Vincent Ni
Good evening. Welcome to Chatham House and a thank you for tuning into this event on China’s economy. My name is Vincent Ni and I’m the China Affairs Correspondent for The Guardian newspaper, based in London.
Following the closure of the National People’s Congress last month, China set a target for its economy to grow at about 5.5%. Now, to some Economists, this is a pretty ambitious goal, especially in light of what we’ve been seeing in the past few weeks in Shanghai, the country’s most populous city and a key financial hub, as lockdown’s affected nearly 26 million population in Shanghai. There have also been concerns about disruptions to the global supply chain. So, a lot of volatility in China’s economy today, but of course, reading the Chinese economy is not just about crunching numbers. There are bigger political, as well as geopolitical, contexts lurking in the background.
So, given the current situation in China’s economy, to what extent is the state preparing to intervene, and if it did, will this be a temporary fix in the event of, say, market failure, or part of a general move towards greater state intervention? And, of course, what next for President Xi Jinping’s Common Prosperity initiative, as well as China’s Belt and Road Initiative, and how will China’s economy weather things like COVID-19 and other ramifications of the ongoing war in Ukraine? And all of this will have a wider impact, not just for China, but also to Europe and elsewhere.
So, I’m delighted to say today we have a excellent panel of experts, who would not only help us crunch numbers, but also put things into a wider context, both domestic, political dynamics, and international geopolitical reality. So, without further ado, let me quickly introduce all of them to you, and first and foremost, Jinny Yan, who is the Chief China Economist at ICBC Standard Bank here in London, and Dr Yu Jie, Senior Fellow on China Studies here at Chatham House, and then last but not the least, Professor William Hurst, Chong Hua Professor of Chinese Development at Cambridge University in England.
Now, before we start today’s discussion, a quick reminder to our audience. If you have any questions, please do send them to the Q&A box and we’ll go through as many of them as possible in the Q&A session afterwards. And, also, to add that this event is on the record and a video will be made available for members of Chatham House after this event.
So, let’s quickly turn into this discussion. First, I wanted to turn to Jinny. Jinny, could you give us an overview of the state of China’s economy right now? How damaging is this current Omicron situation in Shanghai to things like supply chain? And, as you know, next week, there will be a flurry of reports coming out of China, including first quota GDP, industrial output, and of retail sales. So, give us a preview of what to expect in the coming week.
Jinny Yan
Thank you very much, and it’s a pleasure for me to address this audience and such a distinguished panel of experts, as well. Let me start by, well, first of all, saying that as an Economist, I love numbers, but I’ll save everyone the bore today, as I’m not talking to investors today, but a very wide-ranging and very experienced audience, I’m sure.
So, first of all, I think when we talk about “China’s Evolving Economy,” as the title of today’s event suggests, it is certainly something that is evolving on a day-to-day, or even minute-by-minute, basis, depending on what you look at. But increasingly, sitting here in London, looking at China, having, you know, been based in Shanghai, what you’re seeing is a real differentiated approach and perception between the Western view on China compared to domestic. And depending on what your interest in China is, whether it’s economics, political, developmental, social, environmental, your conclusion will always be different, so seeking the truth is becoming more and more difficult.
And of course, you know, evidence-based, you know, research is increasingly difficult, especially since a – you know, a lot of those statistics, number one, would tend to be lagging, particularly statistics related to economics. You alluded to there in your introduction, Vincent, on the upcoming economic data for March, which is due to be released on Easter Monday, and markets are very much expecting monetary policy loosening. The RRR, so the reserve requirement ratio, so how much banks have to set aside in the Central Bank, is widely expected to be eased. And also, you know, other monetary policy tools will be adopted as well to loosen the current monetary conditions, as well as try to, you know, obviously lower the rate of borrowing and also costs of funding domestically.
But the timing of it is incredibly important. We had the US Fed, the Federal Reserve, at the point of hiking, increasingly hawkish, because across the Western world we’re seeing inflation. We’re seeing inflation in the UK more than 7%, in the US 8%. We’re hearing these inflation figures and we’re wondering how could China, you know, the second largest economy right now, soon perhaps to be the largest economy in the world, go in the opposite direction? And this is really where investors are increasingly dubious is – in terms of the outlook, because that constant, you know, positive outlook on China, its currency and the capital inflow into the country, is based on the fact it has a positive yield compared to US Treasuries. That yield is now not so positive, in fact, it reversed.
So, when you have a negative yield compared to US Treasuries, how do you view China? It’s constantly reviewed as – it’s seen very much as an emerging market, but in fact, it’s acting and it’s behaving much more like a developed market in many senses, from a government – obviously a sovereign yield perspective and also from, you know, the size of its markets. So, I wanted to maybe start off by saying, well, yes, that 5.5% GDP growth, very much – in many people’s perspective, very much an ambitious target, but to put it into context, we’re not just looking at China as a snapshot. We’re looking at China on a much more longer-term perspective and this is where the differences in opinion comes in, because even if you look at China since 2018, you know, we’ve consistently had GDP prints down from seven to six, and that 6% target is the target we had pre-pandemic.
