China: turning away from Western-style capitalism

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Chinese President Xi Jinping continues to disrupt “China’s decades-long evolution towards Western-style capitalism,” Lingling Wei told The Wall Street Journal. Last week, “Chinese government measures to control house prices” and limit debt sparked a dramatic cash flow crisis in Evergrande, putting the country’s second-largest real estate developer on the brink of collapse. But Beijing is unlikely to bail out the real estate giant and might even rejoice in its downfall. Xi’s ideological view increasingly seems to align with Mao Zedong’s development theories, “who call state capitalism a temporary phase” which will be replaced by socialism. “A staunch follower of Mao,” Xi preached that “China’s hybrid model has passed its expiration date.” This allowed the Chinese economy to “catch up with the West”, but also “to lead to widespread corruption and to erode the ideological basis of the communist regime”.

The Evergrande crisis was probably inevitable, James Kynge and Sun Yu told the Financial Time, because of “deep flaws in China’s growth model”. His ‘build, build, build’ playbook has made him ‘the most powerful engine in the world economy’. But “the demand picture has changed since Beijing triggered the biggest real estate boom in history” two decades ago. China’s birth rate is falling and its cities are shrinking. There are now “enough empty properties in China to house over 90 million people,” more than the entire German population.

It should be China’s “time to take stock”, Megan McArdle told The Washington Post. Its export-oriented model cannot continue to grow indefinitely; America and Europe “are not going to start buying three times as much of everything.” Chinese builders have mushroomed for years, creating entire cities filled with apartments that no one plans to live in. The reason China is littered with these “ghost towns” is that “Chinese savers have few good places to park their money except for real estate.” China needs a more open financial system and a more balanced economy, even if it is “brutal” to achieve it. China’s situation is dire, said Paul krugman To The New York Times, and bears “a striking resemblance” to Japan in the late 1980s. There, “the prices of many assets, especially commercial real estate, went completely crazy” – and then it all fell apart.

Xi’s crackdown on Evergrande and other developers “is just the latest blow” against Chinese business giants, historian says Niall ferguson To Bloomberg. The plan is to quell the “get-rich-quick” mentality of Chinese companies – and keep them under the regime’s control. In reality, we know how things are going to turn out for the giant Chinese automakers. “Those who are considered politically important will get away with it lightly; throwaway politicians will lose their shirts; a few senior executives will be jailed.” It will not turn into a global economic calamity. But for Xi, it’s a dangerous time. Years ago Mikhail Gorbachev brought about the dissolution of the Soviet Union while trying to reform it. Although Xi’s reforms “go in the opposite direction to Gorbachev’s – turning the political clock back to Marxism-Leninism, rather than liberalism” – the risk he runs is that in the long run, the effect may be the same.

This article first appeared in the latest issue of The week magazine. If you want to read more, you can try six risk-free issues of the magazine. here.

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