There is no doubt that Xi Jinping is a strong leader. But will he prove to be a successful leader?
Mr. Xi strengthened his leadership position in October of last year after securing an unprecedented third term as general secretary at the 20th National Congress of the Communist Party (CCP). He also was able to pack the Politburo Standing Committee with loyalists. This could be a problem as during Mr. Xi’s reign decision-making seems to be more centralized than under his predecessors and Mr. Xi’s management style cannot be described as consensual (the word “debate” is not part of his vocabulary). The times of Mao Zedong seem to have returned; decisions are taken by one man only and must be executed without wavering. A particular problem with Mr. Xi is that he tends to make bold decisions without taking its consequences into full account.
Say yes…
In 2012, when Xi started his first term as president he initiated an anti-corruption drive. Under his predecessors (Messrs. Jiang Zemin and Hu Jintao) corruption became engrained, so much that it threatened the legitimacy of the CCP as citizens had more than enough of it. Xi was right to tackle corruption and it was popular with ordinary citizens. His anti-corruption drive was very tough and effective and led to a substantial reduction in sales of baijiu (a strong liquor) and the arrest of the chairman of Kweichow Moutai (the best-known baijiu brand). But he also used it to purge his political enemies (remember Bo Xilai?), whereby enemy is defined as somebody who has opinions that diverge with Mr. Xi’s. In order to ensure that everybody understands from which song sheet to sing, Mr. Xi published his own “thought”. It quickly became clear that putting forward alternative thoughts come at their own peril and that there is no room for messengers of bad news.
Another example of bold decision-making is the “three red lines” policy. After years of unconstrained credit growth and, thereby, the creation of an enormous property bubble, Mr. Xi decreed that, as part of what now is known as his “common prosperity” banner, houses were meant to live in and should not be used as a speculative investment. In August 2020 (after 8 years of inaction), new guidelines were imposed to rein in the unwieldy property sector. Property developers were starved from credit almost overnight. The consequences were dire: some large developers (the most famous one being Evergrande) defaulted on debt; many apartments were not finished due to lack of funding; owners of unfinished apartments stopped paying interest on mortgages; small and mid-sized banks faced a liquidity crisis (and some banks also became insolvent); due to a drought in land sales local governments lost their most important source of income; etc. Of course, reining in the unbridled growth in home construction was a sensible policy decision (one that we called for in 2016) but the “cold turkey” approach taken caused unnecessary damage to the economy. Now, the government is backtracking and easing credit constraints for developers, but is not addressing the root cause of the bubble, namely that citizens have few attractive alternative saving options. The risk simply is that the bubble reflates again.
China’s covid-19 policy is another example of what can go wrong when an autocratic leader calls all the shots. Initially, the zero-covid measures in the form of strict lockdowns, mass testing, tracking and harsh quarantines were effective in keeping the number of infections (and, thus, death toll) down. Mr. Xi trumpeted its success as an example of the infallible communist system. But when the virus became more contagious in 2022 with the emergence of the omicron variant, the government should have changed course and inoculate citizens, preferably with the most effective vaccines from abroad. Instead, Mr. Xi took pride in his zero-covid policy and ignored the facts on the ground. Late last year, new lockdowns in various cities (including Beijing and Shanghai) led to widespread protests as desperate people grew tired of the intrusive measures and lockups. These protests took a personal twist as people accused Xi specifically for being responsible for the dreadful situation they were in. Then, as a bolt from the blue, the government announced an abrupt end to the zero-covid measures. But, as with the introduction of the three red lines to deflate the property bubble, no precautions were taken (e.g. vaccinating the elderly, ramping up ICU capacity in hospitals), whereas predictably the abrupt abandonment of the measures led to a wave of infections. The result is chaos and many unnecessary deaths. We wonder what this does with Xi’s credibility, being the self-proclaimed architect of China’s covid-19 policies.
Mr. Xi takes the CCP back to its Marxist-Leninist roots; ideology is central to his political agenda. He also applies this ideologic approach to economic development, reversing Deng Xiaoping’s reforms. He believes in state-led industrial policies and demands that private enterprises subscribe to his ideologic agenda, especially if these enterprises are operating in strategic sectors. Mr. Xi wants less TikTok and Weibo and more AI and microchips. In itself this is understandable but the question is whether you get there by pumping money into state-owned enterprises and telling private entrepreneurs what to focus on. Under Xi’s direction, the state is taking so-called golden shares in companies like Alibaba and Tencent to nudge R&D efforts in the desired direction. Both companies were already under intense scrutiny from the authorities in recent years. Xi is lashing out at successful entrepreneurs, probably thinking that making money is incompatible with communist values, or more likely that a rich middle-class is a threat to the CCP’s hegemony. For example, after Jack Ma, Alibaba’s founder, accused the government of regulatory overreach, regulators responded by restricting his control over Ant, a fintech company, amongst other things. The crackdown on tech companies will reduce innovative investment by the private sector, whilst favouring state-led projects risks suboptimal capital allocation. China will need productivity growth to offset unfavourable demographics. By bullying the private sector, responsible for 80% of jobs, into embracing a top-down state development policy this is less likely to materialize.
The best decisions are taken when there has been open and constructive debate and pros and cons have been weighed. In a political context, having checks and balances is a good thing, even if it slows down decision-making. Having an almighty leader surrounded by yes-men is unlikely to yield good decisions, especially if this leader is obsessed by keeping control over all important aspects of life. This will hurt China’s vibrant economy. We already have witnessed a number of colossal mistakes on very important issues. We wonder how long the Chinese will put up with Mr. Xi. His political power grab will in the longer term inevitably lead to China’s economic power nap…