And, obviously, the blip of the pandemic came in the first quarter of 2020 and that is when, you know, that disruption came. So, before the pandemic the target was 6%, so, actually, putting it into context, that 5.5%, going back to the normal medium-term trajectory of potential growth, doesn’t seem so ambitious. It’s still lower than where China was, obviously, before the pandemic. So, I think Beijing is very much hoping that 2022 was the year that we get back to normal, get back to what is in the blueprint, what is in the 12 – you know, the current five-year plan and beyond, and it’s incredibly important to realise that context, that China was already slowing, even before the pandemic.
And the current narrative is very much that even without considering the geopolitical international, you know, events, you know, China is still go – undergoing incredible uncertainty. So, you mentioned already these current lockdowns in Shanghai, in Guangdong, but also what China went through last year, in the sense of the property market crunch, the deleveraging cycle of high yield, you know, creditors and in terms of the power crunch that China saw, all of these stress test scenarios were lessons to be learnt.
And these are the lessons, I think, that cannot be planned and I know that, you know, obviously, the other experts on the panel will talk about how China’s, you know, incredibly state-planned economy and, you know, the narrative will continue to guide China’s development and – but from a economic perspective, some of these very short-term uncertainties, increasingly, is very difficult to plan. And obviously, these volatilities is what’s driving the current confidence collapse, both domestically, but internationally.
And then maybe if I jus – could just touch on three key themes that I wanted to maybe outline. You know, pre-pandemic, the three Cs I talked about were capital account opening, currency, the currency internationalisation of the RMB, the drive or the shift or transition towards a consumption-based economy.
Now, the pandemic, basically, threw a lot of that, you know, away because essentially, a lot of the efforts put into these three Cs, capital account opening, currency internationalisation, consumption-driven economy, were taking a backstep, really, because what happened is that the current market volatility made a lot of the longer-term developments very difficult and challenging.
So, although the aim is still very much to open up the capital account, and certainly there are still efforts, unified markets, one example recently, to continually trying to boost that longer-term confidence in, you know, the development of China’s capital market, particularly from a governance perspective, currency internationalisation, also. You know, when we talk about China’s economic growth, you know, we need to understand economic growth comes from the flow of capital, labour and goods, and if we think about China right now, the flow of capital is increasingly difficult. The flow of labour, obviously, was relatively immobile anyway, but increasingly difficult, once again, especially in those lockdown cities. The flow of goods, even, is being impacted. We’re hearing about cargos, freight being stuck in ports, and the supply chain impact is really, you know, putting a lot of pressure on those economic activities.
So, when I used to talk about, you know, the three Cs of capital account opening, currency internationalisation, or becoming a reserve currency status, and consumption, those are still very much the intended, you know, consequences of China’s economic development. However, the current uncertainties are putting that as a really aside, really, I wouldn’t say that this has been completely forgotten.
There are efforts still ongoing, but obviously, the priority now, heavily, is on, number one, stabilising confidence, the labour market, and that’s why we’re hearing in the latest state council communication that the labour market, once again, is becoming a fore, is becoming a priority. Making sure that unemployment doesn’t rise beyond the official 5.5%, graduates, you know, record number of graduates coming onto the job market, they’re not left unemployed, and China coming into this upper-middle income status, you know, whilst economically, you know, it’s seen and from a capital market perspective, is very much seen as a upper-middle income country. However, from a social welfare perspective, a lot of those, you know, flaws are really starting to be accentuated by the current lockdown and this is a reality that we see, even from an Economist perspective.
So, I wanted to maybe start with that, Vincent, if I may, and I really wanted to maybe just end my remarks, opening remarks, on that, you know, my three Cs of the capital account opening, currency internationalisation, consumption-driven economy, is very much shifting onto, you know, the search for liquidity and globally, that search for liquidity, discontent, particularly with the current state of affairs, especially when it comes to immobility, the immobility of labour, goods and capital, and then, last but not least, security. We’re talking about security, food security and energy security. If those three conditions are not met, unfortunately, the outlook will als – deteriorate even further.
But currently, I don’t think the priority is to boost, you know, the market sentiment around China’s economic growth, so that GDP target is almost not the priority right now, but really to make sure those security, you know, targets are met and, also, that the current job – labour market do not face any further downward pressure, because that will obviously lead to further social unrest. And those are the challenges, I think, that China, domestically particularly, are facing today.
Vincent Ni
Hmmm, excellent, excellent opening remarks, Jinny. Thank you very much for providing such a comprehensive picture, laying out all the opportunities, of course, you know, more challenges, as well.
And I wanted to turn to Yu Jie, and Jinny mentioned a whole host of challenges the economy is facing. Lurking in the background is this, you know, part of the political discourse these days, called common prosperity. You know, it is initiative to address a longstanding problem in China. But in recent days, it seems to me that this prosperity is much less stressed than what Jinny also mentioned, the stability. Is that also what you are seeing, you know, well, in terms of this pair of contradictions, stability versus prosperity? What is your take on that?
Dr Yu Jie
Thank you, Vincent, for this, and, also delighted to be here and share the distinguished panel with the other two panellist in here, and I also welcome everyone to Chatham House, as well, you know, doing the home team and singing the song in here.
