Considered the world’s second-largest economy, if you can believe its statistics, China went from annual growth of more than 10% for decades until the last four years when it began to decline to just over 2% per year. Although some external factors contributed to the economic downturn, the CCP’s policies were the leading cause of its decline.
The information blockade
An accurate analysis of the Chinese economy is an ordeal. Not only is the Chinese communist regime the only source of statistics and figures about China for the rest of the world, but the CCP has a long history of manipulating public opinion by using false information to deny without explanation.
Additionally, the state interferes with all Chinese mainstream media, and there are no media critical of the CCP in China. Moreover, Internet censorship is so high that it is challenging to send essential information outside the country. As a result, to get an approximation of what is happening inside China, many experts and specialized media use data from “citizen journalists,” informants within the system, or Chinese exiles who know the country’s internal situation.
Even so, all figures and statistics on China are considered approximate and are always estimated to be worse than what is published.
A concrete case: Many experts and specialized media in China claim that there are hundreds of millions of Chinese in rural and urban areas living with very high levels of poverty, without access to drinking water, electricity, hospitals—living on what they sow.
However, based on the Chinese regime’s statistics, the whole world celebrated in 2020 when China announced that it had eliminated extreme poverty, although no independent organization or government in the world could prove that this was true.
The ‘Chinese miracle’
Under the leadership of the Chinese Communist Party, while most countries in Asia were prospering, China was impoverished. Due to the CCP’s constant political moves, such as the Great Leap Forward, which caused the Great Famine where over 10 million Chinese died because of Mao Zedong’s idea to ‘industrialize’ China, the CCP’s policies drove China into poverty and despair.
Deng Xiaoping decided to open up the economy in his last attempts to stay in power. Within a few years, the abundant cheap labor, a temptation for companies seeking to reduce production costs, gradually turned China into the world’s manufacturing center.
Deng Xiaoping, along with Jiang Zemin, in response to students’ demands for democracy, responded by using the military and rolling over thousands of innocent Chinese with tanks in the 1989 Tiananmen Massacre. Even so, the United States helped the CCP join the World Trade Organization in 2001, which was a turning point in its economic growth.
We will analyze the external factors that impacted China’s economic growth and separately the internal factors or domestic policies that worsened the delicate situation.
External factors: The trade war with the United States
Undoubtedly the trade war initiated by Donald Trump in 2018 had a significant impact on the Chinese economy, although CCP officials have tried to play it down.
According to official data, it was from 2018 that China’s GDP began to decline. Along with the pandemic in 2019, the Chinese economy went from just over 6 percent annual growth to 2.3 percent in 2020; no data is yet available for 2021.
Trump initiated the trade war with the CCP to balance the trade imbalance, where China always sells far more than it buys. While the CCP responded aggressively by imposing tariffs on U.S. goods, the media effect of Trump’s campaign influenced some of America’s allies to decrease their dependence on China.
According to a Forbes report, the trade war decreased trade between China and the U.S. However, it remains China’s largest trading partner, but Chinese exports globally are estimated to have fallen by $25 billion since the tariffs were implemented.
And although in the first nine months of 2021, imported goods from China to the United States soared 19% and the trade deficit increased by 15% compared to the same period in 2020, the dispute between the two countries continues, especially in the area of semiconductors.
According to a South China Morning Post report, of the 500 large U.S. companies that have their factories in China, 50 moved their production totally or partially out of China to other Southeast Asian countries, among them Apple, Dell, Hewlett Packard, Nintendo. However, their motives were to avoid the tariff crossfire that impacted the final cost of their products.
Although it cannot be considered an external factor entirely, the pandemic that originated in the city of Wuhan accentuated the downturn in Chinese economic growth mainly because of the disruption to the supply chain of items considered essential during a health emergency most of which are manufactured in China. Moreover, it forced many governments to rethink the scenario of reliance on another country to mitigate a crisis of such magnitude.
A Gatner report said 33% of supply chain leaders moved all or part of their manufacturing out of China or plan to do so by 2023.
The report is based on a survey of 260 global supply chain leaders who indicated that the most important reason is the increase in the U.S.–China tariffs, which caused costs to produce in China and other Asian countries, or even locally, to increase dramatically.
“We have found that tariffs imposed by the U.S. and Chinese governments in recent years have increased supply chain costs by up to 10% for more than 40% of organizations. For just over a quarter of respondents, the impact has been even greater,” said Kamala Raman, senior director analyst in Gartner’s Supply Chain Practice.
“The most popular alternative locations are Vietnam, India and Mexico. The second main reason for moving business out of China is that supply chain managers want their networks to be more resilient,” she added.
In July 2020, the Japanese government announced a more than $2 billion subsidy for Japanese companies to exit China to decrease overdependence on China.
The program was called “China exit,” According to Japan Forward, some 87 companies accepted the government subsidy to move their production back to Japan and other Asian countries.
In 2010, Foxconn, Apple’s leading supplier, announced that it would move 30% of its production to Vietnam and invested $1 billion in a plant in India and not be entirely dependent on China.
