The Great Wall Cracks

Saying that Donald Trump likes to tweet is as much a truism as remarking that the sun rises in the east. Yet, even by his overblown standards, there was an unmistakably triumphalist tone to his email missive of July 14th, 2019:

“China’s 2nd Quarter growth is the slowest it has been in more than 27 years. The United States Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving. This is why China wants to make a deal with the U.S., and wishes it had not broken the original deal in the first place.”

Trust the 45th President of the United States to defy economic gravity. In fact, China’s economy had decelerated to its slowest growth rate in 27 years, partly because of a slump in exports, as Beijing and Washington remain locked in a trade war that Trump ignited and, despite restarted trade talks and prognostications to the otherwise, has no real end in sight.

The data did appear to bolster Trump’s assertion that his Chinese counterpart, Xi Jinping, is under increasing pressure to strike a trade deal to shore up the world’s second-largest economy.

It is probably wise to expect an otherwise totalitarian country like China to “massage” or “fudge” its statistics a wee bit, yet official numbers from the National Bureau of Statistics showed that the annual growth rate slowed to 6.2 percent in the three months to the end of June, down from 6.4 percent the previous quarter.

While comfortably within the 6 to 6.5 percent band the government has set for this year and was in line with market expectations of a gradual slowdown, it is China’s lowest growth rate since records began in March 1992. This would make it more difficult for the government to hit its target of doubling the size of the economy between 2010 and next year. No amount of creative positioning (or mathematics) can likely cause that result to occur.

China’s export figures were particularly challenging, contracting 1.3 percent in the three months to the end of June compared with a year earlier. Shipments of suitcases, plastics, furniture, footwear and textiles were the worst affected, economists at UBS wrote in a research note.

Exports to the United States fell by an additional 8.2 percent in the past three months, particularly after U.S. tariffs on $200 billion worth of Chinese exports rose from 10 percent to 25 percent in May. American data had previously shown the amount of Chinese products on all tariff lists being shipped to the United States had declined by a further 33 percent in May, the UBS economists noted.

But the trade war is also affecting the United States. Customs data from Beijing published Friday showed that Chinese imports of American goods fell 31.4 percent in May compared with a year earlier, actually widening China’s trade surplus with the United States.

Not that Trump cares. He’s playing realpolitik with an gambler’s instinctive intention: 1) all this tough trade talk plays well to an apparently unshakeable power base that keeps him at 45% popularity despite a litany of personal and political landmines that could so easily have detonated other men’s careers; he won the 2016 election with a similar percentage and likely reckons that he can again so long as he galvanizes the same coalition of the aggrieved; 2) Moreover, he may just have been shrewd enough to have read his Reagan and realized that, in the same way the 40th president drove the Soviet Union into penury through a massive arms build-up it could not afford so too could he deal grievous injury to China’s economy and by so doing neutralize its competitive threat.

The simple fact is that that ever since his election Beijing has consistently misread Trump’s intentions -- as a businessman he was supposed to have been open to pragmatic deal-making -- and made a hash of managing the increasingly volatile Hong Kong portfolio (where two the two extremes of reaction short of Carrie Lam being replaced or the army being brought in to fire on civilian protestors a la Tiananmen Square are scarcely less palatable than the current inaction). These two factors, when added to the declining economic situation and Trump’s surprising focus on checking Chinese expansionism in the South China Sea through aggressive flag-waving “Freedom of Navigation” exercises, have begun to cause spreading concern about what was once thought to be a masterful and inevitable rise to superpower status.

In recent months, Xi Jinping has found himself subject to a series of extraordinary outbursts of public criticism which has raised the question of whether his hold on power is really as secure as it appeared months ago. What is significant is that the sniping has come not only from the highest levels of the business community and the media but also from within the Communist Party itself. Moreover, some of the criticism has taken on a distinctly mocking tone, all in stark contrast to the burgeoning manufactured personality cult (he has been referred to as Xi Dada -- Uncle or Papa Xi -- and the village of Liangjiahe, where young Xi was sent to work, has been transformed into a kind of contemporary shrine adorned with Communist propaganda and murals celebrating his formative years. This does not even take into account the numerous adulatory passages in government missives extolling his philosophy and his being at the "core" of the Party).

To be sure no one in their right mind is predicting that China’s president is about to either be ‘ Khrushcheved’ or that he is being compelled to change course in the Beijing leadership’s relentless quest to project both hard and soft power as far as possible. More likely is that Xi and his cadre will be so preoccupied with internal politics that he continues to shy away from the painful structural changes needed to resuscitate China’s slowing economy. He may also continue to take policy in a more nationalist direction to bolster his support. Just as likely is a continued attempt to centralize power and crush dissent, both within the party and outside with the trade war and its wearying effects acting as a convenient pretext.

Yet, Xi is not acting like someone who’s all that secure in his power. On the contrary, a quick checklist of his big moves in the past seven years suggests an increasingly nervous leader:

· Increasingly consolidating power to himself and his faction, led by majordomo Wang Qishan

· Imposing obedience within the party and public

· Reasserting party control over the PLA (People's Liberation Army)

· Blanketing the country with intrusive surveillance systems and introducing the concept of a citizen's "social"

score

· Demanding nothing less than a fawning and unquestioning media (and banning references to Winnie the

Pooh)

· Imprisoning hundreds of thousands of Muslim Uighurs in “re-education” camps

This list seems to indicate that Xi surely has much to concern himself with. His reforms and crackdowns have created many enemies and much disgruntlement, especially among the very communist elites from which he sprang. Income disparity has grown as wealth has become concentrated in fewer hands. The pace of China’s economic growth is slowing. Localised unrest is rife, ranging from protests against high real estate prices to unsafe products.

Most external analysts agree that much bolder economic reform is needed to avoid the stagnation of the “middle income trap” which befell other Asian tigers like Japan in the late twentieth century. Like virtually every Asian nation, China is also facing a perilous demographic future as the population ages and people have fewer and fewer children. Furthermore Xi’s ambitions at home and abroad are increasingly being met with push-back – not least from the United States and an increasingly vocal and resurgent Japan – leading some in China to question whether he has over-reached, spawning more enemies than the allies the Belt and Road chequebook diplomacy might have bought.

But the biggest challenge is the same one every Chinese leader since Deng Xiao Peng has faced: how to continue maintaining a balance of sustained, robust economic growth and social stability without losing the party’s absolute political control. Slogans, media campaigns, a personality cult, fake news and propaganda are not enough, especially in these digital times when reality is but one crack in the Great Firewall away. The day of just telling seems to be giving way to a new Age of Persuasion where facts must at least have origin in truth. Or reality.

Embarking on political and economic reforms would help ensure a more prosperous, stable and equitable future for the country. But doing so would surely undercut the one-party rule of the communist party. On the other hand, foregoing these changes in favour of tighter control risks future stagnation and possibly instability.

One thing is certain: having removed himself from even the theoretical constraints of term limits, Xi Jinping has assured himself that the credit for everything good and the debit for everything bad will now fall upon his shoulders. And that weight can only go heavier as the Communist Party’s next leadership plenary session draws a few years closer.