Why Does China Remain Locked On Growth Targets?

Xi Jinping’s ostensibly left-wing efforts to move the country in a more equitable direction conceal a regressive focus on growth.

(Eugene Mymrin, Getty)

Jeremy Wallace is a professor of government at Cornell University. His most recent book is “Seeking Truth and Hiding Facts: Information, Ideology and Authoritarianism in China.”

Common Prosperity: More Slogan Than Policy

In August 2021, Xi Jinping gave a speech to a rapt audience of the Central Finance and Economic Affairs Commission. Xi noted other countries’ high levels of inequality, social disintegration and political polarization, and then he acknowledged his sense that China faced similar threats because of its own income gaps, especially between the city and the countryside. The country must focus on “dividing the cake well,” he said, rather than relying on growth alone to provide opportunities for the poor to advance themselves. He envisioned the growth of a large middle class where workers can move forward.

Similar rhetoric had resonated in China a decade before when Xi’s erstwhile rival Bo Xilai launched various initiatives in the central city of Chongqing, where he served as party secretary until a scandal of murder, mutiny and money led to his dismissal and imprisonment. Yet unlike Bo, who actually implemented his policy visions, Xi’s bark seems bigger than his bite. Indeed, as the economist Barry Naughton has noted, Xi’s “common prosperity” is merely a “substitute for genuinely redistributive policies.”

Some China watchers go further than Naughton to argue that, despite his perception in the West as a deeply devoted Marxist, Xi has actually reversed the redistributive policies of his predecessors, particularly Hu Jintao and Wen Jiabao. As the law professor Wei Cui noted, Xi cut taxes and made Beijing more reliant on regressive revenue sources for income, all while putting forward nothing in the way of progressive transfers amid a “resolute refusal to build a welfare state.” Indeed, even after launching his ostensible leftward lurch, Xi’s conservatism comes through:

We should not bite off more than we can chew and make promises that we cannot keep. The government cannot cover everything, and the focus is on strengthening fundamental, inclusive and basic living protection and efforts. Even if the level of development is higher and the financial resources are stronger in the future, we still cannot set too high goals and provide overprotection; we should resolutely prevent falling into a “welfare” trap and raising idlers.

Xi claims to support efforts to move the country’s economy in a more equitable direction, noting that the equalization of basic social services is critical to such efforts, and he has called for buttressing pensions, providing basic poverty alleviation assistance and education reform. He has also spent years unsuccessfully pushing a property tax against reluctant local governments and landowners.

But his actions are mostly limited to cracking down on the rich and the powerful. Back in 2020, the government abruptly turned the screws on Jack Ma, canceling the IPO for Ant Group, the company he founded, which had been expected to raise upwards of $37 billion. Rich individuals became targets of tax evasion investigations. The for-profit tutoring sector was effectively shut down. Tight restrictions on new video game licenses and user time limits were imposed. All told, by September 2021, the China Project counted 19 distinct sectors facing crackdowns in what it called China’s “Red New Deal.”

While these actions scared investors — four big tech firms alone had lost $1 trillion in stock value by August 2021 — they seemed designed to please middle-class parents and offer symbolic solace rather than trying to cut through the Gordian knot of China’s political economy.

Two Growth Models, Both Sputtering

Chinese national, provincial and local policy for decades has prioritized growth and development to legitimize itself. The media has long been suffused with an endless stream of figures, statistics and numbers, all of which pointed toward China’s increasing wealth and power, deeply embedding this developmental perspective in people’s worldviews. Growth largely arose from hundreds of millions of people moving from an unproductive agricultural sector to build infrastructure and housing and to the factories that made China the “workshop of the world.”

Growth has relied on two distinct areas: exports and investments. But the former is stuttering and returns in the latter, after decades of construction mania, are diminishing, especially in the heavily indebted real estate sector. 

Regarding exports, as the flow of rural migrants has waned and China’s demography has shrunk the labor pool, wages have risen, especially in the mega-regions of Beijing, Shanghai and the Greater Bay Area, making China less compelling as a site of production. To seek cheaper labor costs, facilities have shifted both to the Chinese interior and increasingly out of the country — to Bangladesh and Vietnam, for example.

Second, the sheer scale of the Chinese industrial base has swamped global demand such that further added production would be superfluous. The Belt and Road Initiative represented an attempt to simultaneously export Chinese production and construction and to develop external markets for Chinese goods. It’s been an extremely expensive venture, with losses mounting and little to show in terms of sopping up excess Chinese production.

Third, the international perception of China as a geopolitical threat that needs to be contained resonates so strongly because of the perceptions of displaced labor in advanced countries.

“Xi’s bark seems bigger than his bite.”

Given these factors, while it’s clear that trade will remain a critical piece of China’s political economy, there’s little reason to believe that it can truly power the country’s continued development going forward.