Now, Vincent, for your question, it’s a very difficult trade-off in here and what my sense, really, from a Political Scientist’s point of view, is that there’s two words that basically justify the Chinese Communist Party regime. The first word is prosperity, the second word has been stability, and these two words has been intertwined ever since 1949, ever since the time of Mao and to even today’s China.
Now, for many occasions, ever since 1979, the ideas of a prosperity has always precede the idea of a stability. So, that is what Deng Xiaoping’s idea, you know, letting part of the people getting rich first and therefore – in order to generate enough wealth for the entire society and, therefore, everyone getting richer.
But however, I think China, since last year, in the time of the party’s centenary, come to that certain, I would even argue, inflection point, an inflection point that the ordinary population, which have not really been benefitted from the previous economic reform, and they would like to be part of that beneficiary and they would like to be in that so-called – the expanded middle class. I mean, one of the key target for the common prosperity initiative Xi Jinping put forward to last August, was about to – creating a olive shaped society for China, to expanding the size of middle class from 300 million into 800 million to 2035. And that is really incredibly difficult to achieve unless the economic speed will run up onto – from around 5% year-on-year and to 2035.
So, that will be incredibly difficult, firstly, for Xi Jinping for doing that and he could do so, given time of the last year, when COVID seems to eased and then it seems the world is remaining quite stable. But – and however, given the entire disruption at the geop0litical front, and I think perhaps the word, the old trick of having stability, have really come out from Xi Jinping and also his colleagues’ economic planning agenda.
So, even though we’re not crunching the numbers in here, but what I have really counted is I have counted the State Council, Li Keqiang’s Government Work Report for the national parliamentary session this year. The word of the stability has been mentioned 33 times and, however, the word of common prosperity and – has only been mentioned once. So, that clearly indicate that overall direction of travel, it is to having the stability.
It is to have the stability of – with the reasonable income level for every single ordinary household. It is the – searching for stability that supply chain, even the domestic supply chain, won’t be getting disrupted. It’s also the stability that China won’t be seeking – China won’t apply, you know, China won’t entering the phase of international isolation. So, I think that’s really putting the background of the stability that the country is searching for.
Now, let’s go back to the idea of common prosperity. I mean, this is really nothing new, really, for the discerning China watchers in here. It’s about closing that income gap between the rich and poor. And I believe, obviously, President Xi has a right – the right diagnosis, but unfortunately, not really the right solution, because what he has presented so far is really spooked the international investors and also spooked private entrepreneurs, which produce the 80% of the total employment of China. So that’s one, diagnosis right, but the wrong solution.
Now, the second solution is about, for example, imposing property tax or inheritance tax. Again, this has really created so much anxiety across different aspect of society, the anxiety that exist in China’s middle class and worry about their second property going to be taxed. So, at the end of day, the government only signal that – its interest in imposing property tax, but result really apply, or implemented, so that’s already indication that the senior leadership perhaps realised universally apply income ta – property tax is – not would be applicable for the ordinary household of China.
Now, hence, you also come to the question of the productivity, how are you going to improving the Chinese productivity considering the demographic decline? And, obviously, that demographic decline can only be mitigated, cannot really reverse that trend. So, that is – perhaps would be the medium-term headache for President Xi. And what he did, instead, it is like to create a society that you have much better quality and better educated blue collar workers and less students, less university students and less university attendees.
But whether that would really work applied for the Chinese society nowadays and perhaps not, because the majority of those who have not really been benefited from the previous run of economic reform, and also yearning for their opportunities and their chance to go to university, as well. So, again, it’s really about fair distribution of resources, the fair distribution of education resources, and that could be really difficult to achieve for President Xi, even in his third term.
Now, this also bring into the bigger political background that is going to be the 20th Party Congress and that is going to be his third term. For his third term, and compared with his second term, I think there seems to be a little bit continuation here. I think, for most of the sinologists would take this idea of the so-called principal contradiction, what Xi Jinping referred back to five years ago, in the 19th Party Congress, you know, to addressing the living standard question, to addressing the living standard challenge, to the ordinary population.
So, what he’s trying to do with the common prosperity, it is really the continuation of serving that so-called principal contradiction, it’s very much a dogmatic term for the Chinese Communist Party, but essentially, it is about the most pressing concern for the Chinese society. Essentially, it is about closing that income gap.
So, common prosperity, it is not new. It’s that sense of continuation. But what could really disrupt President Xi’s idea and his initiative would come the – really into the medium-term shock that the war towards Ukraine and also where China stands on Ukraine. So, much of this stability that President Xi wanted, and perhaps he may be able to achieve at a domestic front, but when it come to the international front, that would be hugely difficult. Because what China’s trying to do now, China’s trying to avoid a international isolation like what Russia has experienced in the past few weeks.
Now, Jinny earlier was talking about these ideas of the capital account opening, the currency – internationalisation with currency and, also, increasing the consultation-led economy, and all this very well in a time of when the external stability will be really safe and stable and sound for China’s own economic development. But in a time of the geopolitical volatility and what China can really do in here, it is perhaps to strengthening these ideas, strengthen these ideas of attracting foreign direct investment, in order to avoid the international economic isolation.
So, while we have been talking too much about the so-called dual circulation, the internal circulation using demand and supply to generate Chinese economy, but I think perhaps now the right time to rethink about this internal circulation and instrea – instead, really, the emphasis should be given to the external circulation that further integrated China into the global economy in order to avoid international isolation.
