China has wrapped up its two big annual meetings, the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC). The first is the country’s parliament, while the second is the top political advisory body. While the NPC is routinely dismissed as “a ceremonial legislature,” the meetings provide valuable insight into the thinking of the country’s top leadership. This year’s meetings sent two important messages. First, China is bracing for economic troubles. And second, as a result, there is a growing need for political discipline and control.
The NPC includes nearly 3,000 legislators, Chinese Communist Party officials from all levels of the country, government officials, business leaders, provincial heads and military commanders. One of the highlights of the meeting is the work report of Prime Minister Li Keqiang, which lays out the leadership’s analysis of economic conditions and sets goals for the coming year. Li explained that China’s economy is expanding at its slowest pace since 1989 and the beginning of the explosive reform era. He said it would be a “tough struggle” to reach the government target of 6 to 6.5 percent growth, a number that is slightly lower than the 6.6 percent recorded in 2018.
Virtually every measure of economic activity shows weakness. Cellphone shipments marked double-digit declines in January, as did car sales (the seventh straight monthly fall) and the number of unsold houses is at its highest level in two years. The Purchasing Manager’s Index, a respected measure of factory activity, has plummeted to its lowest level in three years. To adjust, companies have begun to lay off workers. Li blamed “profound change in our external environment,” in particular U.S. President Donald Trump’s trade war, for the frictions that China is facing.
A slowdown is especially worrisome for the Chinese leadership because most Chinese have only known economic opportunity. They have not faced a downturn or real hardship. In the past, the Chinese government had real firepower to goose a slowing economy. When the great recession struck in 2008, Beijing spent an estimated $586 billion to compensate for slowing demand, Now, however, debt is mounting and has reached $34 trillion, nearly 2½ times the size of the entire economy. Li promised fiscal stimulus, but it is not clear what and how much is on the table: Tax cuts have been discussed and their impact is much more diluted than the infrastructure spending that has been used in the past to create demand.
Dwindling policy options have forced Beijing to instead focus on mechanisms of social control to ensure that there are no protests or challenges to the government. It should be remembered that the demonstrations that culminated in the 1989 Tiananmen massacre started with unrest over economic conditions — and this is the 30th anniversary of that mass uprising. The CCP knows well that economic dissatisfaction was the real cause of the collapse of the Soviet Union and is a threat to autocratic governments around the world. That partially explains the efforts to develop the “surveillance state” that the CCP has been perfecting.
One important element of the budget is military spending and it appears to have defied the gravitational pull of the slowdown. China will boost the defense budget by 7.5 percent, pushing the official total to $177 billion, a number that most experts believe underrepresents true spending. While it is less than the 8.1 percent increase recorded last year, it is still a bigger increase than the growth in the overall economy and nearly four times Japanese defense spending.
In recent years, strategists and analysts have expressed concern about the challenges posed by a rising China. The most astute observers, however, have warned that a weak China could be equally destabilizing. Regional countries should be worried that growing dissatisfaction at home could push Chinese decision-makers to look abroad for scapegoats, and China has a long list of grievances with many of its neighbors. In that context, the Chinese military’s growing capabilities are especially troubling. Instability could spill over borders as well. And Japan, which has been depending on the Chinese market for much of its own economic energy in recent years, should rightly fear the ripple effects of a slowdown in that market.
President Xi Jinping should be worried. Since assuming power six years ago, he has consolidated control over key policies, making him responsible for all developments — good and bad. Thus far, he has enjoyed the fruits of China’s successes. Now, he will face his first real test as a leader as the country confronts powerful headwinds.