Wall Street Journal: What Explains Xi’s Pivot to the State?

Written by Kevin Rudd.

Something is happening in China that the West doesn’t understand. In recent months Beijing killed the country’s $120 billion private tutoring sector and slapped hefty fines on tech firms Tencent and Alibaba. Chinese executives have been summoned to the capitol to “self-rectify their misconduct” and billionaires have begun donating to charitable causes in what President Xi Jinping calls “tertiary income redistribution.” China’s top six technology stocks have lost more than $1.1 trillion in value in the past six months as investors scramble to figure out what is going on.

Why would China, which has engaged in fierce economic competition with the West in recent years, suddenly turn on its own like this? While many in the U.S. and Europe may see this as a bewildering series of events, there is a common “red thread” linking all of it. Mr. Xi is executing an economic pivot to the party and the state based on three driving forces: ideology, demographics and decoupling.

Despite the market reforms of the past four decades, ideology still matters to the Chinese Communist Party. At the 19th Party Congress in 2017, Mr. Xi declared that China had entered into a “new era” and that the “principal contradiction” facing the party had changed. Marxist-Leninist language seems arcane to foreigners. A “contradiction” is the interaction between progressive forces pushing toward socialism and the resistance to that change. It is therefore the shifting definition of the party’s principal contradiction that ultimately determines the country’s political direction.

In 1982, Deng Xiaoping redefined the party’s principal contradiction away from Maoist class struggle and toward untrammeled economic development. For the next 35 years, this ideological course set the political parameters for what became the period of “reform and opening.” In 2017 Mr. Xi declared the new contradiction was “between unbalanced and inadequate development” and the need to improve people’s lives.

This might seem a subtle change, but its ideological significance is profound. It authorizes a more radical approach to resolving problems of capitalist excess, from income inequality to environmental pollution. It’s also a philosophy that supports broader forms of state intervention in the Chinese economy—a change that has only become fully realized in the past year.

Demographics is also driving Chinese economic policy to the left. The May 2021 census revealed birthrates had fallen sharply to 1.3—lower than in Japan and the U.S. China is aging fast. The working-age population peaked in 2011 and the total population may now be shrinking. For Mr. Xi, this presents the horrifying prospect China may grow old before it grows rich. He may not therefore be able to realize his dream of making China a wealthy, strong, and global great power by the centenary of the formation of the People’s Republic in 2049.

After a long period of engagement, China now seeks selectively to decouple its economy from the West and present itself as a strategic rival. In 2019 Mr. Xi began talking about a period of “protracted struggle” with America that would extend through midcentury. Lately Mr. Xi’s language of struggle has grown more intense. He has called on cadres to “discard wishful thinking, be willing to fight, and refuse to give way” in preserving Chinese interests.

The forces of ideology, demographics and decoupling have come together in what Mr. Xi now calls his “New Development Concept”—the economic mantra combining an emphasis on greater equality through common prosperity, reduced vulnerability to the outside world and greater state intervention in the economy. A “dual circulation economy” seeks to reduce dependency on exports by making Chinese domestic consumer demand the main driver of growth, while leveraging the powerful gravitational pull of China’s domestic market to maintain international influence. Underpinning this logic is the recent resuscitation of an older Maoist notion of national self-reliance. It reflects Mr. Xi’s determination for Beijing to develop firm domestic control over the technologies that are key to future economic and military power, all supported by independent and controllable supply chains.

Much of the party’s recent crackdown against the Chinese private sector can be understood through this wider lens of Mr. Xi’s “new development concept.” When regulators cracked down on private tutoring it was because many Chinese feel the current economic burden of having even one child is simply too high. When regulators scrutinized data practices, or suspended initial public offerings abroad, it was out of concern about China’s susceptibility to outside pressure. And when cultural regulators banned “effeminate sissies” from television, told Chinese boys to start manning up instead of playing videogames, and issued new school textbooks snappily titled “Happiness Only Comes Through Struggle,” it was all in service of Mr. Xi’s desire to win a generational contest against cultural dependency on the West.

In his overriding quest for re-election to a record third term at the 20th Party Congress in fall 2022, Mr. Xi has apparently chosen to put the solidification of his own domestic political standing ahead of China’s unfinished economic reform project. While the politics of his pivot to the state may make sense internally, if Chinese growth begins to stall Mr. Xi may discover he had the underlying economics very wrong. And in China, as with all countries, ultimate political legitimacy and sustainability will depend on the economy.

Originally Published in the Wall Street Journal on 21 September 2021.

Photo: David Klein WSJ