Analysis: The Chinese Communist Party Falls into Its Own Economic Trap

Job Fairs Are Packed, But Few Are Finding Employment(Video Screenshot)

October 23, 2024 — The Chinese Communist Party's (CCP) stubborn support for an export-oriented manufacturing strategy has led China down a path of diminishing domestic returns and increasing foreign hostility. The CCP has fallen into an economic trap of its own making.

CCP's Economic Stimulus Lacks Innovation

Recently, the CCP authorities launched a makeshift economic "bazooka"—the People's Bank of China, the National Development and Reform Commission (NDRC), and the Ministry of Finance all rolled out economic stimulus plans, but without exception, these lacked any significant measures to boost consumption.

Later this month, the National People's Congress approved the issuance of approximately $284 billion in special bonds, but most of the bonds are expected to be used for local debt swaps and to inject capital into banks.

This indicates that the overall economic agenda of the CCP has hardly changed, still moving in the direction of state-led so-called "new quality productivity" in advanced manufacturing, with little focus on household consumption.

Wang Guochen, a research associate at the Chung-Hua Institution for Economic Research, told The Epoch Times that the current wave of economic stimulus does not address the root problem, which is the need to spend 10 trillion yuan to purchase unsold housing stock. From the People's Bank of China meeting on September 24, to the NDRC meeting on October 8, the Ministry of Finance on October 12, and the Ministry of Housing and Urban-Rural Development press conference on October 17, all mentioned the issue of fiscal purchase of unsold housing, but there is no specific plan. It was only on October 17 that the Ministry of Finance supplemented that local governments should issue bonds to solve the problem themselves.

He said that on May 17, Chinese Vice Premier He Lifeng proposed the idea of fiscal purchases of unsold housing stock, but less than two weeks later, on June 2, Zhang Zhengxin, the Chinese Executive Director of the International Monetary Fund (IMF), publicly said that this would create moral hazard, fostering an irresponsible attitude among people speculating on housing.

"This is definitely not a personal statement. To publicly contradict He Lifeng, there must be authorization from Xi Jinping. So this area has become a forbidden zone that cannot be touched," Wang said.

Wang Guochen pointed out that Xi's policies have essentially remained unchanged. Fiscal spending, particularly regarding national debt, continues to be directed toward major strategic and security projects.

He noted that in this round of market rescue efforts, various ministries have been holding press conferences, but the key leaders were absent. During the meetings, He Lifeng was traveling through Xinjiang, Shanxi, and Fujian, covering much of China; Premier Li Qiang went to Cambodia and attended the Shanghai Cooperation Organization (SCO) meeting; Xi Jinping and He Lifeng together visited Fujian on the 12th.

"In other words, the real leaders are not paying attention to how the economy is performing. The economic departments responsible for these matters are getting anxious because they could be dismissed if the economy looks too bad," he added.

Sun Guoxiang, a professor of international affairs and business at Taiwan’s Nanhua University, told The Epoch Times that the CCP fears relying too much on consumer-driven economic growth could weaken government control. Particularly, the rise of the middle class and the accompanying demands for rights could pressure the government.

The CCP Has Fallen into Its Own Trap

The policies of the Chinese Communist Party (CCP) have had disastrous effects on China's economy, trapping it in an economic crisis of its own making. This process accelerated from 2020 onward, and the consequences have now become too significant to ignore.

In 2020, the CCP began a crackdown on the real estate sector. Many property developers, unable to secure bank loans, quickly went bankrupt. Local governments, having lost their primary source of revenue from land sales, fell into debt. The CCP's strict zero-COVID policies worsened the economic situation, while simultaneously suppressing China’s dynamic private sector, stifling private investment, and cutting off job opportunities for university graduates. It was around this time that tensions between China and the U.S. escalated, and Xi Jinping doubled down on technological self-reliance, diverting resources that could have helped alleviate the economic crisis.

So far this year, housing sales in China have plummeted by 24%, while household savings have surged. Due to the overproduction of unsold goods by factories, the Producer Price Index has been declining for two consecutive years, and consumer prices are hovering near deflation.

Faced with millions of vacant and unfinished apartments, rising youth unemployment, declining wages, and a policy focus on high-tech industries over traditional economic pillars, China’s current economic reality is dire: businesses are not investing, consumers are not spending, and local governments are struggling to provide public services.

Aside from providing one-time cash subsidies to impoverished families and some student loan funding, the CCP has shown an extreme aversion to any welfare-related policies. This means that millions of unemployed young people are receiving virtually no assistance.

The economic data has become even more concerning. In June, the youth unemployment rate was reported at 13.2%, which surged to 18.8% by August. Although the rate dropped slightly in September, it was still the second-highest this year.

The collapse of the real estate market has made consumers hesitant to purchase big-ticket items, with many repaying mortgages and saving money instead. Without directly stimulating demand, efforts to encourage businesses and households to spend might prove futile.

In the first eight months of 2024, retail sales grew by only 3.4%, far below the government’s 5% GDP growth target.

September brought more bad news, with China's manufacturing sector experiencing deflation for the second consecutive year, putting immense pressure on corporate profits. Even China’s export engine unexpectedly slowed during the same month.

Wall Street Journal columnist Walter Russell Mead pointed out that the CCP's stubborn support for an export-oriented manufacturing strategy has led China down a path of diminishing domestic returns and growing foreign hostility. The CCP has fallen into an economic trap of its own making.

