China's third Principal Contradiction is driving Xi Jinping's latest crackdown

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A simple way to understand what's going on in China, and why Xi Jinping is targeting his own giant firms

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 China's third Principal Contradiction is driving Xi Jinping's latest crackdown

Read more on - Polity | Economy | Schemes | S&T | Environment

  • The story: Everyone is wondering what's motivating the Chinese president Xi Jinping to crack down on his own country's Big Tech firms, and other rich elite. The answer is to be found in the 'third principal contradiction'.
  • The conference: The 19th CCP conference: When the 19th Chinese Communist Party Conference was held in 2017, it was a major moment of change, not only because the 10 year term limit was removed, but also because the "principal contradiction" was reworded.
  • Principal Contradiction: In early times, China struggled for economic productivity, and Mao's Cultural Revolution destroyed whatever existed.
  1. Then came Deng Xiaoping in 1980s. He reworded the "principal contradiction" China faced.
  2. Earlier it was the "class struggle between the proletariat and the bourgeoisie", but Deng reframed it as the "tension between growing material needs of people     and backward social productivity".
  • Net result: Due to that, the CCP then followed liberal economic policies that brought a 10% average growth for many years at a stretch, and also collateral damage in the form of environmental degradation. CCP focus was growth and employment.
  • Rewording again in 2017: To align everything all over again, the CCP reworded the principal contradiction once more in 2017 as tension between "unbalanced and inadequate development" and "people's need for a better life".
  1. The CCP now saw China differently, from a poor nation struggling to generate millions of new jobs, to a rising middle income nation striving for higher quality of life
  2. Experts predicted that the 2017 rewording would lead to dramatic results like the 1981 rewording did
  3. Prediction was that growth would slow down, regulations tightened and debt leverage controlled
  • Exactly like that: And that is what happened, despite the new dynamic of a trade shock with US, and the Covid pandemic.
  1. What all was done by Xi Jinping as per the new wording? Fiscal and monetary tightening, housing market tightening, private edutech made non-profit,     decarbonisation push, allowing weak corporates to fall etc.
  2. Now all this is couched in the terms of "common prosperity"
  • Evergrande case: Many corporates defaulted since 2018, in line with the new wording. But Evergrande is a huge company, the largest real estate developer in China. Many fear it may create a financial contagion.
  1. Fears are over-stated, as real estate is a huge sector but its post-pandemic growth contribution was anyway low, and 2022 was not expected to be any different
  2. Evergrande's overall financial liabilities are just 0.65% of corporate and govt. debt combined (total social financing) and bank loans are just 0.25% of total credit
  3. Most of its debt is local not foreign
  • Sector's slowdown: The whole sector has slowed down since 2018 due to the CCP's changed policy, of crushing prices and sales. Banks are well-capitalised so banking collapse won't happen, and CCP won't let that happen. China's debt to GDP is 300%, but government and PBOC have enough ammunition.
  • Why let it fall: For many years, experts have urged China to allow defaults and send a clear signal that there are no implicit state guarantees, and no one "too big to fail". That alone can bring the needed distinction between good and bad credit.
  • Future of Chinese economy: It is headed towards a 4-5 % growth rate, with rebalancing of growth drivers. Income will be redistributed towards households, away from corporates. More services consumption will happen. To do all this, China's entire policy regime will be changed.
  • China 3.0: It is arriving, and all countries with trade and financial links will have to change accordingly.
  • Summary: From Mao's "class struggle between the proletariat and the bourgeoisie", to Deng's "tension between growing material needs of people and backward social productivity", China's principal contradiction now is "unbalanced and inadequate development" and "people's need for a better life".
  • EXAM QUESTIONS: (1) Explain the motivations behind China's latest crackdown on its own giant corporations. (2) Explain how the Chinese state's direction changed structurally, first under Mao, then Deng, and finally Xi Jinping.
Read more on - Polity | Economy | Schemes | S&T | Environment

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PT's IAS Academy: China's third Principal Contradiction is driving Xi Jinping's latest crackdown
China's third Principal Contradiction is driving Xi Jinping's latest crackdown
A simple way to understand what's going on in China, and why Xi Jinping is targeting his own giant firms
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PT's IAS Academy
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https://civils.pteducation.com/2021/09/Chinas-third-Principal-Contradiction-is-driving-Xi-Jinpings-latest-crackdown-Prelims-UPSCMainsGSII-WorldPolitics-WorldEconomy-History-PeopleandPersonalities-September2021.html
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