January 5, 2022 | Policy Brief

China’s Sharp Economic Slowdown Threatens to Constrain Xi in 2022

January 5, 2022 | Policy Brief

China’s Sharp Economic Slowdown Threatens to Constrain Xi in 2022

With 10 months until China’s 20th Party Congress, at which Xi Jinping will likely assume a once-unthinkable third term as general secretary, the Chinese Communist Party (CCP) is grappling with an economic downturn, a burgeoning housing crisis, and rising unemployment. These unforeseen developments raise serious questions about Xi’s stewardship over the country and will likely constrain his geopolitical ambitions in 2022.

In 2021, the CCP issued disruptive, “anti-monopolistic” regulations aimed at “curbing the disorderly expansion of capital” throughout China’s economy. 2021 thus became known as “the year of the crackdown,” as Xi reined in China’s most over-leveraged conglomerates and several of its technology giants, including Alibaba, Didi, and ByteDance.

Xi instituted many of his most controversial policies following the CCP’s centenary in July — an event marked by heightened nationalism and tense relations with Washington. The party geared some initiatives toward addressing structural imbalances in China’s economy. Others, such as incorporating what the party calls “Xi Jinping Thought” into China’s educational curriculum, sought to deepen the CCP’s influence in the lives of China’s citizens.

The CCP’s message was noticeably different following last month’s Central Economic Work Conference, where leaders gathered to codify China’s economic priorities for 2022. Having devoted 2021 to restricting speculative economic behavior, China’s leaders instead flagged “economic stability” as their top priority. CCP officials further noted that unemployment among younger urban workers could threaten social stability.

This shift in messaging largely stems from the sharp economic slowdown resulting from Xi’s fiscal mismanagement and China’s “zero-COVID” strategy, which has crippled industrial activity and supply chains.

China’s historically strong economic performance is a central pillar of Xi’s narrative about the country’s “unstoppable rise” and the West’s decline. However, China’s gross domestic product (GDP) grew at half the rate of the U.S. GDP for much of 2021, and China’s economic growth in 2022 will likely hover at around 4.5 to 5 percent — a dramatic decline from prior years. Nationwide power outages, high raw material prices, and surging labor and freight costs will further hamper China’s recovery. Already, Chinese Commerce Minister Wang Wentao has signaled concern about China’s foreign-exchange risk and Beijing’s ability to maintain stable trade growth.

Looming large is uncertainty throughout China’s hyper-leveraged property market, which accounts for one-third of China’s GDP. After recent defaults by Evergrande and Kaisa, Shimao Group is the latest Chinese developer to see its share price plunge. Shimao’s sudden collapse is concerning given that until recently it enjoyed a strong credit rating and had not breached any of the CCP’s “three red lines” — metrics introduced to restrict borrowing by China’s overleveraged developers.

The outsized role of China’s housing sector in its broader economy suggests that even a minor drop in real estate activity could lead to further declines in Chinese GDP — even if Chinese regulators prevent a wider banking crisis following additional developer defaults.

Faced with the prospect of a hard economic landing, Xi finds himself in unfamiliar territory, as neither crackdowns nor stimulus have stabilized China’s economy. While Xi is unlikely to completely retreat from his regulatory crackdown, these latest crises necessitate that he put his grand international ambitions on hold and shift his focus toward more pressing domestic matters. With the Party’s very legitimacy in question, China’s leaders will be forced to embrace the age-old adage of “crossing the river by feeling the stones” (摸着石头过河). Experimenting with both market and Marxist policies will likely yield differing and often contradictory approaches as Xi pivots from crisis to crisis.

Consequently, Xi will find himself constrained. Still unclear, however, is how exactly he will respond to these newfound pressures. Washington should capitalize on Xi’s misfortune by continuing to wield its legal and regulatory powers to complicate his task. Finally formalizing the Biden administration’s nascent China policy will be key to those efforts.

Craig Singleton, a national security expert and former U.S. diplomat, is an adjunct China fellow at the Foundation for Defense of Democracies (FDD), where he contributes to FDD’s China Program and Center on Economic and Financial Power (CEFP). For more analysis from Craig, the China Program, and CEFP, please subscribe HERE. Follow Craig on Twitter @CraigMSingleton. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.