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Is China’s social contract about to break down?

China's growth strategy is running out of road. Credit: Getty

July 19, 2024 - 1:00pm

Steady as she goes. That was the message from the Third Plenum of the Chinese Communist Party, which concluded yesterday. Watched closely as an indicator of the ruling elite’s policy intentions, the communique that emerged from the meeting suggested no major change to the country’s economic direction.

But Xi Jinping saying everything is going to plan is starting to sound a bit like Joe Biden saying he’s going to beat Donald Trump in November’s election. Because in an unfortunate piece of timing, as the Plenum began the Chinese statistical agency reported that economic growth had recently fallen below the talismanic 5% figure.

For quite some time, economists have been warning that the current Chinese growth strategy is running out of road. Building manufacturing industries to export to the world has delivered Beijing the phenomenal rise in income it has experienced in the last 30 years. However, there’s only so much capacity on the planet to absorb Chinese products.

Decades of cheap Chinese goods flooding the world enabled Western shoppers to keep shopping and Western firms to reap the profit bounty by outsourcing production to China. But that also led to the decay of industrial heartlands, stirring the rise of populist politicians who made their names on bashing China. Now those populists are in power or knocking at the doors across the West. With a second Trump presidency currently looking likely, the reception Chinese trade delegations will receive on their travels will get even frostier.

Yet the response in Beijing has been to double down on export promotion with subsidies and supply-side reforms that will cut the cost of doing business. Still, the fundamental imbalance remains: China exports far more than it imports, and buys relatively little of what it produces.

While the government could reinvigorate the economy by reducing its export subsidies and instead using the money to raise local incomes, thereby enabling Chinese consumers to buy more of what their factories are producing, the leadership is so far resisting such an approach. Xi Jinping dislikes “welfarism”, and wants to build Chinese supply chains across the globe so as to secure his nation’s future.

Instead, the Plenum communique referred to the need to “maintain social stability” and “strengthen public opinion guidance”, a hint that if the social situation deteriorates, greater repression may be in order. These are not the words of a self-confident ruling party.

But in the long term, this approach doesn’t look sustainable. Throughout Chinese history, the “Mandate of Heaven” has always been an essential component of the country’s social contract: the leaders can enjoy absolute power, provided they deliver the goods. In a country that has always had strong regional power centres, maintaining control by force alone seldom works over anything more than the medium term.

The social contract between the Communist Party and the Chinese people has itself been a simple one. In return for giving up Western-style freedom and democracy, their government will deliver them Western-style prosperity. Until now, that has worked. But in recent years, as the economy began slowing, social discontent began rising. So far this hasn’t burst into open protest. but the eruption of civil unrest during the Covid lockdowns shows just how difficult it can be to maintain social order in a country of over one billion people.

That’s why the 5% growth target has assumed such importance, standing as proof that the governing class is keeping its end of the bargain. So we needn’t be surprised if later in the year the government caves and engages in some kind of demand-focused stimulus spending, if only to juice the figures enough to hit their target.


John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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Alex Lekas
Alex Lekas
4 months ago

“strengthen public opinion guidance” — There are quite a few Western leaders who would like a dose of that as well.
In return for giving up Western-style freedom and democracy, their government will deliver them Western-style prosperity. —- Meanwhile, all sorts of “far-right” people and parties are springing up as freedom erodes in the West, taking prosperity with it. It’s almost as if those things work in tandem.

RA Znayder
RA Znayder
4 months ago

“However, there’s only so much capacity on the planet to absorb Chinese products.Decades of cheap Chinese goods flooding the world enabled Western shoppers to keep shopping and Western firms to reap the profit bounty by outsourcing production to China.”

Isn’t that also a world problem then? It seems to me that in the modern post-Fordist age we have an enormous capacity to overproduce. The actual problem is not maintaining production, it is to sustain demand. In fact, this was already a problem recognized by capitalists in the 1920s, where they felt they needed to transform capitalism from a system of needs to a system of desires. Globalism amplified this principle even more.
Moreover, cheap Chinese products did not just support the Western shopper, it arguable also allowed the West to transform its society to a financialized managerial bureaucracy. But is that sustainable? Are we perhaps toiling, producing and consuming simply because abstract economic models tell us we need to because we need “growth”? What does that even still mean in the real physical world where so many things exist in abundance?
The only real physical limitation we do have is a fragile environment and limited energy and resources in the absence of relevant innovations. And that, economists overlook all the time.