Vincent Ni
Excellent, thanks very much, Yu Jie. We’ll come back to some of the questions, you know, in particular, you know, how China deals with what’s happening in Ukraine and the implications for China’s global dipl0matic standing, as well as how China attracts FDI into the country, later.
But, you know, let’s turn to William, first, William Hurst, Professor at Cambridge University. Before William starts, just a reminder to our audience, this session is being recorded, a video will be uploaded to Chatham House’s website after this event, available to Chatham House’s members. And if you have any questions, please do send them my way, to the Q&A box, and we’ll try to go – answer as many of them as possible in the Q&A section.
William, so it’s your turn. Yu Jie talked about, you know, China’s internal dynamics, as well as external dynamics. You know, one of the – China’s external projects is called a Belt and Road, and I’m sure everyone here have, you know, heard about – has heard about this and, you know, have discussed at great length about this, you know, Belt and Road Initiative. You know, given what’s happening inside China, as well as what’s happening when it comes to China’s relations with the West, what is going to happen to Belt and Road Initiative?
Professor William Hurst
That’s a really nice place to start off. Let me first say thank you, thank you very much for having me, and for the opportunity to listen and learn from the other panellists. I’ve already learned a great deal and I look forward to more dialogue in the question and answer session, as well. Thinking about One Belt One Road first, I’d like to talk about that and then maybe expand into a few other questions and, also circle back to a couple of points raised, the benefit of going last.
So, when we think about the genesis of the One Belt One Road programme, if we go all the way back to before the international financial crisis of 2008/2009, during that time it became very clear to a lot of people inside China and outside, but particularly to the state, the Chinese state, that China’s economy was very much overdependent on investment. It had a very much higher ratio of investment to consumption, or spending, government spending, than almost any other economy in the world. It was overdependent on investment and the return on investment was incredibly low, right? And so, there was a very strong desire, on the part of the state, to channel investment into maybe some more productive avenues, some areas where it might earn a higher return, even at a slightly higher risk, and also to reduce the overall share of investment relative to consumption in the economy.
Then, you know, around the time of that financial crisis, as well, it also became clear to many people that a lot of China’s outbound foreign direct investment was not being, let’s say, the most rationally allocated as it could be. A lot of it was flowing, of course, through Hong Kong and then onto various other points, we don’t know where, but a very large percentage, an alarmingly high percentage, was flowing to places like the Cayman Islands, the British Virgin Islands, and other, sort of, centres for shadow banking, offshore banking, sort of, murky financial transactions.
Now, a great deal of that was what we used to call roundtripping or hot money, where that would come back into China as foreign investment. Some of it was, no doubt, going elsewhere as well, but this was something that unnerved the state quite a bit, ‘cause they didn’t know what was really happening to this money. Was it coming back, was it going somewhere else? Was it being used for purposes they didn’t really like and how productive was this?
So, One Belt One Road was an attempt, I think, to channel some of this outbound foreign direct investment into areas that the state could monitor and control and into activities that might bring higher returns. Maybe higher risk activities abroad that might’ve been happening domestically, but places where you might get a higher return, such as building infrastructure projects in Central Asia and South-East Asia.
It had an added benefit, at least in theory, which was deploying what could be called soft power. Now, the problem with deploying soft power in a manner as, arguably, ham-fisted as One Belt One Road, is it often can create a bit of a backlash and what we see in country after country is, in fact, a backlash against the programme, in part because of direct implications of what was done and the way it was handled, in part just because of political shifts in the countries that are playing host to some of the projects. And that’s something that I think has been underemphasised in a lot of the scholarship of it in third countries and also, not fully understood in China.
That, for example, Malaysian politics shifted rather dramatically over about the last five or six years in ways that meant many of the One Belt One Road projects that had been, sort of, in the pipeline ended up being far less feasible, politically, than they were before. Not necessarily because everyone in Malaysian society changed their opinion of China, but because of the coalition of parties and power, it was simply not workable to pursue that kind of project anymore. Thailand has seen some more political shifts, Indonesia saw some more political shifts.
So there have been a lot of changes on the ground politically that didn’t have to do directly with those states’ relations with China or with the One Belt One Road project specifically in every case, but that made those projects much less feasible. And I think the other aspect has been even those projects completed have not always borne the kind of economic returns that had been hoped for. So I don’t think the One Belt One Road programme is really going to be the wave of the future in directing Chinese foreign investment abroad or in heralding a new age of, sort of, China’s global influence economically, much as that may still be, on paper, one of the goals of the programme.
What I’d like to then, sort of, shift to talking about is what’s happened over the last couple of years, more broadly, not just with the economy, but socially and politically. And here I think there’s – something that is useful to bear in mind is that the CCP loves lockdowns, as a general policy in certain contexts, and specifically they love lockdowns when something sensitive is going on.
Anybody who’s ever been in Beijing during the Two meetings, or during a party congress, or in Shanghai during the World’s Fair or the Expo, or anywhere when there’s a sensitive meeting, a sensitive anniversary, a sensitive congress, anything like this, for many, many years, for decades, lockdown of some form is usually imposed. And so, COVID, in that sense, is a wonderful political opportunity for the state and the CCP to impose lockdowns around very, very sensitive events, anniversaries, meetings, etc.
