China’s economic dependence on the outside world and mounting domestic debt may turn out to be President Xi’s twin challenges in the need of a magic wand, says the author.

As curtains came down on Year 2019, China finds itself at new cross roads with its economy under increased scrutiny as much on account of trade war with the United States as on account of rapid growth in household debt amidst desperate government’s efforts to boost consumption.

Turmoil in Hong Kong and the global concern over the treatment of Muslims in the so called education camps in the Uighur belt are no less causes of damage to the image of President Xi Jinping, who, critics say, is “responsible for a rotten 2019” with his centralization of power.

The forecast is that 2020 may turn out to be even worse than the year gone by. If this, indeed, is going to be the case, then President Xi will have to return to the drawing board for new strategies to weather the brewing storm since neither the economic might nor the military muscle is enough to do one-up on Dale Carnegie.

As long –time China watchers, Nicholas Ross Smith and Tracey Fallon pointed out in South China Morning Post (27 Dec 2019), Chinese leadership has attempted a multi-pronged charm offensive and spent billions on soft-power initiatives like the Belt and Road Initiative (BRI) to create a loyal constituency of acolytes across the continents. Neither this effort nor the Chinese market power has blunted the criticism that has come Xi way. Instead it has pump-primed Sinophobia.

Like in the past, now also, China is working on the pull of its market with full faith in Mao’s dictum that ‘money has no colour.’ Given the flux in the Sino- American dealings, what with President “Maverick” Trump’s concerns with his own re-election bid coupled with his inward looking policies, Xi’s problems are unlikely to go away.

In fact, China’s economic dependence on the outside world and mounting domestic debt may turn out to be his twin challenges in the need of a magic wand.

A near term solution for image makeover demands a better deal to ethnic minorities particularly Uighur Muslims. Inter alia this will depend as much on an end to repression as on snapping the linkages between Pakistan’s non-state actors on the pay-roll of army’s jihadi enterprise and Uighur extremists.

A near term solution for image makeover demands a better deal to ethnic minorities particularly Uighur Muslims. Inter alia this will depend as much on an end to repression as on snapping the linkages between Pakistan’s non-state actors on the pay-roll of army’s jihadi enterprise and Uighur extremists.

From what is in public domain, these goals will remain an unfulfilled wish-list. Firstly because of Beijing’s fixation with Islamabad as its gateway to the Muslim world and the Arabian Sea routes. Secondly because, Chinese Communist leadership refuses to entertain dissent of any hue even long years after embracing market economy.

No surprise, Minxin Pei, the author of China’s Crony Capitalism, avers that the New Year 2020 may turn out to be Xi’s worst year yet. He rests his case on the fact that Xi’s intolerance of dissent and his vulnerability to bad information have made his government more prone to policy blunders.

This analysis does not mean that there is a threat to Xi’s power structure. Only an ignoramus of the decision dynamics in a Communist regime will reach such conclusion either for short term or near term.

Simply put, there is no challenge to Xi’s grip on power. The challenge comes from domestic economy.

As pointed out at the outset, flip-side of Chinese economy is mountain of debt.

Historically, China has never managed to come to grips with its debt bomb which is a direct result of two phenomenon. One a socialist inability to look beyond the nose. Two political interference that makes debt resolutions hostage to ‘three nos’ – no credit recalls, no litigation and no reporting the defaults (to Central Bank), according to a media report.

So much so, China has been witnessing reckless growth of credit for close to two decades – binge borrowing as an economist terms it. Today banks, particularly non-bank financial institutions (NBFCs) are desperately looking for official bail-out. And are hoping for a turnaround in the Chinese debt repayment culture.

Economists view the household debt growth as a major concern. “It may be becoming a financial risk”, Xia Le, chief economist for Asia at Spanish banking group BBVA, said. “Looking at the rate of growth of household debt or leverage, in just over two or three years, it’s already grown to a level where you can’t say it’s particularly safe or low.”

The middle class is reeling under the impact of joblessness besides debt stress. The unemployment rate jumped to 5.3 per cent by early 2019 and it is the highest in two years.

Household debt makes up 60.4 percent (up from 52 per cent in 2018) of China’s gross domestic product (GDP). It includes mortgage and credit cards. And the household debt to income ratio at 99.9 per cent is now roughly equal to total household income.

Inflation has dashed hopes of households that their disposable income will keep pace with the surging debt, going by the data from the National Bureau of Statistics.

A related area of worry for the Chinese monetary managers is the spurt in the number of credit card loans that have soured. One estimate is that the outstanding balance of credit card repayments have reached US dollars One trillion (7.23 trillion yuan) by the first half of 2019.

Cumulative effect is a sharp decline in retail sales across a host of products, cars including. Also under check is household consumption. It is unlikely to look up, and therefore remain weak in 2020 too, according to China market watchers like Louis Kuijs, who leads Oxford Economics’s Asia research.

Against this reality check, President Xi government has turned all its attention to stabilising the economy. It has been hoping for economic nirvana through tax reliefs and big push to sales. It has offered tax cuts worth nearly US dollars 284 billion (2 trillion Yuans).

Year-end reports show that these offerings have not spurred spending even during the annual shopping festival held in November. Put simply, the Chinese consumer sentiment is refusing to look up. Domestic economic slowdown demands attention to fault lines. Otherwise, China’s GDP which has slipped to 6 per cent in the third quarter (2019) will remain bound for southwards in 2020 too.

–By Malladi Rama Rao