China Crackdown in Hong Kong Betrays Xi’s Internal Crisis

PRESIDENT Xi’s crackdown in Hong Kong raises an obvious question: why is the Chinese regime risking its important international financial base in the ex-colony? The answer lies in the rapid changes now affecting the mainland economy.  The Chinese economy has reached a new stage that is exacerbating internal tensions – hence Xi’s drive to impose greater personal and party control.

But this extension of Communist Party rule under Xi met with strong resistance in Hong Kong, where over two million people took to the streets in June last year to oppose the regime’s new extradition laws. Xi was forced to climb down – a major blow to his prestige.  It made Xi look weak to his enemies and inferred the regime was vulnerable to mass pressure from below.  It was only a matter of time before Xi retaliated.  The issue at stake has little to do with Hong Kong per se and everything to do with maintaining the regime’s internal stability, especially as Xi has made himself absolute leader in perpetuity, with no obvious successor in train.

What are the economic roots of this crisis?  Westerners still think of China as basically a giant, offshore factory manufacturing and exporting Western-designed goods to the global marketplace. Certainly, this describes the Chinese economic model of the 1990s and first decade of the 21^st century.  President Hu Jintao and Premier Wen Jiabao initiated significant pro-market reforms, integrating China into the world market using export-led growth, and ploughing a massive 48% of GDP into capital investment.  Annual growth was double digit as was the rise in incomes.

True, there was a serious upsurge of worker and peasant unrest as state-owned businesses were replaced with private ownership, and as millions of rural workers were decamped to newly built coastal industrial zones to form a new proletariat. But the rise in living standards and the emergence of a new middle class – not to mention Big Brother advances in social control through the use of social media – brought a return (seemingly) to political stability.

China embraced the motor car, becoming the world’s biggest domestic vehicle market.  A private housing sector mushroomed – though not for transient peasant girls living in crowded dormitories in the coastal manufacturing ghettos.  China became predominantly an urban culture and went to work in a car rather than on a bicycle – this writer remembers Beijing in the 1980s when crossing the street was life-threatening due to the massed, unyielding wave of cyclists that dominated the roads.

In the West, these changes were looked on benignly.  While US capitalism deliberately excluded a moody ex-Soviet Russia from the global supply chain (because it feared technological competition), China was welcomed into the neoliberal fold.  China offered a cheap, disciplined labour force willing to supply to Western order.  Also, the Chinese regime was happy to recycle its vast dollar export earnings back to the West, investing in US government bonds.  Meanwhile, Western consumers were showered with cheap mobile phones and other electronic trinkets, which ipso facto hid the fact that American and British wages were stagnating.  It was an economic marriage made in neoliberal heaven.

What’s gone wrong in the past decade?  A host of things at one time.  But one way of summing up China’s predicament is that its economy is reaching middle age.  For starters, the vast reservoir of cheap rural labour has dried up, meaning future growth will depend on higher productivity.  But how to achieve that?  Answer: invest in technology.  But that has triggered fears in the West that China is no longer a semi-colonial manufacturer of Western designed gizmos, but a technological threat.  Hence the White House campaign to ban its allies from using Huawei telecoms products.

Second, the West’s seemingly bottomless desire for imports has disappeared as a result of prolonged austerity, while at the same time China is facing competition from cheaper, rival exporters such as Vietnam. In 2007, China’s export surplus was 10% of GDP.  That has gone.  For the last three years, it has been hovering around 1%.  In short, future growth in China’s economy now depends on internal (particularly consumer) demand.

If the Xi regime cannot make this turn from an export-led to a consumer-led economy, long-term growth will falter and Xi will come under threat within and without the Communist Party. Xi’s response is the so-called “Made in China 2025” plan to end reliance on imported Western technology.  Priority areas include 5G telecoms, robotics, aerospace, and electric cars.  The idea is to boost local production in new sectors, making China self-sufficient.  But the ultimate goal is to boost productivity enough to enable a shift of precious resources from capital investment to consumer demand, closing the circle.

(Note: it might seem paradoxical the Boris Johnson wants to increase UK capital spending while the Chinese are going the other way, but the proportion of UK GDP spent on infrastructure and machinery is one of the lowest in the industrial world – the very opposite of the Chinese problem.)

The scale of the industrial conversion problem in China has led Xi and the Communist Party to take back significant control over the levers of economic and political power (witness Hong Kong). At the same time, sections of the new Chinese bourgeoisie and middle class – which is itself heavily embedded inside the Communist Party – are growing restive at this power grab.  For one thing, President Xi is cracking down on Party and business corruption, in a bid to improve investment productivity and economic decision-making.  Dangerous conflicts of interest – personal and political – abound in this process.

One obvious result is a desire by business interests and the Chinese middle class to get their money out of China.  The Bloomberg consultancy estimates that capital outflows (often illegal) from China came to circa $226 billion in the first seven months of 2019 – nearly a fifth higher than the same period in 2018.  Indeed, one other reason Xi may be intent on taking back direct control over Hong Kong is to stem illegal outflows of money.

Can Xi succeed in reconfiguring the Chinese economy?  To put the question in perspective, China’s GDP income per citizen is roughly the same as in Brazil, but average, individual consumer spending is on a par with Peru!  The difference represents the massive amount China still pumps into capital investment, much of which is wasted in productivity terms.  However, a lot of that investment cash ends up in the pockets of corrupt official and businessmen.  Which is why, in the end, Xi is riding a political tiger.

By the way, I don’t wish to portray Xi as any sort of hero.  I saw him up close when he came to the Palace of Westminster and wasn’t impressed.  Like a latter-day Chinese emperor, he was surrounded by dozens of sharply dressed bodyguards and fawning young female assistants wielding mobile phones.  Xi was impassive to the point of looking like a robot.  I doubt if he has ever smiled in his life.  Mr Xi is a pampered bureaucrat who wants the credit for saving Chinese state capitalism.  He hasn’t the whit to realise that you can’t create an advanced technological economy through social regimentation.

As he will find out when China’s waiting masses realise that being offered the chance to become consumers for Alibaba is no different from being consumers for Amazon – a dead end as far as humanity is concerned. The resistance in Hong Kong is only the start.