So, I mean, I’ve been saying for over a year, we’re not going to see China’s, sort of, national lockdown from most of the world lifted in any meaningful way, I don’t think, until after the Two meetings in March of 2023, at least, if not beyond that, but at least before then, there’s no way it can be done. Politically, not scientifically, not public health wise, that’s a separate question, but just politically, you know, we’ve seen the Olympics, we’ve seen the Two meetings, we’re going to see the 20th Party Congress coming in a few months, and after that, we’re going to see the Two meetings again.
All of these are so incredibly sensitive that it would be foolish, from the point of view of many, I think, in the top echelons of party leadership, to lift the basic restrictions any time before that. So, I think we’re going to see, essentially, a ban on inbound travel into China from most of the world and severe restrictions on outbound travel, whether they’re imposed through actual direct regulations or simply the absence of flights, things like this, that everybody who’s tried to go in or out of China has faced. Long quarantine periods, internal quarantines where you’ve got to quarantine again when you go to another city, all of these things just making it very, very difficult for people to move in or out of many parts of China.
So, that’s one aspect of COVID lockdowns and COVID closures that I think is the longer-term structural aspect that’s going to be with us for at least a little while longer, maybe a longer while longer, I hope not, but maybe. And that, I think, is going to have a profound effect, already has had a profound effect, on economic activity and on social and political life.
The other aspect of COVID closure is this, which is that from very early on, from, I would say, the end of January, certainly early February 2020, the narrative presented by the leadership of the CCP and the Chinese state has been that COVID is a deadly and dangerous disease that must be stopped as completely as possible and from which everyone should be protected as completely as possible.
That narrative kind of remains, despite the fact that China has very, very high rates of vaccination, despite the fact that the Omicron variant appears less severe than earlier variants, despite all of these changes in the way that we think the virus behaves and the way that other societies have reacted. China has stuck with this so-called zero-COVID line pretty strongly, both in terms of the policies its implemented to stop COVID and in terms of the narrative it’s put out to the world and to its own population.
That means that when you have an outbreak, such as has occurred in Shanghai or in Guangzhou before, or in other places throughout the country, you have to lock down. How can you say that this is a terrible and deadly disease from which everyone needs to be protected and then just let the outbreak spiral? Right, of course, you have to lockdown, of course you have to take every measure feasible to stop it.
Now, the question, I think, for domestic political stability and for economic activity, as well, is really, to what extent does a critical mass of the population continue to buy into this narrative? And that’s something I honestly don’t know, right? I’m not on the ground in Shanghai right now, or in another part of China, I’m in the UK. I don’t know what everyone is really thinking, obviously. But I don’t think people are foolish and I don’t think people are just blindly following either the government narrative or blindly throwing it away. But it’s a – I think, a critical question of, you know, to what extent does the majority of people believe this narrative still today, or not? And I don’t know.
But I think to the degree that people still believe the narrative, there is unlikely to be a strong, sort of, backlash against the lockdowns and people, in fact, will, in some measure, perhaps even support or applaud the state for stopping the virus. But to the extent people no longer feel that tense about COVID and are more upset about the inconvenience and, indeed, the harm being caused by the lockdowns, then we might see a very different political dynamic emerging. And it just isn’t clear to me yet, sort of, where people fall on that.
What this all adds up to, as well, then is this, kind of, political sensitivity, which speaks back into some of what Yu Jie was talking about in this trade-off between prosperity and stability. This is an incredibly politically sensitive moment in China. It has been for a while and it continues to be, both because of COVID and because of these other factors in play, and so I think it’s right to say that the state has shifted very strongly in favour of stability over any other kind of measure of success, whether that’s prosperity or something else.
But I also think it’s not obvious what the best policy is for that stability, right? If I were sitting in Zhongnanhai trying to work out, you know, what is the best policy to keep stability at the fore? How do we actually maintain the most stable political and social situation possible? Should we actually go for more draconian lockdowns? Should we ease up a bit? Should we open up things a bit? Should we try to get the economy going? I’m not sure, it isn’t obvious, at least to me, what that choice would be if I try to put myself in the shoes of someone making that decision.
Likewise, even with things like monetary policy, right, a general loosening of monetary policy would seem like a good thing to do to, sort of, stoke the economy and get things moving again. But, at the same time, the government has been trying for many years to, kind of, unwind the asset price bubble in real estate, and if you loosen monetary policy and make lending easier, where are people going to rush with their money? The government, I’m sure, hopes that they’ll rush back into the equities markets and prop those up, as those continue to, sort of, falter. But they might well race back into the property market, too, and if they do that, that’s going to then reinflate the property bubble that they’ve been trying to, sort of, slowly deflate for a long time, and might actually end up causing more instability, as well as more inflationary pressure.
So, likewise, the demographic decline, I think there’s a really easy worldwide proven solution to the demographic decline, but it’s one that China will never go for, it’s immigration, right? Every country that’s beaten the demographic decline has substantial levels of immigration. China does not and probably will not in the near future, but if immigration’s off the table and it’s now probably about 25 to 30 years too late to have adjusted the family planning policy in hopes of avoiding the worst of the demographic decline, what is it that China should do? It isn’t clear, right, there’s no obvious measure to take, short of opening immigrations.
