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The historic protests in China are just the start. Unless Xi Jinping can fix the economy, his problems are just going to get worse.

Markets Insider
Markets Insider
 2022-12-01

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Chinese President Xi Jinping has a lot of problems: from blank paper-wielding protestors to a crumbling economy. But seeing the limits of his power will only make him more paranoid — and defiant — than ever before.

With a stumbling economy and angry citizens, Xi Jinping is facing the biggest crisis of his time in power

Over what has been a stunning week, China has erupted in mass protests calling for an end to the country's restrictive COVID lockdowns. The boldest of the disruptors have even demanded an end to political repression in China — a startling and unprecedented challenge to the authoritarian rule of President Xi Jinping.

"This is Xi's first real test," Minxin Pei, a political scientist at Claremont McKenna College and a leading expert on governance in China, told me. "The choices are very hard, and he's not been faced with such a tough challenge in the last decade."

Unfortunately, Xi does not have the tools he needs to pass the test. Easing the COVID lockdowns could spur a potentially devastating public health crisis . China still lacks effective vaccines , and a large swath of the population, especially the elderly , have not kept up with booster shots of the vaccines that the country does have. Forcing people to remain indoors is the only public health response that China has the ability to enforce.

At the moment, Xi also has no way to convince the Chinese people to continue buying into his rule. As prospects for growth have dimmed in recent years, he has little to offer in the way of economic growth or entrepreneurial opportunity to distract people from the growing political unrest. As analysts at Societe Generale wrote in a note to clients last month, China's economy is "in the gutter."

That leaves Xi with the one thing authoritarians typically rely on when faced with domestic pressure — more repression to enforce order, as Xi did in Hong Kong. "If they see another round of protests," Pei said, "they'll say: Let's just go back to the good old ways of using overwhelming force to show resolve." The choice for Xi is lockdowns or batons. And either way, the Chinese people lose.

Xi won't change

Beijing tried to subtly relax zero COVID restrictions last month, reducing quarantine time for those who had come into contact with the virus. They were minor tweaks, but the number of COVID cases immediately jumped , prompting tighter lockdowns across the country. Last month, 53% of the businesses surveyed by China Beige Book, a data collection firm, reported COVID cases among their employees, up from 24% in October.

During the last wave of nationwide protests — the Tiananmen Square uprising of 1989 — authorities met peaceful demonstrators with violence, killing thousands. This time around, Xi is clearly keen to avoid a repeat of the bloodshed, but there is little room for him to maneuver. Accepting Western vaccines or rolling back zero COVID would be a tacit admission that he is fallible. Allowing for more political expression would only trigger more anti-government expression and discontent. So for now, China's security forces are trying to put down opposition as quietly as possible, relying on its sweeping surveillance state to identify protestors and threaten their families.

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For now, China's security forces are trying to quietly quell the protests using the country's massive surveillance state.

For all of the "inconvenience" of zero COVID — as one state news outlet wrote — the policy has been useful in further centralizing Beijing's control over every Chinese citizen. Under zero COVID protocols, people are required to show a "green code" on their smartphones whenever they enter public places or ride mass transit. The code indicates that they do not have COVID, have not been in close proximity to anyone who has had COVID, and have not come from an area where an outbreak is occurring.

What the tracking mechanism failed to detect was the rising level of discontent that spurred tens of thousands to take to the streets in protest. That failure will have political consequences. "The CCP will have some soul searching to do," Pei told me. "What happened this time is that the surveillance state failed to detect the protests before they happened. That's quite serious."

In the short term, the CCP is trying to diffuse the situation by going after COVID itself. Officials have announced plans to ramp up vaccination efforts for seniors, a modest effort that seeks to preserve Xi's zero COVID policy — and hence his genius. For the moment, the party is also going easy on the protestors, in the hope that the unrest won't escalate. But it remains to be seen, Pei warns, whether that strategy will work. "Are they going to keep this little door open, so the people can blow off steam?" he says. "Or are they going to keep North Korea-style repression all the time?"

Xi can't change

Ever since Tiananmen, Chinese citizens have exchanged their political freedom for the Chinese Communist Party's promise of competent management and economic growth. For years, the tradeoff worked: living standards climbed , GDP soared, and the country enjoyed decades of relative political stability. But over the past few years, the CCP has failed to hold up its end of the bargain .

Ambitious plans to dominate the future of technology have stumbled. Youth unemployment has hit 20%. Retail sales and industrial output continue to disappoint. Exports, which have been carrying the economy through the nosedive, are starting to slump due to a slowdown in global growth. China used to be the reliable factory of the world; now, international investors are backing away at a moment when the country is at its most desperate. To make matters worse, a massive property bubble is deflating while the population is both aging and shrinking — a recipe for long-term economic decline.

So China finds itself stuck in a painful and volatile loop: Unless it relaxes zero COVID, its economy will remain in tatters, meaning Xi cannot offer his people economic growth. And until he can offer them economic growth, he must use the surveillance state built around zero COVID to maintain his hold on power. Xi has responded to the dilemma by protect his own image by deflecting culpability. State media has blamed Western forces for plotting the protests, shifted responsibility for the repressive COVID lockdowns to overzealous local officials , and accused COVID testing companies of exploitation. Xi knows that any sign of weakness or wavering can shatter his legitimacy and bring about his end. Seeing the limits of his power reflected in unrest in the streets will only make him more paranoid — and defiant — than ever before.

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Xi knows that any sign of weakness or wavering can shatter his legitimacy, so the protests will only make him more paranoid and defiant.

Another leader might consider opening up the country to foreign investment, which would help jumpstart the economy. But Xi is a closer , not an opener. Since taking power, he has tightened control over the economy and many elements of society while making a show of pushing back against Western democratic ideals . His impulse is to crush his enemies, whether they be political rivals or Hong Kong protestors. He is well known for being a student of the USSR, and has blamed its collapse on Soviet leaders who went too soft on democratic activists — who allowed themselves to be critiqued by their own people. It is unlikely he will turn his back on those beliefs now.

Wall Street continues to pounce on any signal, however small or insignificant, that China might be opening trade. That's completely understandable. There's lots of money to be made in China, and its economy would almost certainly improve if zero COVID restrictions were loosened. But such optimism ignores the underlying reality. Under Xi, China was already shuttering its doors long before the pandemic struck. He is still the same leader who purged his enemies from the party, destroyed entire industries to strengthen his grip on the economy, and ended democracy in Hong Kong. His inclination is to centralize power, not to allow it to be dispersed. Whatever investors may think, that's unlikely to change, long after both the pandemic and the protests have receded.


Linette Lopez is a senior correspondent at Insider.

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