Arthur G
Arthur G
4 months ago
Reply to  RA Znayder

“The only real physical limitation we do have is a fragile environment and limited energy and resources in the absence of relevant innovations. And that, economists overlook all the time.”
That’s actually not true. The cost of commodities continuously falls. The technology for extracting resources always outstrips demand. The earth has greened tremendously over the last 25 years, adding arable land the size of the United States. Our capacity to produce energy and food far outstrip human population growth, which is coming to an end this century.
The Malthusians have always been proven wrong. They’re wrong now. The earth can easily support 8 billion people at a much higher average standard of living.

Steve Jolly
Steve Jolly
4 months ago
Reply to  RA Znayder

The environment is not fragile. That’s a myth perpetuated by environmentalists not supported by the scientific facts. They get away with saying that because they define the scale. Those environmentalist documenataries that talk about the ‘fragile ecosystem of such and so island’ are invariably talking about an isolated ecosystem that has arisen through very specific conditions and by being isolate by some sort of feature of geography. Those sorts of environments are fragile and can be very sensitive to conditions, including the overall state of the climate. These sorts of small local environments were being created and destroyed by natural processes millions long before there were humans to fret over it. There are many that exist today that would have one day disappeared without any help from us. In fact, most of them probably would. It’s basic logic. Things that arise because of very specific conditions are sensitive to those conditions.

But the environment planetwide, considered in total, the global environment, and the life within it, are in fact quite resilient. Life has endured through crises orders of magnitude more destructive than anything produced by mankind. Things like asteroid impacts and supervolcanoes make our nuclear weapons look like firecrackers in terms of relative force and energy. There have been double digit changes in average global temperature. The average temperature has been both much higher and much lower than it presently is. There have been radical changes in the atmosphere, including an era where there was so much oxygen in the air that fires could start by spontaneous combustion, dragonflies could grow as large as hawks, and there were centipedes as big as us.

If you’re one of those people who finds things to worry about, I suggest microplastics are a far greater concern than climate change. Those might conceivably create serious havoc, because unlike climate change, we don’t have scientific evidence that life will adapt to microplastics as easily as climate change. Climate has been changing since ever and life plows right along, changing and adapting to it. Tiny bits of material made by processes that don’t exist anywhere else in nature (that we’re aware of anyway), are a legitimately unprecedented phenomenon that’s quite obviously a result of human activity. It’s quite likely life can and will adapt to such things. For all we fretted about nuclear war and the resulting radioactive contamination, Chernobyl is basically a nature preserve less than five decades later, far less than the blink of an eye in geologic time.

chris sullivan
chris sullivan
4 months ago
Reply to  Steve Jolly

thats a big thumb up thanks Steve!

Steve Jolly
Steve Jolly
4 months ago

The author is right, but it doesn’t matter, because Chairman Xi is no fool. He is prepared for this. Even as he delays the reckoning as long as possible, he’s already laying the groundwork for his eventual response to this crisis. Chinese media control and surveillance is orders of magnitude greater than anything else we’ve seen even in the heights of the Stalinist era. Stalin didn’t have the technology. Xi Jinping does. He’s used it to create a narrative of the west oppressing China and conspiring to ‘keep China down’. The Chinese people have all been indoctrinated by a country without free speech and with total media control. They believe in the nonsense about China’s ‘century of humiliation’ and how the CCP is correcting that historical injustice. The closer we get to China’s inevitable economic slowdown, the more Xi will hammer that strategy. When the moment comes, the people will be prepared to receive Xi’s excuses. He’ll blame the West. He’ll blame America. He’ll blame their populism, and protectionism. He’ll take a cue from our own misguided intellectuals and play the race card, throwing accusations of racism around internationally while in his own country he is openly promoting traditional Han Chinese culture, putting minorities in concentration camps, displacing native peoples through targeted immigration, and so on. Then he’ll turn those factories that are no longer churning out iphones to other purposes and have them churn out weapons instead, building an arsenal to force his terms on his neighbors and maybe eventually beyond. He will militarize his economy and stoke nationalist sentiment, keeping the people busy and productive as workers in munitions plants and as soldiers in his army. His strategy is well considered and backed by ample historical precedent, most recently by Nazi Germany, and lest we forget, Hitler conquered most of Europe and threatened the entire world before he was stopped, and the USA of 2024 is not the sleeping giant it was in 1941. Mark my words, this is what’s coming. You heard it here first.

chris sullivan
chris sullivan
4 months ago
Reply to  Steve Jolly

and thats another big thumb thanks steve – unherd should be paying YOU !