The very last thing I will say is about the – this idea of performance legitimacy and the state basically delivering prosperity with stability, right? This, I think, to me, very much harkens back to the idea that the Sociologist, Zhao Dingxin, put forward about 30 years ago, of performance legitimacy, saying that, essentially, since 1978, the CCP rooted its claim to legitimacy on its ability to deliver economic growth with general political stability.
Now, that – I think that’s a real departure from the Mao era. We could discuss that later, as well, but I think during the Maoist period, stability was not really the favourite attribute of the state, right? I mean, chaos and instability and ongoing radical political change were often, in fact, preferred to stability and stagnation, as it was seen, or ossification, bureaucratism, all kinds of other negative attributes applied to that. But I do think that, to the extent that there’s a trade-off, that the state has gone for stability, and I think it’s been going that way actually for quite a while, really since about 2007 is where I would put the inflection point, rather than more recently, but we can, again, talk about that.
So then, the open question still remains, though, can China find a way to prevent severe economic crisis, keep politics stable, and hopefully promote some aspect of common prosperity, whatever we really think gòngtóng fánróng means. I think it really probably amounts to, sort of, reducing social inequality in some way, right? So, can social inequality be ameliorated while politics remains stable, and the economy is prevented from crashing?
It’s not obvious to me how China does that and it’s not even obvious to me what the preferred options would be of those that I think are on the table. So, I’d be really curious to discuss that further with the other panellists and with the audience, sort of, what are people’s ideas of how the state can structure this choice and what the options that might be best could be.
Vincent Ni
Excellent, thanks very much, Bill. You echoed a question, somewhat, as I understand it, from Lee Jones. Can we cut to Lee to ask his question? I think the question is about the aspects of lockdown you were talking about and, you know, Lee has some questions for you, Bill. Just – I’m quite conscious about time and we’ve only got 18 minutes left, so if we could be as brief as possible, but Lee, over to you, please.
Lee Jones
Thanks. I wasn’t expecting you to come to me, actually, but thanks, that was really fascinating, Bill. So, I think you’re suggesting the lockdowns are really being used for sociopolitical control, this is not really about health, and that is costing – the cost is enormous. The economic cost is being estimated by some Hong Kong Economists at 4% of GDP just from the Shanghai lockdowns alone. There’s massive social havoc, you know, people running out of food, you know, screaming about it on Weibo and so on.
So, you know, you talk about performance legitimacy. What is this zero-COVID fanaticism doing to the performance legitimacy of the CCP? We’ve seen reports saying the reason they can’t back down is ‘cause it’s really popular. It doesn’t look very popular from Shanghai, so what’s happening to the performance legitimacy at the grassroots level, in your judgment?
And then, you know, is the CCP elite, nationally, locally, whatever, unified behind this strategy? Shanghai tried to steer its own course for a long time, with a lighter touch policy and then, it – you know, as cases got out of control under Omicron, massive crackdown from the centre, this is likely to happen other places, I guess, with Omicron, as well. So, what’s your – what are your views on that? I mean, this is – seems like quite a risky strategy of social control, really, in the long-term, just because it’s a kind of – such a, kind of, lunatic policy in the long run. You and anybody else that wants to come back on it, thank you.
Vincent Ni
Thanks, Lee. Yeah, just very briefly, William.
Professor William Hurst
Yeah, I’ll just say very briefly to that that, I mean, I’ve written about this before, actually, that it – very early on in January of 2020, I don’t think the central government quite knew exactly what it wanted to do when the first reports of this novel coronavirus started appearing from Hubei. But once the decision was taken in late January, the line’s actually been remarkably consistent, and yes, it is very useful for social control to keep the lockdowns, but I don’t think that was the original intent and I don’t think that’s the only intent.
So, I think, genuinely, in that move from late January 2020, the intent was to suppress the virus, right? The intent was to say, “We have to get rid of COVID. We have to actually stop this, it’s very dangerous.” And they did that and in that sense, it was a success story, at least of sorts, when it was adopted for – fully and formally, in January and February of 2020.
The question about political control and the political utility of lockdowns really obtains later than that. Once you’ve got vaccines, once you’ve got large percentages of people, in fact, inoculated, once you have variants spreading that really are less dangerous, is it still really about public health or is it about political control? I think there’s at least a significant element of political control and social repression entailed in that, which has a high utility for the central state, particularly at really sensitive moments such as this.
But the other aspect of the zero-COVID policy that maybe I didn’t emphasise enough earlier, is that I do think that the state and the party have adopted this, both internally and explicitly externally, as a critical criterion of measuring success, right? That this counts for more, that it’s okay if people can’t get food, it’s okay if people die of heart attacks in their homes because the ambulance can’t pick them up ‘cause they didn’t get their PCR test result in time, right? That’s alright, as long as you have zero COVID cases, right?
This has become one of those veto targets, one of those really important measures that trumps everything else, at least for now, and I think that ties in very strongly with the narrative that the state continues to promote, that this is a critically dangerous disease from which all of society needs to be protected at all costs.
