Expansionist and communist China cannot follow the growth path shown by the IMF

The prescription of Managing Director of the International Monetary Fund Kristalina Georgieva for China to return to the high growth path of yesteryears is a bitter pill that the Chinese government under President Xi Jinping is unlikely to swallow.

The growth rate of the Chinese economy has been restricted to only 5.3 percent in the first quarter of 2024, a far cry from the era of double-digit growth of the past decades.

The recommendations of the IMF M.D. are essentially two-fold: China must return to the path of market reforms and Beijing must increase Chinese exports. China will, however, be prepared to accept neither.

Under President Xi, the Chinese government is hell-bent on taking China back to the days of hardcore communism of Mao Zedong. Market reforms are anathema to hardcore communists.   

To step up exports, it is essential for China to increase interactions with the global economy in general and the developed countries of the West in particular. The policy of the Xi Jinping government of establishing Chinese hegemony on a global scale by the use of military power and money power has isolated China in the international arena.

The liberal democratic world now wants to boycott Chinese products, to avoid investments in China and generally finds it more prudent to shun the company of China. In such a situation, the future of Chinese exports is not very bright.

The overall German imports from China reduced by nearly a fifth between 2022 and 2023, says a Reuters report on April 9, 2024. The Joe Biden administration in the U.S. has introduced new trade and tariff restrictions on imports from China.

With state-led development, Beijing is pouring subsidies into targeted industries; denying the level playing field to U.S. and other foreign companies. Investments by Chinese companies have raised national security concerns in the U.S. and other Western nations.

The recommendation of the IMF Managing Director to the mandarins of the Chinese Communist Party is a down-to-earth one: it is better to forget about export-led growth. The time has come for Beijing to look at domestic sources for growth. But the continued downturn in the property market and a subdued domestic demand are standing in the way of recovery of the domestic sector in China.

Here again, her recommendations will not be music to the ears of the government of President Xi. Market reforms are necessary to expand the home market and push up the rate of growth through increased domestic demand; which alone can arrest the downturn in the property market.

The Chinese government can still try out some of the recommendations of the IMF Managing Director to improve the growth rate in the domestic sector. Among them are an expansion in the healthcare services in China which leave much to be desired now and a better social safety net. “These will give the people an opportunity to save a bit less and spend a bit more,” she has said.

But the other prescription from the IMF Managing Director cannot be accepted by the present generation Chinese authorities as easily. She has said it will be necessary for state-owned enterprises (SOEs) to open up more for a competitive environment and offer the private sector a level playing field. This essentially means that it will be necessary for China to continue with the reforms that had yielded China double-digit growth in the era of Deng Xiaoping. Under the rule of President Xi Jinping, this will be more easily said than done.

Kristalina Georgieva has identified the concessions given to SOEs in China vis-à-vis the private sector as the reason for inefficient allocation of resources and has called for reforms in this sector. Priority sectors in China get preferential access to credit research funds. Firms in the areas of strategic manufacturing and science and technology get incentives. Urgent reforms are necessary in the SOEs, she has said; changing policies which provide guarantees to these behemoths.

On the contrary, the rule of President Xi has been marked by increased harassment of leading private sector entrepreneurs in China. They have been booked under corruption cases and imprisoned. Some of them have vanished from the public eye for prolonged periods. Businessmen in China are feeling it difficult to survive in an increasingly state-driven economy where politics and national security are a bigger priority over growth.

As the government cracks down on business with charges of corruption, and the economy weakens, many entrepreneurs are maintaining a low profile, stepping down from their companies or leaving China altogether. Private entrepreneurs in China are concerned that the era of freewheeling capitalism of Deng Xiaoping is over. In the rule of Xi Jinping, China has become an authoritarian society. Business leaders who have questioned the policies of President Xi have been jailed.

The well-known instance is that of Jack Ma, the co-founder of Alibaba who dominated the e-commerce sector in China. After having criticized regulators and state-owned banks in China for holding up the financial technology sector with their “pawnshop mentality,” he was called for questioning in November 2020. Then he disappeared from public view for three months. A big initial public offering of his company was suspended. For the next three years, he was hardly seen in public in China again. His worth is now less than half of what it was three years ago because of the massive fall in the valuation of Ant Group which he owned. In 2023, at least 11 listed Chinese companies were reported to have disclosed that their Chairman had disappeared without notice. This is said to be one of the ways President Xi tightens control over the Chinese economy.

In December 2023, the Criminal Law in China was amended to toughen anti-bribery provisions by increasing penalties and expanding the scope of implementation to include private companies. Earlier these provisions were applicable only to SOEs. Now after the amendment, if a senior employee of a private enterprise operates a business similar to that of the enterprise and makes significant profits from it, he is liable to be imprisoned. In a liberal society, such an employee will at the worst lose his job. Clearly, under such legislation, the private sector will find it difficult to operate.

Such laws, and stricter legislations on state security, have made it difficult also for foreign companies to do business in China. It is no wonder that foreign companies are withdrawing from China.

President Xi has asserted the control of the Communist Party of China over the private sector and pursued a “common prosperity” campaign, asking businesses to share more wealth and reduce inequality. But “private entrepreneurs are incompatible with ‘common prosperity’ and the direction that Xi Jinping has taken,” Drew Thompson of the National University of Singapore has recently observed.

It seems the mandarins of the Chinese Communist Party have studied their Communist Manifesto well but did not care to read the basic principles of economics. Efficient allocation of resources in an economy calls for perfect competition. All over the world, large state sector enterprises have proved to be dinosaurs who have survived on subsidy from the government. The SOEs must be in competition with the private sector to operate efficiently. The role of the profit motive cannot be denied.

 It is also a basic principle of economics that the wealth of nations accumulates through international trade. The strong-arm tactics of Beijing are, on the other hand, isolating China internationally. Perhaps the rulers of China are trying to go back to the days of colonialism through their efforts to spread hegemony on a global scale. But, the days of colonialism are now over.   






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