Image courtesy Christian Junker
China’s greatest present challenge is The Party’s inability, in current form, to graduate the country from a developing to developed nation status. It’s a tall task for any state to move toward having an advanced economy. Most nations that have overcome the odds are those utilizing a democratic and capitalistic set of systems. While China certainly exhibits many capitalist characteristics and is seen as a capitalist hybrid, Xi Jinping’s government will need to further loosen its grip on the economy.
The Party’s ability to centrally plan solid strategies is limited. After the 2008 financial crisis, the government used a massive stimulus package which created corresponding massive levels of debt. Since 2008, corporate debt levels have increased by 66%. That money has not been put to work efficiently, especially by SOE’s, which have gobbled up loads of cash. In 2016, the government funded China Ocean Shipping Group with most of the money needed to build three $1.5 billion container ships, at a time when global trade had decreased by 12% in the previous year and shipping capacity was already in excess. All around China, local governments are dutifully dolling out money to help the government hit GDP growth targets, but the Communist Party is misconstruing what they perceive as dutiful.
The story of debt and misused funding is trickling down to the Chinese as well. Just over a decade ago, the broader real estate industry made up around 10% of China’s GDP. Today, that number is at around 30%, as a result of the middle class stashing its money in the housing market. Housing prices have sky-rocketed and the Chinese have taken on extraordinary amounts of risk, not to mention debt, in the process. In fact, Shenzhen, Hong Kong, Beijing, and Shanghai topped the list of the world’s cities with the highest home-price-to-income ratios in 2016 at 44.4, 36.2, 33.8, and 32.6 respectively. That same figure in New York is 12.1. Many people following the masses in this way have put themselves in dangerous spots. Dilapidated ghost towns are popping up around the country, built with the money of people lured into the idea that they would be investing in towns of the future.
The Communist Party’s series of five-year plans has gotten the country from the developing to the developed status. Their loosening and allowance of capitalism has helped them expand the successes of Hong Kong and Macau into the mainland. Now, they need to find more ways that allow market forces to eradicate gross financial inefficiencies. Furthermore, this would help ‘the rest’ of the country. Rural Chinese and those outside of Eastern commercial centers need the incentives and opportunities that come with a more democratic and capitalistic system. They are being left further and further behind, which could have negative long-term implications to national security. If China is willing to relinquish more control and augment its system further, its own people will trust the country’s future more. Rather than siphoning trillions of dollars out of the country, they will be able to efficiently put their money to work at home and help China become a service-oriented advanced economy.