The Chinese economy faces major headwinds.
China's economy is struggling with a huge debt crisis in its critical property markets, declining productivity growth, high youth unemployment rates and falling foreign investment. Making matters worse, China's population is aging and birth rates are grossly inadequate to relieve the coming economic pressure. The good old days of relying on massive low-cost exports are also over thanks to rising wage pressures.
Still, China's most significant economic challenge is the tension between a need for growth and the Chinese Communist Party's need for control.
CHINA UNVEILS ITS VISION FOR A NEW WORLD ORDER
The best examples of this need for control are Beijing's escalating raids against foreign businesses in China. Increasingly obsessed about the threat of foreign espionage or the foreign undermining of its authority, the Communist Party is targeting what is otherwise a key focus for Xi Jinping's economic strategy. Namely, foreign investors. The problem for Beijing? Investing in China becomes a lot less desirable if your business and assets face unpredictable new search, seizure or regulatory actions at any moment. Or if your executives are prevented from leaving China (another example of which the Wall Street Journal reported on Friday).
Beijing recognizes this tension between its security and economic interests. It knows that foreign investors are scared. China is thus deploying diplomats and employing its Western focus state media apparatus with assurances that their concerns matter, that regulatory actions are highly targeted and that China seeks only mutually beneficial engagement. But none of this can fix the ultimate problem here: Xi Jinping's paranoid need for control.
Xi's demand for robust anti-corruption, anti-foreign interference activity has a corrosive effect on regulators. It makes them believe that it is far better to err on the side of aggressive action rather than risk being accused of weakness on national security. A risk that comes with a one way trip to the gulag. This leads to regulatory actions that are unpredictable and often unnecessary. In turn, China risks foreign investors cooling their existing investment plans or even looking elsewhere for their next investment.
It's unclear how Xi can escape this economic trap. For all his economic concerns, Xi fears that the monster of Communist Party collapse lurks outside this regulatory trap of his own making.