Expertise about technology, markets, economics and politics

The Troubles of Chairman Xi

It was less than a year ago that the 20th Congress of the Chinese Communist Party named Xi Jinping ruler for life.

It’s shaping up to be a tough life. Xi has real troubles. Getting past them would require some dramatic backpedaling. If he can pull that off, he could save himself and serve his country.  If he can’t, that whole ruler for life thing may turn out to be a shorter gig than he expected.

The Chinese Communist Party, because it has all the guns, looks secure to us in the West. But its rulers never seem to feel secure. In a one-party state, the institutional security of the party itself is little comfort to the ruling clique. They are always at risk.

The internal politics of the CCP, the jockeying to gain or keep power, are as inscrutable as they are reputed to be. Nevertheless, we know at least three things:

  • The system is political. It has mechanisms other than military coups by which it can make leadership changes. Ambitious Chinese leaders seek support within the upper echelons of the Party, and, in turn, seek to advance their supporters into those upper echelons. That’s politics.
  • Chinese leaders are more sensitive to public opinion and popular discontent than we Westerners, who are accustomed to institutionalized democracy, tend to assume. Lack of elections doesn’t render their constituents powerless. The latest example of their power was Xi’s sudden, public and surely embarrassing backdown from his lockdown policy in the face of massive and increasingly disorderly public protests.
  • For decades, the CCP’s bargain with the Chinese people was: if we may rule, you may eat. Since Deng, though, standards have risen. The leadership fears it will be tolerated only as long as the Chinese continue their rapid ascent from poverty. This is why the Party obsessively and frantically takes credit for economic successes to which they have been largely irrelevant.

Xi’s troubles arise from his determination to make the CCP relevant again.

Alas for the Chairman, the main result of his efforts is that the Chinese people are in a seriously bad mood, pessimistic about the economy and dubious of the government.

During the lockdowns, Americans stopped spending and frantically increased their savings. But in relief at the lockdown’s end, they spent big time on deferred purchases. The Chinese also saved during the lockdown, but no big, deferred spending boom has come. Saving rates remain elevated; the Chinese consumer remains on defense.

As Shaun Rein, managing director of the China Market Research Group has argued, this consumer pessimism has a large political element to it.

“Chinese consumer confidence remains weak due to a mix of geopolitics, continued weakness from COVID-19 and domestic Chinese politics,” Rein opined.

It is not just consumers who are worried. Prior to Xi’s reign and in his early years, total Chinese annual investment in fixed assets was rising by 20% or more a year. In 2016, the rate fell below 10%. Since then, it has rarely exceeded single-digit-percentage growth, according to the Financial Times. This spring, that number turned negative.

Some of the decline is about teetering real estate markets, but not all of it. In any event, losing money on your house is quite upsetting.

Investment from foreigners did continue to rise during 2022 but has fallen significantly in 2023. The deteriorating relationship with the United States will make that worse. Western investors have abandoned Chinese stocks: MCHI, the MCSI China ETF, remains roughly 50% off its all-time high reached in January 2021.

The People’s Bank of China’s recent cuts in interest rates have stimulated neither business nor consumer borrowing.

In short, after decades of observable, almost fantastic optimism, Chinese investors and Chinese consumers are losing faith in the future.

Worse for Xi, most of this is visibly his fault.

He does not yet seem to grasp that his grasp for control is crushing what he covets. His harassment of entrepreneurial heroes like Jack Ma and Ma’s Alibaba (BABA), his canceling of the Ant IPO, his persecution of DiDi Global, Tencent (TCEHY) and even the food service industry via Metuan (MNPGY) have all spooked entrepreneurs in the most naturally entrepreneurial nation on earth.

His willful destruction of the for-profit tutoring industry killed off not only a fount of employment but a crucial supplier of China’s greatest need: expanding the educated class.

More damaging yet was his destruction of the shadow banking system, crucial to entrepreneurial ventures unable to raise funds from establishment banks. Ant, with its millions of micro-loans, was perhaps the most important of shadow institutions. Beyond government control, the shadow bankers had to be destroyed.

Even as Xi has been undermining China’s private sector, he has been massively re-funding the barren state-owned-enterprises. He has poured so much capital into this wasteland that, according to Nicholas Lardy in “The State Strikes Back,” China’s national return on capital has dropped into the low single-digit percentages.

And though the breakdown in U.S.-China relations is at least as much America’s fault as China’s, until very recently Xi has done little to heal the breach.

Meanwhile, China has arisen as the supreme alibi for America’s imitative communism, Chip Act “industrial policy,” roseate greenery, and woke warrior effeminism. The U.S. policy, if anything, is even more self-defeating than China’s, since China has escaped the “climate doom” suicide pact and is developing its own chips galore.

Our guess is that, finally, Xi has realized much of this. And he knows he has a choice. Either beat a retreat or endanger his regime. The happy news is that retreat seems to be under consideration.

P.S. You’ve got to come to COSM 2023, Nov. 1-3 in Bellevue, Washington. COSM 2022 and 2021 were probably the best tech gatherings we’ve ever been to, and the 2023 version is not to be missed.

COSM is the ultimate expression of George’s worldview, the Gilder Team’s insights into what is happening in tech, how it matters to the world and especially to our readers and tech investors.  Save the dates of Nov. 1-3:

The focus this year is on AI and all its works. Key speakers include:

  • The Wall Street Journal’s Andy Kessler on the economics of AI.
  • Juan Lavista Ferres, Microsoft’s chief scientist on AI’s potential for global problem solving.
  • Ray Kurzweill will shock you with the prospects for AI immortality.
  • Archana Vemulapalli, head of solutions architecture at Amazon AWS, will plunge into the AI open or closed debate.
  • Michael Milken will propose a new AI-enabled high-yield healthcare system.
  • …and more

Plus, you will meet lots of key folks from the companies we cover.

  • Ariel Malik, the venture capitalist backing a dozen graphene companies spun out of Jim Tours Rice University Lab, will give important updates on the graphene revolution.
  • Steven Balaban, of Lambda Labs, a George Gilder favorite, will cover the prospects for companies enabling AI on the edge.
  • DO NOT MISS Vered Kaplan CEO of Orgenesis on the amazing prospects of affordable cell therapy.
  • Another half a dozen start-up heroes.

Speaking of heroes, the brilliant and brave Michael Shellenberger (recently harassed by Congress People of Limited IQ) will speak on Free Speech in the Digital Age.

As always, Carver Mead will give a riveting reflection on our three days together.

Social time is great—meet old friends and fellow subscribers and investors.

George and Nini, of course, and the rest of the Gilder Team, John, Steve, Paul and Richard will be there, too.



P.P.S. Come join our Eagle colleagues on an incredible cruise! We set sail on Dec. 4 for 16 days, embarking on a memorable journey that combines fascinating history, vibrant culture and picturesque scenery. Enjoy seminars on the days we are cruising from one destination to another, as well as dinners with members of the Eagle team. Just some of the places we’ll visit are Mexico, Belize, Panama, Ecuador and more! Click here now for all the details.

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