And that’s why the real question is to what extent do people continue to believe that, or not? If they continue to believe it, then I do think the lockdowns should be popular. If they no longer believe that, rightly or wrongly – I’m not a Scientist, I don’t know the correct answer to this, but if they don’t believe it anymore, then I don’t think it’s going to be very popular.
Vincent Ni
There’s a lot of influx, as you indicated, Bill. We’ve got a question from Benjamin. “As a means to bolster Chinese financial markets” – I suppose this is a question to Jinny, “As a means to bolster Chinese financial markets, the government are likely to accelerate their easing of the regulatory crackdown on certain key growth sectors, for example, technology, gaming think tank, etc., etc. Do you think this is likely to happen?”
Jinny Yan
Thank you for that question. Yeah, when it comes to regulation, I don’t thin – first of all, I don’t think removal of regulation is a means to stimulating the economy. The regulatory guidance, you know, last year was happening at a time – obviously, we were still seeing the recovery, the nascent recovery, on the back of a peak pandemic year, at the time obviously, probably retrospectively, we will rethink when the peak pandemic time will be, maybe a year down the line. But certainly, it’s not a way of removing, you know, uncertainties when it comes to economic down pressure.
What the regulatory – you know, the guidance, really meant – and by the way, this regulatory guidance, it wasn’t out of the blue, it has been in place for a while, really to really remove the moral hazard situation, particularly aimed at those who are looking to invest inbound into China. You know, we tal – when I talked about the capital account opening is mainly to attract not only hot money, so money that, you know, temporarily comes in and out again, once it’s earned that return, but sticky investment. So that – not only FDI, so projects on the ground, factories, businesses, you know, think about those factories that supply global supply chains of these big US and European multinationals, but also investors, sovereign investors, looking for alternative ways of investment that makes more sense from a reserve management perspective, reserve diversification.
And from those senses, the regulatory guidance meant that the market, China’s market, is becoming more transparent, if you think about global index inclusion of China into, you know, these bond indices. We had three major indices all including China in the recent years and that is because the improvements in terms of the market guidance, market regulation. And the same thing for tech, for property market, FinTech, you know, all of these sectors that are really related to innovation, related to, you know, IP, as well, property rights – all of these things means that it takes time for China to develop those. It doesn’t come overnight.
So, proper regulatory guidance on those sectors, innovation driven, property rights to – you know, import dependent, sort of, sectors, you know, are dependent on a healthy set of regulations, so I don’t think that that’s going to go away. And quite the contrary, there’s probably going to be a time where more guidance will be coming through and I alluded to previously on the unifying markets, it no longer is about a size – sort of, one size fits all. So we’re going by the, kind of, piloting zones once again, so Shanghai Free Trade Zone, known to many, was open to capital, you know, trials, capital account opening, and just recently today, I think, it was in the news once again, the domestic media, about Beijing’s also economic zone, so these pockets of experiments.
And also, back to the COVID lockdown – and, by the way, just today, quite interestingly, eight cities have announced a shortening of self-isolation for international…
Vincent Ni
By four days, yes.
Jinny Yan
Yeah, exactly. So, actually, what China may be doing, in fact, is that China doesn’t know the answer, but the right way to go about it is to have smaller sized pilots and testing, you know. So, I said, actually, Shanghai, the lockdown started as an experiment to see whether, you know, this new shift towards a dynamic zero-COVID policy would work, and obviously that policy has changed, obviously, because of that abrupt impact on, you know, certain areas within Shanghai. But Shanghai remains the most international city in China, so clearly, any of these kind of draconian measures will have very different impacts on Shanghai compared to any other city.
So, I just want to point out one last thing. I agree with many things that my fellow panellists have been talking about, but anecdotally, vaccination rates in China, on the ground, particularly amongst the elderly, is actually surprisingly low, and very interesting, particularly if we talk about three or four, you know, vaccinations. And that is the scary aspect and I think the narrative is not to keep cases low, but to keep death at zero.
Vincent Ni
Exactly, and…
Jinny Yan
And I think that’s priority, that’s the narrative.
Vincent Ni
And I think…
Jinny Yan
And…
Vincent Ni
…you give me a very good opportunity to put a plug. So, we are putting out a Science Weekly podcast later this week about the situation in Shanghai and one of the things we mentioned in our podcast, The Guardian podcast, by the way, please do go to Apple podcasts and subscribe to it, is, you know, over 80 years old, the third dose vaccination rate is only 20%. That is staggeringly low, that is, you know, something that the government needs to address.
So, these are the domestic challenges. You know, what about international challenges? Yu Jie, earlier, talked about this war in Ukraine. Robert has a question about that, “What does the panel think China will take away from the West’s economic response to Russia’s action in Ukraine?” Yu Jie, over to you.
Dr Yu Jie
Sure, there’s not really straightforward answers in here, because China and Russia, a different nature of the economy, a different size of the economy, first in foremost. And secondly, really the nature of the power of each country are very different. China is – preferred itself to be integrated into a global economy and, therefore, extended its influence, so the party prefer the companies to go out, whereas, on the other hand, Russia is the 19th Century great power that’s seeking to have that territorial conquest in order to extend its geopolitical influence. So, the nature of the power itself is very different.