Samuel Ross
Samuel Ross
4 months ago

Cheap Chinese Products (CCP) last for 6 months and then break down (if they don’t poison you with their toxic components). Produce in China and soon your Intellectual Property will belong to the Chinese Communist Party, who never met someone else’s idea that they didn’t like (and never had to work hard to invent and develop).

While the industrial manufacturing capacity of the world is lost to a Communist country, they pay for those lost jobs with cheap exported junk.

That’s what I call a ‘Raw Deal’.

Liakoura
Liakoura
4 months ago
Reply to  Samuel Ross

China’s Top 10 ExportsThe following export product groups categorize the highest dollar value in Chinese global shipments during 2023. Also shown is the percentage share each export category represents in terms of overall exports from China.
Electrical machinery, equipment: US$899 billion (26.5% of total exports)
Machinery including computers: $512 billion (15.1%)Vehicles: $192.7 billion (5.7%)
Plastics, plastic articles: $132.5 billion (3.9%)
Furniture, bedding, lighting, signs, prefabricated buildings: $121 billion (3.6%)
Articles of iron or steel: $97.9 billion (2.9%)Toys, games: $89.1 billion (2.6%)
Knit or crochet clothing, accessories: $83 billion (2.5%)
Organic chemicals: $77.9 billion (2.3%)
Clothing, accessories (not knit or crochet): $70.9 billion (2.1%)
China’s top 10 exports accounted for just over two-thirds (67.2%) of the overall value of its global shipments.
Vehicles was the lone gainer among the top 10 export categories, up by 28.3% from 2022 to 2023.
https://www.worldstopexports.com/chinas-top-10-exports/

Samuel Ross
Samuel Ross
4 months ago
Reply to  Liakoura

China remains a massive manufacturing country; agreed. Decades of investment in industrial infrastructure cannot be undone in a day. Every company is nervously looking to exit and start producing in India, Malaysia, Philippines, Mexico, etc., where they don’t have to worry about their IP being ripped off, or subsidized state-owned enterprises taking over their market.

Liakoura
Liakoura
4 months ago
Reply to  Samuel Ross

“Cheap Chinese Products (CCP) last for 6 months and then break down (if they don’t poison you with their toxic components). Produce in China and soon your Intellectual Property will belong to the Chinese Communist Party, who never met someone else’s idea that they didn’t like (and never had to work hard to invent and develop).”
Largest foreign enterprises operating in China in 2022, based on domestic sales and employees.
Hon Hai Precision (Foxconn)
Volkswagen
Apple
General Motors
CP Group
HSBC
Robert Bosch
Toyota
Samsung
BMW
You seem to have such little faith in the business practice of these companies, if you claim, with no evidence provided, that their manufactured products are all “cheap exported junk”.
https://www.statista.com/statistics/1420082/largest-foreign-companies-in-china/#:~:text=Hon%20Hai%20Precision%20had%20sales,third%20in%20the%20ranking%2C%20respectively.

Bernard Davis
Bernard Davis
4 months ago
Reply to  Samuel Ross

And that’s what I call a typical racist, right-wing rant. Get back on your meds.

Liakoura
Liakoura
4 months ago

“China exports far more than it imports, and buys relatively little of what it produces.”
From Reuters
“BEIJING, July 2 (Reuters) – China’s BYD, posted a 21% rise in second-quarter electric vehicle sales, closing the gap with Tesla after handing back the world’s top EV vendor title to the U.S. rival in the first quarter.
BYD sold 426,039 EVs in the April-June quarter, according to Reuters’ calculations based on its monthly sales reports. That is almost 18,000 vehicles fewer than Tesla’s vehicle deliveries for the second quarter, but far closer than the more than 86,000 gap in the prior quarter.”
So who’s buying all these electric vehicles, or is BYD giving them away? (not a serious question).

Richard Millard
Richard Millard
4 months ago
Reply to  Liakoura

BYD is selling lots of EVs both domestically and as exports, but still “China exports far more than it imports, and buys relatively little of what it produces.” It’s economy is perilously dependent on exporting “far more than it imports” – a bit like Germany on steroids.

0 0
0 0
4 months ago

Has Xi been talking to Rachel Reeves and Sir Keir?