China under Uncle Xi

Arriving in China, you experience a sense of déja vu: key-rings, portraits, images, quotes on large banners, billboards. Except that their hero is not, as formerly, Chairman Mao, but the current leader, Xi Jinping. The whole China is reading bland works of the new Chairman and reigning in the media is a song called: “If you want to marry, marry someone like Uncle Xi.” The term Uncle Xi (Xi Dada) is in common use. The aim of these efforts is clear: to soften the image of the leader who has a rather austere appearance. The outside observers only argue if he is more committed to fighting against corruption or to fighting his political opponents.

We again have one leader in China, like in the “Mao era” (1949-76). Thus we see a clear departure from the concept of the visionary of reforms after 1978, Deng Xiaoping. Taught by the bitter experience of history, he ordered his successors to pursue collective rule. When in the late 2012 and early 2013 the “fifth generation” of leaders took power, with Xi Jinping as the head of state and party secretary in the lead, it seemed that the country would be ruled by a new duo—that Xi would play in tandem with Prime Minister Li Keqiang, well-educated and speaking fluent English.

Li Keqiang, doctor of economics, put forward bold ideas on economy and further reforms. He said that China had to change its economic model, above all to switch the driving force of the economy from large investments and exports to domestic consumption and an increase in the purchasing power of the middle class. He assured the world that there would be no further investment package (stimulus) after the one introduced by China after the 2008 crisis on the world markets, and he also aimed at deleveraging of credits, as the credits, especially on the grass-roots level, were growing too fast.

In June 2013, the whole package was labelled by Chinese experts from Barclays Capital as “Likonomics,” invoking, for example, the earlier “Abenomics” of the Japanese Prime Minister Shinzo Abe, and the much earlier Reaganomics.

President Xi initially seemed to share these concepts, as evidenced by his statements in the much-publicized volume published at the end of 2014, “The Governance of China.” In it he was frequently calling for “comprehensive measures,” which, however, “cannot be implemented in one stroke” as a reform package. China should be cautious. What is more, in the spirit of “Likonomics,” he was asking for “allowing the market to play the decisive role in allocating resources,” which sounded like a revolutionary measure. In other words, the world after 2008 was headed towards a greater state interference or intervention, while China declared that would it would go in the opposite direction, wanting more market.

But only for a brief period, as it turned out. Introducing deep, structural reforms in an autocratic system, as we know already from the works of Alexis de Tocqueville, is a difficult and risky enterprise. The fifth generation of Chinese leaders also realized that soon. It wanted to quickly build a “moderately prosperous society” [xiaokang shehui] as the driving force of the new economic mechanism. One of the measures meant to help in achieving that was inviting the Chinese to play on the stock market. They responded massively and pumped up a bubble which burst ear-splittingly on June 12, 2015, bringing in its wake three successive stock market crashes (June and mid-August 2015 and early 2016) and an index dive in the range of 40%.

Billions or even trillions of dollars were lost together with the trust of a major part of society, for the number of those who lost—often their entire savings or fortune—is estimated at 80 million people. It is a serious problem and a new challenge, for in the entire reform period after 1978 the Chinese society trusted the authorities that they were going in the right direction. This was the first time that at least some people started to have doubts.

So far, the authorities in Beijing have responded to the stock market turmoil and crisis in a way directly opposite to the one they initially announced: Instead of more market there is less of it, but there is definitely more centralization and state intervention. At the same time, the Prime Minister Li Keqiang is becoming much less visible, while the role and influence (and even a personality cult) of Xi Jinping is rapidly growing. It is hardly surprising then that an important daily from Hong Kong, The South China Morning Post, has claimed in mid-February: “The long-standing collective consensus-driven form of leadership that has existed since the era of Deng Xiaoping is now giving way to a centralized system dominated by a strongman leader—Xi himself.”

It is in this context that the national Communist Party newspaper People’s Daily offered to the Chinese society, and then to foreign observers, a series of articles explaining the “economic thought” of Xi Jinping, baptized by some commentators as Xiconomics. By all accounts Li Keqiang’s market course has been abandoned, as the recent words of Xi Dada himself testify: “Market reform is not an end itself, but a means to strengthen China.”

It is clear that China has found itself at a turning point. It had started to change its development model, to promote the enrichment and strengthening of society, but this transformation has so far proved very difficult. Instead of a stronger society we have a bullied society and an increasingly stronger, authoritarian regime, prone to a personality cult to boot. Are these maneuvers intended at hiding serious problems or even a crisis and a “hard landing” of the Chinese economy, as the well-known stock market player and philanthropist George Soros recently warned (of course, immediately encountering a sharp retort by the authorities in Beijing)?

Looking from domestic perspective, there are no signs of an economic crisis yet, but statistics start to be alarming. In 2015, China lost more than 700 billion dollars in foreign exchange reserves, capital began to flee the country instead of flowing in even faster, as it permanently did until recently. Economic growth, exports, and industrial production slowed down. We may only hope that after the 2008 crisis, caused by the largest economy of the world, that is the US (now firmly back on its feet), in 2016 another crisis will not be procured, this time by the second-largest economy of the world, which is China. We must watch it even more closely than before.