The CCP’s economic policies: Domestic factors
Unlike other developing countries, the Chinese Communist Party regulates and controls all aspects of the economy at macro and micro levels. Therefore it cannot be considered a free-market country, but its economic growth or stagnation results from the regime’s policies.
In other non-communist countries, although the state regulates the private sector to a certain degree, companies and individuals, in general, are free to make decisions, and the market fluctuates naturally.
In analyzing the Chinese economy, it is vital to keep in mind that nothing escapes the scrutiny or control of the Chinese regime. As we will see below, political decisions are often made to favor the Party and not so much the country’s economy.
Rising labor costs
One of the pillars of Chinese economic growth was abundant cheap and highly skilled labor. As a result, 2017 saw as much as a 20% increase in Chinese incomes, according to Fox News.
Last year, under Xi Jinping’s “shared prosperity” policy, wages in China rose again. According to Nikkei, they rose from $254 per month to $370.
Compared to other Southeast Asian countries, which are also a destination for large companies, the cost of Chinese labor was no longer competitive. As a result, it was a reason for many companies to look for alternatives outside the country.
To get a rough idea, Japanese companies in the manufacturing sector in China paid an average base salary of $531 per month in 2020, compared to $447 in Thailand and $250 in Vietnam.
State intervention in education and technology: Technology sector
Between September and November last year, the CCP decided to apply new regulations to the technology sector, including the Data Security Law and the Personal Information Protection Law, and other anti-monopoly measures, which had a massive impact on the economy.
Under the new regulations, companies with more than one million users cannot share their data with foreign entities. At the same time, foreign companies operating in China must host their customers’ data on local servers.
For local companies, this means that the Chinese communist regime will decide whether they can operate on foreign stock exchanges.
The most notable case was the Didi Company, which offers urban transportation services similar to Uber.
After Didi made its first public offering on Wall Street without the Chinese regime’s “approval,” the regime launched an investigation into the company and accused it of violating data protection laws. As a result, it removed all of Didi’s apps from online stores in China, and Didi was forced to withdraw from Wall Street, losing millions of dollars.
After Jack Ma, the founder of Alibaba, the online retail giant, criticized the CCP for strict private sector control, the regime forced Ant Group out of Wall Street. Also, it forced the corporation to register as a financial company and fined it a historic $2.8 billion for its monopolistic practices.
Tencent, the developer of Tik Tok, also had to cancel a merger with a music service under antitrust law.
According to the South China Morning Post, the Chinese technology sector, which absorbs the vast majority of university graduates, lost a combined $1 trillion, a significant source of taxes for China.
As collateral damage, companies such as Yahoo and Microsoft’s Linkedin announced their exit from mainland China due to the “increasingly difficult business and legal environment.”
The Chinese communist regime’s offensive on the technology sector, which according to the Center for Strategic and International Studies, contributes almost 40% of China’s GDP, is a mystery to many observers. Many predict a severe drop in Chinese economic growth, which has always been one of the CCP’s pillars for legitimizing its regime.
The world of video games and entertainment also suffered. The regime’s offensive established that games with topics such as reincarnation, demons, and things about nature could not be developed for T.V. Novels cannot have too extreme characters, and dramas must describe everyday life’s good and simple things.
In July last year, the State Council issued new rules prohibiting for-profit companies from providing private tutoring in core curriculum subjects and foreign investment in such companies. As a result, no new licenses will be granted, and all existing enterprises will be required to register as non-profit.
In other words, from one day to the next, all companies engaged in private education could not charge for their classes.
The sector had an estimated 10 million employees. A notable case was the company New Oriental, which announced the layoff of more than 50,000 employees due to the new regulations.
New Oriental was initially dedicated to preparing Chinese for the U.S. immigration exam, although it later closed its program.
Experts see this decision as a clear indication that the Chinese communist regime is seeking to cut off the influence of the West in Chinese society since, in the private education sector, students are exposed to the methodologies and contents of other countries.
The ‘Zero COVID’ policy
With the coronavirus outbreak worldwide, the CCP resorted to extreme measures to control contagions, locking people in their homes, putting up security fences with policemen making sure that no one went in or out.
This became a factor that caused the interruption in the supply chain since it was not possible to go to the port to ship the products or even to pick them up.
Shipment delays caused an increase in the cost of shipments due to the high demand generated by the delay.
The California company T2M, which manufactures iPhone joysticks, produces its components in various Asian countries, assembles them in China, and then ships them to the United States.
Its CEO, Fraser Townley, told Vision Times the company went from paying $3,500 per container to $18,000 in 2021 when the pandemic restrictions were lifted.
As a result, T2M is considering moving from assembling its products in China to California as the benefits of assembling in China are eaten up by the cost of shipping.
A 2020 report by German news site D.W. claims that CCP officials and state media are more aggressive with foreign company executives after the pandemic.
Many executives claim that they were not allowed to return to their companies, their employees were not allowed to enter, and they noticed that the news in the state media is more aggressive towards European companies.