Now, secondly, it is also in terms of multi-facet economic sector, that is also very different, as well. I mean, Russia is mostly in the primary material, mostly in the crude oil sector, so resources sector, whereas on the other hand, China is entering into both from manufacturing, into primary sources and also into services economy.
So, it’ll be much harder for the Western government and also for the Western companies to real decoup – really decouple from China, because then, that would also equivalent to some sense of economic suicide for some of the Western companies of themselves. So, I think that’s would really make China, firstly, to be careful with this association with Russia. I mean, if you look really carefully, for the sake of avoiding the secondary sanction, I think most of the Chinese [inaudible – 54:16] banks are very careful not to step in the wrong water in this case.
Now, secondly, I think also there is a problem that the Chinese Government overthink, you know, this whole idea of closing its border, close its door and only run into the internal circulation. I mean, one point which I’ve – in my opening remark, I’ve said earlier, we were talking so much about dual circulation in the last two years, but realistically, it is part of export growth that really regenerated the Chinese economy in the last two years. So, at the end of the day, perhaps the government will still have to use an old trick by expanding its export volume, both in goods and in services, in order to regenerate its economy and therefore, to creating that interlink with the rest of the world.
And this also including, as Vincent, you mentioned earlier, on South-East Asia. And a part of the reason why China would be able to have some sense of comparative commercial advantage when they come to the competition on the Indo-Pacific, and perhaps it’s about China’s trade data, China’s much larger trading partner, with all the South-East Asian countries, except [Bhutan – 55:18], compared with United States. So, China will have to utilise the existing economic interdependence already with those region and therefore to avoid the Western companies and government imposing on certain sanctions against China and therefore to avoid international isolation. So that international isolation perhaps would translate it into downgrading living standard inside the country, so domestic politics and foreign affairs and closely go intertwined.
Now, come back to the zero-COVID strategy debate. I mean, Shanghai seems to be a quite unique case in here. I mean, you hear so much complain from the Shanghai – from the citizens and the locals from Shanghai, but you also hear, equally, same amount of complain for many Chinese citizens of many other cities. But however, as China – the Chinese Government being a big government and therefore the population expect the government to do many things and in great – and also plus, creating a zero-COVID society, as in the last two years. So, that narrative has been so strong, and therefore, the Chinese population has the expectation that this society will become zero-COVID, so that expectation has become now a double-edge sword at the end of the day. The government really didn’t know what to do, whether to loosening or to tightening, so I think, really, the Chinese Government is the victim for its own success, partially.
Vincent Ni
We’ve talked a lot about China’s domestic and international issues. One thing we didn’t really talk about is the environment. We’ve got a question coming in from Sitoku, who asked, “What are the panel’s opinions on how climate change requirements contribute to prosperity and stability of China? On the one hand, some would argue China is quite nicely positioned to prosper, given its nomination in solar PV, development of EVs, or more in general, increase in renewable energy, in general. On the other hand, China has a lot to accomplish. What is the panel’s view on this?” So, I think this aspect of, you know, Chinese economy, the new type of economy, environment, climate change, is rather important. So why don’t we start to tackle this from this question, please? We’ve only got three minutes left, by the way, so let’s be very briefly here.
Jinny Yan
Can I make a contribution to the…
Vincent Ni
Yes, please, Jinny, yeah.
Jinny Yan
…question on climate change? So, I hear your point about the fact that China has a huge role to play in the contribution to the Global Climate Change Initiative. And I think, you know, many people have this perception that, obviously, China has a – has, you know – has mainly not made much of an effort, or much of an ambition, particularly from a zero-COVID – sorry, a net zero agenda, ambitious net zero agenda or target. So, the 30-60, so 30 peat carbon and 60 net zero, to many in the Western world, obviously, is not that ambitious, however, for China to reach that peat carbon ambition I think already takes a lot.
And you’re already seeing that in many of the global – particularly the renewables supply chains, China is increasingly leading the pack, as it were, and reducing the cost of renewable energy and that’s the key thing. And, obviously, it’s becoming increasingly difficult with the current energy security debate, and obviously not only China but many major economies are backtracking in terms of carbon intensity. And – but that said, I don’t think the real challenge is about how China contributes towards a global, you know, financing or investment into renewables. Actually, China’s doing quite a lot on that. What’s really challenging is the G in ESG, so environmental social governance, the governance aspect. So, how do we define, you know, clean energy? How do we define projects that’s worth, you know, investing in that will have a net positive contribution, that impact positive compac – impact from a ESG perspective?
So, I absolutely believe that from a, sort of, investment or a contribution perspective, China has a great role and already is playing that role, but from a governance perspective, there needs to be more work, mutually recognised work, internationally recognised work, that China can participate in and be part of a wider initiative.
Vincent Ni
Excellent, excellent. The evolution of Chinese economy, it’s as complex as ever, but thank you so much for everyone for tuning in and thank you to my panellists, Jinny Yan, Yu Jie and Professor William Hurst at Cambridge. That’s all for this evening. Thank you for joining and thank you for all your questions. I’m sorry we weren’t able to go through every single question, but thank you very much for engaging in this conversation. Please do keep engaging with Chatham House and, of course, please do keep reading The Guardian’s coverage of China. Thank you all and happy holidays.