China, The Renegade, is Tethered Back to the Global Order

Xi had to learn a tough lesson, one that authoritarian leaders have inevitably had to learn through the ages.

Something has turned big time in China. Is it economic policy or politics?

After slipping into a COVID-induced coma, China lost control of its economy. Prices and demand slipped into crippling deflation; the once buoyant real estate segment began reeling under mortgage defaults, unsold inventories, and corporate bankruptcies; young people could find no jobs, with unemployment up in the teens; high western tariffs dislocated exports and critical imports; corporate debt was soaring at 130 percent of GDP, a cliff from where disaster is foretold; and the country was sawing off its own limbs by harsh regulatory actions against tech companies who were once the poster boys of the Chinese miracle.   

China's Seductive Stimulus

Then China blinked.

It unleashed a “stimulus” to trigger economic recovery. Interest rates were cut by 20-30 basis points, and the reserve requirement by a hefty 50 basis points to inject massive liquidity; mortgage rates were also slashed by 50 basis points; you could buy a second home by paying only 15 percent down, as opposed to 25 percent earlier; beleaguered property developers were thrown a credit lifeline; almost $300 billion of fresh money was given to struggling local governments and state-owned companies; over 100 billion dollars were put in play to stop the stock markets from falling. 

The world sat bolt upright and took note. Western investments swivelled from emerging market darlings like India to beaten-down China. European and Japanese stock markets gained at the prospective revival of global supply chains. Commodity economies like Australia and South Korea got tickled. Even French and Italian luxury makers caught the excitement – what if Chinese tourists were to flood their stores and reopen wallets? China, the “has been”, is looking seductive again!

There’s been frenzied analysis around China, the comeback economic kid. But there’s been very little commentary around the relatively invisible geo-political ramifications of China’s economic stimulus. I intend to do that here.

'Xi Jinping Thought'

Let me pick up the story from circa 2014 – no, not because India’s glorious history started in that seminal year (emoji!), but because President Xi Jinping began a stunning repudiation of China’s institutional prowess built over the previous three decades. When China sprang out of the blockhole in the 1980s, Deng Xiao Ping, its supreme leader, dismantled Mao’s cult and “democratised” the Chinese Communist Party.

Leadership got broad-based, not in thrall to any Great Leader. The top man had to bow out after two terms. The prime minister took charge of the economy. The Politburo was packed with powerful chieftains holding reasonably autonomous sway over their respective bailiwicks, from the foreign ministry to the army to internal security and other key portfolios.

In March 2018, President Xi Jinping drove the final nail into the coffin of this decentralised edifice. He abolished term limits on himself and became a “lifelong president”. Only two out of nearly 3000 delegates dared to oppose Xi at the National People’s Congress. Deng’s model of collective leadership was smashed to pieces.

The cult of Mao resurrected in the personality of Xi Jinping. He now controlled all levers of power, relegating even the prime minister to relative anonymity. Ruthless anti-corruption agencies snuffed out even the semblance of any resistance. “Xi Jinping Thought” became the ideological brain warp of students and party activists.

A $1.5 Trillion Cost of Political Hubris

China’s celebrated tech titans, newly minted billionaires who once enjoyed more wealth, power, and fame than even high-ranking Communist Party leaders, failed to grasp this power shift. Or perhaps they were fatally seduced by a decade of hero worship, believing they had become too big to be neutralised.

It was in such an intoxicated moment that Jack Ma, the incredibly wealthy and iconic founder of Ant Group, delivered a speech at the Bund Finance Summit in October 2020. Ma lit into Chinese regulators and policymakers, equating them with a “pawn shop” that destroyed innovation. He was riding high on an imminent $37 billion IPO of Ant Group, the largest ever in market history.

But President Xi Jinping’s retaliation was swift and deadly. The IPO was cancelled. Jack Ma virtually disappeared from the public gaze. His wealth evaporated.

A massive anti-monopolies and antitrust drive was launched against other icons like Tencent, Meituan, and Pinduoduo. Communist Party cells were inserted into large private enterprises to keep them on a tight leash. An eye-piercing $1.5 trillion of market value was wiped out. 

Then the Cost Climbed to $7 Trillion

In June 2021, Didi Chuxing, China’s Uber-like ride-hailing app, made a resounding debut in American markets.

But it became the fall guy, almost as if China wanted to pounce on and parade a harsh, visible example to warn the world about its new anti-wealth campaign.

The post-listing champagne was still bubbling when Didi was removed from all app stores in China amid allegations of data breaches. Didi was left stranded. Tens of billions of dollars of American investors’ wealth vanished in a matter of days. Eventually, Didi was delisted from American markets, causing a huge loss of trust and hard cash.

The Didi episode unleashed a tsunami of wealth destruction, estimated at over $7 trillion in market value. Overnight, China’s private tech titans became a curse for global investors. In a cutting-your-nose-to-spite-your-face sort of way, this suited President Xi just fine. He wanted to kill consumer-facing internet companies to corral the flow of investments into “deep tech” sectors like quantum computing, artificial intelligence, and semi-conductors. The heavy hand of the Communist state had violently reasserted itself.  

But Markets Always Beat Dictators!

But President Xi had to learn a tough lesson. As his crackdown widened, China’s economy plummeted. It’s a lesson that authoritarian leaders have inevitably had to learn through the ages.

However fearsome their power, they cannot bend markets to their will. Ultimately all dictators must make a choice – either exterminate the market and imprison all commercial impulses, or bow before the inevitable.

Having gotten badly bruised (mauled?) in the post-COVID era, China seems to have made the call. It cannot exterminate the market, because that could exterminate the current institutional framework of the country. It’s too dependent, too interwoven, into the global economy. Any attempt to isolate itself further, or annihilate its open markets and wealth creators, could be disastrous.

That’s the political thrust of China’s new economic stimulus. We need the world. We need open markets. We want to be tethered to them.