Boycott of Korean companies
In 2017, after South Korea signed an agreement to grant land to the United States to install a missile system as part of the usual security agreements between the two nations, Chinese state media began calling for a boycott of Korean brands.
Lotte Mart, a Korean shopping mall chain with a significant presence in China, was responsible for granting the land to the United States. It suffered strong retaliation from the Chinese regime, which closed at least 10 malls for “security defects.”
According to South China Morning Post (SCMP), dozens of Chinese also staged protests in front of Lotte’s malls at the time. However, local Party leaders probably organized the protests with monetary incentives.
Lotte Mart has at least 20,000 Chinese employees in its malls across China.
Samsung closed all its factories in China and, in 2019, completely stopped production there. As a result, some media claim that entire villages depended on Samsung that has become ghost towns.
Kia, the car brand, also closed a major factory in 2019 due to falling sales.
The giant Hyundai Company closed its Beijing factory in 2019 after reporting a $1 billion loss in sales. However, the company in parallel reported huge profits in the rest of its global sales.
While the boycott may have achieved its goal, the collateral damage to the Chinese economy was devastating.
The issue of human rights in Xinjiang
Major companies such as Adidas, Nike, and Apple were involved in the scandal of the persecution of Uighurs in Xinjiang province due to the use of cotton and slave labor in the production chain.
A report published by the Australian Strategic Policy Institute (ASPI) claims that these major brands have benefited from the slave labor of Uighurs in concentration camps in Xinjiang and throughout China due to the Chinese regime’s systematic campaign of persecution.
After the scandal, Adidas moved most of its production to Vietnam. Apple also invested in India and Vietnam, although it still faces challenges moving out of China because Vietnam does not have the needed infrastructure.
Dell and Sony are two other significant corporations that left China partially due to the hostile environment and poor sales performance.
During the trade war with the United States, the Trump administration banned Huawei-branded devices in the country, alleging that the company spied on the personal data of its U.S. users by sending the information to its servers in China. A similar complaint was made about Tik Tok.
The complaint had a devastating effect on the Chinese company that had a pact to install the 5G network in the U.K. and other countries. At the insistence of then-Secretary of State Mike Pompeo, the U.K. canceled the contract with Huawei.
The popular video conferencing app, Zoom, was one of the U.S. companies caught in the Huawei crossfire.
Because the CCP mandates that companies whose servers are in China share data with state intelligence agencies, Zoom, whose servers are in China, in August 2020 announced that it stopped selling its products to customers in China.
With the impact on the economy of the departure of large companies, the trade war, the regime’s offensive in the technology sector, and private education, smaller businesses that do not usually have enough capital to mitigate the effect of a financial crisis bear the brunt.
In December 2021, 4.37 million small and medium-sized enterprises in China were reported to be closed, with the number of new ventures being three times lower than in the past.
Small and medium-sized enterprises in China generate up to 60% of the country’s tax revenue.
According to an SCMP report, as of April 2020, more than 200 million unemployed Chinese either lost their jobs during the pandemic or were unable to find a job as life returned to normal. However, the figure is estimated to be much higher due to a lack of transparency from state agencies.
Last year, Amazon began ‘purging’ Chinese sellers from its sales portal, accusing them of bribing customers to leave good reviews to boost their reputation on the portal.
According to Vision Times, more than 250,000 accounts were closed in the process, 50,000 sellers were affected, and Chinese online sales lost $15.8 billion.
In China, there are more than 3 million companies engaged in online sales with around 50 million employees.
The political cost of the CCP’s policy decisions
Without being able to make a very accurate assessment because of the lack of access to information, it can be said that the Chinese economy is collapsing and that the CCP’s policies have exacerbated the situation, sometimes putting the Party’s interests before people’s interests.
Unlike in other free countries, CCP leaders do not have to worry about public opinion—which is heavily conditioned by the state media and the Internet police—or about being reelected and can simply look for a scapegoat to hold someone else responsible for the disasters caused by their own mistakes.
Such was the case with Evergrande, the world’s largest Chinese construction company.
For years Evergrande took loans from Chinese state-owned banks and, together with funds from foreign investors, undertook project after project, building massively. Very often, before it finished one, it would start another.
Evergrande accounted for nearly 25% of China’s economic growth over the past few years, but overnight it collapsed. It had $300 billion in debts, thousands of people without homes already paid for, and millions of related suppliers, companies, and contractors out of work.
Given China’s system of governance, Evergrande could never have become what it was or generated the real estate bubble without CCP control, and if Chinese officials were not getting rich from it.
However, media reports talk about the possibility of the Party “rescuing or preventing” the complete collapse of Evergrande, trying to present the CCP as the “savior” once again when everything happened under its supervision.
Given that economic growth in China has always been the pillar of the Party’s legitimacy. It has convinced society that “thanks to the CCP,” China enjoys prosperity. The economic collapse over the last three years could also mean the fall of the Chinese regime, or at least the political cost could be high.