Sinology: Two China Questions

="# Heading: Two China Questions

Xi Jinping and the Chinese Economy

The Chinese economy is in decent shape this year. Not fantastic, but still one of the strongest in the world. There are problems, especially in the property market, and confidence is weak. But, at some point in the near future, I believe Xi Jinping will follow in his predecessors' footsteps and make the pragmatic course corrections that will revitalize China's entrepreneurs and consumers.

Despite recent setbacks, China's private sector has been the primary driver of the country's economic growth over the past decade. Since Xi Jinping became head of the Chinese Communist Party in 2012, private firms have continued to drive all net new job creation. Real income growth has increased at an average annual pace of 6.3%, compared to 1.7% in the U.S. and 1.0% in the UK. China's per capita GDP, on a purchasing power parity (PPP) basis, was 28% of the U.S. in 2022, up from 19% in 2012. Entrepreneurial, privately owned companies have fueled this growth under Xi. He has said he wants to "enhance the ability to get rich," and that "small and medium-sized business owners and self-employed businesses are important groups for starting a business and getting rich." Xi said, "It is necessary to protect property rights and intellectual property rights, and protect legal wealth."

While domestic issues are the primary source of weak confidence, concerns about the bilateral relationship have compounded the problem. In this section, I will provide an outlook on the future of U.S.-China relations and how it might affect the Chinese economy.

U.S.-China Relations

One of the very few things politicians from both American political parties agree on is that China is the greatest threat to the U.S., so it is very likely that the tensions between the two nations will persist regardless of who wins the November elections. The prospects for peace look dim while Xi Jinping remains in power and Xi remains determined to achieve "the great rejuvenation of the Chinese nation" and to "restore" Taiwan, by force if necessary.

There are some pragmatic leaders in both countries who want to cooperate with the other nation on climate change and other global issues, but those leaders will be unable to make progress as long as the two nations are at odds with each other. The trajectory of U.S.-China relations is important for the whole world, not just for the two nations involved, because China and the U.S. are the two most important economies in the world. Their relationship affects trade, supply chains, and commodities markets, and many countries side with one or the other based on their own national interests.

Regardless of who wins the U.S. elections in November, the political relationship between Washington and Beijing will remain tense. Tariffs and export controls will probably proliferate. But, the impact on China's economy isn't likely to be as severe as many expect, because it's a domestic-demand driven economy. Most Chinese consumers and entrepreneurs are more concerned about domestic issues, such as the property market, common prosperity, and income inequality, than they are about the U.S.-China relationship.

I expect Xi to make the kind of pragmatic policy adjustments that former leaders Deng Xiaoping and Jiang Zemin made, to revitalize the Chinese economy. In contrast to the U.S., where the government mostly collects taxes and issues regulations, China's state intervention is more direct. It sets broad guidelines and then requires state-owned enterprises and financial institutions to implement its policies. This means that, when policy goals change, the economy can adjust rapidly.

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