He explained that the CCP has become overly reliant on export-driven economic growth. China's massive industrial economy depends on foreign raw materials and energy, as well as access to foreign markets. However, the CCP’s geopolitical ambitions and the explosive growth of its industrial base's exports have made foreign partners wary.

China already dominates the global solar panel market and is poised to achieve similar success in electric vehicles. Beijing also hopes to replace Taiwan as the world's leading producer of advanced semiconductors, solidifying China’s position as a global military and economic superpower.

Other countries are inevitably resisting and opposing the CCP’s ambitions in these areas, leading to increasing trade frictions.

Currently, exports of the “new three” (new energy vehicles, lithium batteries, and solar panels) decreased by 5.1% in the first three quarters of this year compared to the same period last year, with their share of total exports also dropping by 0.4%.

Wang Guochen pointed out that once Xi Jinping decided to confront Europe and the U.S., this path became inevitable. The result has been more industrialization, self-reliance, and overcapacity. Overcapacity always requires exports, prompting more countries to take measures against the CCP.

"He wants to avoid decoupling from the global supply chain, but his actions are only accelerating the process of decoupling."

The CCP Fires Its "Rocket Launcher"—But Its Target Is Taiwan, Not the Economy

On one hand, the Chinese Communist Party (CCP) is trying to stimulate the economy and restore confidence, but on the other, the risk of armed conflict over Taiwan and the South China Sea is growing.

On October 14, the CCP launched a military exercise called “Joint Sword-2024B” aimed at Taiwan. This exercise was notable not only for involving the Army, Navy, Air Force, and Rocket Force but also for including the Chinese Coast Guard.

Wang Guochen observed that many countries are becoming increasingly confused or fearful of the CCP’s policies. On one hand, the CCP emphasizes the importance of the economy, but on the other, it engages in military expansion. It claims to want foreign investment, yet inexplicably arrests foreign businesspeople within China. There is a clash between the national security and military systems and the business systems (such as the Ministry of Commerce, Ministry of Finance, and the People’s Bank of China), increasing global uncertainty and eroding confidence in China.

Sun Guoxiang warned that if the CCP engages in armed conflict with Taiwan or countries in the South China Sea, it would severely impact international trade. International investors' confidence in the Chinese market would weaken, and the risk of capital withdrawal or investment shifting to other regions would rise.

He added that the international community, particularly the U.S. and its allies, might impose strict economic sanctions on the CCP, including export bans on high-tech products, financial restrictions, and even energy supply blockades. Such actions would further undermine China's economic growth potential.

"Armed conflict would force the CCP government to allocate more resources to military spending, weakening an economy already strained by the real estate crisis and local government debt. Military expansion and the high cost of maintaining defense could limit the CCP’s ability to invest in infrastructure and public welfare projects, further stifling domestic demand growth."

The Flaws of the Communist System

This year’s Nobel Prize in Economics was awarded to MIT professors Daron Acemoglu and Simon Johnson, along with University of Chicago professor James A. Robinson, for their research on how institutions form and influence prosperity.

Many netizens summarized the core message of the prize in three sentences: Whether a country is rich or poor depends on its political and economic system. Inclusive institutions protect private property, ensure fair competition, encourage innovation, and provide incentives for the majority, promoting economic growth. Extractive institutions, where property rights are unclear, the rule of law is weak, and power is unchecked, only serve as tools for a few to exploit the many.

This has led many to reflect on the root of China's economic troubles, which lies in the CCP’s institutional problems.

Sun Guoxiang pointed out that China's economic boom over the past few decades was more a result of globalization and market reforms than the CCP’s system itself.

"The CCP’s communist system is incompatible with the requirements of economic development. Its concentration of power among a small leadership circle often leads to policy errors, and the correction process is slow or sometimes impossible. Moreover, economic resources are not entirely allocated based on market demand, which leads to waste and inefficiency. Thirdly, the communist system emphasizes state control and intervention, stifling the innovation potential of businesses and individuals."

Wang Guochen noted that the recent Nobel laureates emphasized that democracy is the true driver of economic development. According to Walt Rostow’s earlier "stages of economic growth" theory from the 1960s, as a country continues to grow, it will inevitably reach an era of mass consumption, which corresponds to the rise of the service sector and democratization.

"Under a communist regime, which demands authoritarianism, there is no space for free speech, so how can the service sector develop? In recent years, we have observed that the growth rate of the service sector has lagged behind that of industrial added value. This approach is naturally inhibiting further growth momentum."

Economic Stagnation Will Lead to More Protests and Riots

Wang Guochen warns that if Xi Jinping does not abandon the authoritarian communist system, China's economy is bound to stagnate. The worst-case scenario could mirror the collapse of the Soviet Union, leading China to further isolate itself, with "internal circulation" turning it into another North Korea. A slightly better outcome might see China return to the early days of the reform and opening-up period. However, the ceiling for China's potential growth is no better than Japan's "lost decades."

Wang points out that during Japan’s lost 20 years, economic growth was approximately between 0% and 1%. He argues that the best-case scenario for China would be similar—around 0% to 1% growth. Beyond that, the only remaining possibility would be the disintegration of the CCP.

Wang also foresees the future expansion of state-owned enterprises and an increase in the number of grid workers and armed civilian units, with more and more people being supported by the state. This would signify a return to the planned economy era before China’s reforms.

"As the economy worsens, social dissatisfaction will naturally grow, and political instability will increase. Consequently, protests and riots across the country will become more frequent," Wang adds.

Edited by: Lin Yan