’s economy operates. Since the 1980s, China’s economy has been based on a fairly simple mechanism: it forces a high savings rate on the population through social policy (or rather, the lack of one), with people depositing their savings either in banks, the stock market, or through highly developed shadow banking institutions. The state then takes over this capital and redirects it toward investments, such as infrastructure projects, or indirectly by providing loans to developers for expanding the real estate market.
But the real estate market has been in trouble for years. Major developers are going bankrupt, and local governments are also facing issues because of this.
These problems arise because the market is overheated. Estimates suggest that China has already built enough residential space to accommodate about two billion people—600 million more than its current population. Many of these apartments stand empty, having been built as investments and bought for that purpose.
I’ll repeat, the mechanism is this: the state forces people to save heavily. It then captures this capital and redirects it toward investments in one way or another. This mechanism has been exhausted for various reasons: demographic trends, the international situation, and China’s own economic progress. This development model made sense when China was starting from a low base and climbing the supply chains. But after reaching a certain level of development, it no longer serves its function.
Why doesn’t China change this model, then?
Because they would have to shift toward domestic consumption, and the problem—primarily a political one—is that Beijing controls the provinces by controlling the flow of capital from the population to the elites. Similarly, local party structures control local economic elites. The Chinese Communist Party’s power is based on two pillars: one is the apparatus of repression, and the other is control over capital flow.
If they reversed this and left the capital in the hands of the people, with market mechanisms beginning to operate, it would suddenly become clear that the party can only control China through force. And that’s not enough to manage such a large country. In my opinion, this is the core issue. Everyone sees what needs to be done, but the party is afraid because it knows it would lose a crucial mechanism of control and power over the country. When Xi Jinping came to power in 2013, he also promised reforms, but later he clearly became afraid of them. He realized that this would mean the party losing some control, and it would create serious political trouble for him.
Is China destined to experience economic decline?
It will certainly lose its growth momentum. Besides, you can’t maintain high growth rates indefinitely—at some point, the economy stabilizes and slows down, which doesn’t necessarily mean a recession. However, the mechanism that drives China’s economy is like riding a bike: you can slow down, but you can’t go below a certain speed without falling over. China is now testing how much they can slow down without crashing.
You’ve talked a lot about maintaining control through capital management, but I wanted to ask about the other element of power—control through force and increasing social control. There have been reports—"Financial Times" wrote about this—that the group of people required to hand in their passports, restricting their ability to travel freely, is expanding. This includes teachers, for example. What’s behind this increase?
This process began back in 2014, but there’s been some acceleration. The screws are being tightened, and the group of people affected by these restrictions is expanding. Government employees are being forced to hand over their private passports and are issued official passports—which are held by their employers. Most Chinese residents cannot have two passports, a private one and an official one. With the official passport, there’s a limit—you can only go abroad for two weeks, and only on a business trip. The group of people affected is growing. Teachers, even those in primary schools, have now been included. They don’t receive official passports, and their private ones are simply taken away. This no longer affects thousands but millions of people.
It seems like a return to the past, reminiscent of times that seemed long gone.
Under Xi Jinping, we can observe such a return to the past. In the case of officials, this is partly due to the fear that during their vacations, they could be recruited by foreign intelligence services. As for teachers, it’s an ideological issue: they are "soldiers" on the ideological front lines, tasked with shaping the new generation. Restricting their foreign travel is primarily intended, in my opinion, to limit their exposure to alternative ideas and viewpoints, and to prevent the contamination of youth with Western thinking. Additionally, those unhappy about having their passports taken away will leave the teaching profession. This is a way to get rid of potential troublemakers and those who are already ideologically contaminated.
Finally, could you summarize the economic situation in China? What’s the state of its economy in general terms?
First of all, there’s an issue with data—we don’t have access to all of it. Since 2013, the Chinese have been systematically restricting access to their economic data. So we don’t fully know what’s happening in the economy. The data that is available indicates that things aren’t that bad. There’s a clear slowdown, but it’s not a crisis. The problem with assessing the situation is that China is a very large, complex economic system. Just because we see signs of a fire somewhere doesn’t mean we know the scale of the problem. What’s certain is that there is a significant economic slowdown, but there isn’t a crisis yet, and the party still has plenty of tools to prevent one. However, they don’t have the tools—and they aren’t ready—to stimulate the economy and give it new momentum. This situation could persist for quite some time.
Dr. Michał Bogusz is an analyst at the Chinese Team of the Centre for Eastern Studies. He graduated in Political Science from the University of Gdańsk and International Relations at the People’s University of Beijing, later working in Beijing and Guangzhou. He spent eight years in China. He is also the author of the blog "Za Wielkim Murem" (Behind the Great Wall).