Meanwhile, property is both at the core of local government finances and stores the vast amount of Chinese citizens’ wealth. Beijing constrains Chinese localities’ ability to raise revenues, so cities have turned to land sales to help keep their budgets manageable. That land is purchased by developers who build apartments, selling them — sometimes even before construction begins in what are referred to as pre-sales — to the population.

The property market has been plagued by distortions and vast overinvestment. Tens of millions of properties are empty — held for speculative purposes by Chinese who trust that Beijing will always protect their bets.

The government has tried to let some air out of the bubble, but speculative action coupled with real demand has sent prices to eye-wateringly high levels, over 40 times average incomes in Shanghai, Shenzhen and Beijing. With prices so steep, many urban migrants abjure from even hoping to own housing in the cities in which they live and work, creating the absurdity of an underclass in distant and substandard units surrounded by empty apartments, some of which they built themselves. The staggering cost to live in Chinese skyscrapers is even leading some tech workers to turn their backs on the rat race, with many “lying flat” and others pining for the simplicity of pastoral life in the countryside. 

But these are minor notes in the orchestra of China that Xi wants to drown out in a march toward development. Xi’s fondness for the countryside comes mostly from the hardscrabble experiences he had as a youth during the Cultural Revolution. He fears creeping welfarism and sees rural life as an anvil to harden soft young people, teach them the value of real labor.

But beyond his own aesthetics, Xi and the political system realize that growth is needed because hundreds of millions remain poor. This invisible China is obscured by those in Washington hyping the Chinese threat and by those in Beijing hoping to avoid criticism for the persistence of poverty.

Growth’s Continued Dominance

Growth’s position as the regime’s lodestar helps account for one of the world’s most dramatic and consequential reversals — the abrupt abandonment of draconian zero-COVID policies last December. It was a mess. When COVID cases spiked, local leaders fell back to the perceived safe choice: lockdowns. Statistics showed the economy in dire straits: Stocks had been slumping and there were narratives of the rich fleeing the country. Protests had erupted in cities and factories, which were disintegrating under lockdown. Only then did Beijing pull the plug and completely drop the zero-COVID procedures. 

The country failed to hit its growth target in 2022, but rather than drop the practice of identifying growth targets as anachronistic for an era of common prosperity, at the annual National People’s Congress in March, the announcement came in: 5%

The dilemma facing Xi and the Chinese party-state is how to demonstrate that it can thrive both after COVID and in the face of America’s attempts to slow it down — while simultaneously transitioning to a more sustainable political economy. Xi’s new economic team, with Premier Li Qiang at its head, seems committed to playing the old hits. Li has been nearly desperate in his attempts to signal that China is open for business, rolling out the red carpet for foreign CEOs. Many of the “Red New Deal” crackdowns are being reversed. Some video game restrictions have been lifted. But such reassurances are a hard sell when Chinese business tycoons like Ma remain abroad.

The first quarter’s economic statistics in many ways paint a complicated picture, but a growth focus remains omnipresent. The property market has stayed in the doldrums, and fixed-asset investments provided robust growth only through state intervention. While private sector investment grew only 0.6% year-over-year, state investments jumped fully 10% amid discussions of local governments planning nearly $2 trillion in major projects for the year. Debt once again accumulated as fiscal income remained flat, but spending ballooned by 6.8%. 

“Xi’s new economic team seems committed to playing the old hits.”

Surprisingly strong export data show glimpses of multiple major transitions in the world economy. First, China’s automotive sector has become an export giant, now trailing only Japan in the global rankings, and in March grew another $4 billion more than a year before as its world-leading position in electric vehicles is producing dividends. The Chinese electric and plug-in hybrid carmaker BYD overtook Volkswagen in March to become the king of China’s automobile market, by far the world’s largest. On the other hand, electronics exports plummeted more than $9.7 billion compared with last March, hit by U.S. pressure on chips.

There are hints of cracks in the formidable and enduring focus on growth. The process of instituting the long wished-for property tax took a small step forward with a national property registration system coming online, although many pooh-poohed the possibilities of property taxes expanding beyond the initial test beds of Chongqing and Shanghai, which were launched a dozen years ago. Efforts to equalize the legal status of migrants continue to churn, but similar doubts persist about the significance of these local actions. A carbon impact analysis is becoming standard for all major projects.

China’s political economy is being squeezed in all directions. Geopolitics, human rights, economics, energy and climate concerns pressure officials to change. But businesses and citizens have come to expect the benefits of growth, fatter profits and bigger paychecks.

And so while it is possible to imagine a Chinese state acting with a gentler hand to support people’s welfare, fighting inequality, supporting its citizens and building a sustainable future for the country and the world, Xi finds himself leading a political system that still prioritizes GDP figures over people’s welfare through internal and external headwinds, just as it has for decades.