Slowing down

News of the Chinese yuan’s inclusion in the global reserve currencies basket of the International Monetary Fund (IMF) late last year was icing on a cake going stale. In 2015 China saw its GDP growth slow to 6.9 percent (in official, apparently exaggerated statistics), its stock market drop 40 percent, and its money flow out of the country as economic confidence dropped.

IMF Director Christine Lagarde said the inclusion (alongside the dollar, the euro, the Japanese yen, and the British pound) was “a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems.” Maybe, but last year China was learning that it’s hard to have it both ways: greater economic freedom without religious and political freedom.

The government has intensified its crackdown on human rights lawyers, ethnic minorities, intellectuals, and religious groups including Christians in Wenzhou. Press freedoms also deteriorated: The day after China’s stock market plummeted in August, state-run Chinese newspapers stayed silent on the topic in line with a government propaganda directive that read, “Do not conduct in-depth analysis, and do not speculate on or assess the direction of the market.”

Authorities detained a Chinese business reporter for writing a story about the government’s intervention in the stock market. They claimed his story caused the market chaos, but markets don’t thrive when investors lose confidence. Many are skeptical of the IMF’s move and the attempt of President Xi Jinping to cover up increasingly authoritarian actions. Xi said the slowing growth is the “new normal” as the country transitions from an economy based on investments and exports to one driven by domestic consumption.

As the problems pile up, Cato Institute fellow Xia Yeliang believes that the reform China needs is incompatible with Xi Jinping’s decidedly leftist ideals. Rather than continuing to open up China economically, Xi is regressing back to a Mao-era climate where control is ultimate, Xia claims. Xia felt this chill himself as he was fired from his position as an economics professor at Peking University in 2013 for his criticism of the Communist Party and for signing Charter 08, which called for democracy and respect for human rights.

The slowdown is revealing deep-seated but glossed-over problems in China’s economy: a real estate bubble, mountains of local government debt, and unprofitable state-owned enterprises. Just under the surface sits the possibility that when the money stops rolling in, public dissatisfaction could bring political change.

CHINA’S METEORIC RISE BEGAN IN 1978, when Deng Xiaoping’s market reforms introduced private property, broke up state-owned industries, and opened up the country to foreign investment. For the next 3½ decades, China grew at an astounding 10 percent a year—compared with America’s rate of about 2 percent a year—and quickly moved from being the world’s factory to being the world’s second-largest economy. Investments fueled the country’s growth, as China overbuilt infrastructure on borrowed money.

Such high growth rates were unsustainable: Official data pegs the current GDP growth at 6.9 percent, but the economic research group Capital Economics believes actual growth is about 4.5 percent. In October, imports fell 19 percent as exports dropped 7 percent from a year earlier. November saw China’s foreign reserves—foreign assets held by the central bank—fall by $87 billion, to their lowest point since 2013, meaning that more and more money is leaving the country.

Rose Lin sees this firsthand at her job as a manager at a real estate firm in Chengdu. The Sichuan capital used to be a thriving market as newly wealthy citizens swooped up properties for investment, leaving the luxury high-rises empty. But now, Lin says the only buyers interested in apartments are those actually needing a place to stay. The investors have fled Chengdu—and China—for brighter prospects overseas, following the example of Chinese real estate tycoons such as Wang Jianlin, who last year announced a $900 million investment in building a waterfront hotel in Chicago.

The Chinese housing market is in poor shape, even as the government provides incentives for citizens to keep buying. According to analysis by Standard Chartered, housing and sectors related to home construction made up 3 percent of the GDP growth in 2010, compared with 1.1 percent in 2015. With an oversupply of apartments, the number of new homes constructed has fallen by 28 percent, with 9 million unsold and 40 to 50 million homes vacant as investments. At the same time, Chinese purchases of overseas real estate in cities like Los Angeles, Vancouver, and Sydney rose by 49 percent in the last year, according to real estate brokerage firm Jones Lang LaSalle.

Regardless of the positive spin in state-owned newspapers, Lin said that “for those of us actually in the industry, it’s very clear that it’s not doing well.” She’s watched as friends sold their companies and moved overseas, while others turned to her for advice now that things have gone south. As a Christian, Lin points them to the Bible and advises them not to place their faith in idols that can disappoint, such as the Chinese economy, but rather in a God who doesn’t change.

“In the next three to five years, I don’t think it’ll get better,” Lin said of the economy. She’s wary of good reports that don’t represent the actual situation: “You can’t expect the government to pull along the entire marketplace.”

Another problem is the massive debts accrued by the local governments, which reached $3.7 trillion at the end of 2014. After the 2008 recession, officials borrowed heavily to fund construction projects such as gleaming new airports or high-tech industrial areas in order to help propel growth. Yet they didn’t have plans in place to pay back those loans, and the central government has had to bail them out. At the same time, the government is also propping up failing state-owned enterprises, leading to a national debt twice the size of the country’s GDP.

Many Chinese overlook the sins of their leaders as they enjoy living standards far surpassing those of previous generations. Xia predicts that a halt in the growth of their wealth—say through a stock market crash or a housing bubble burst—could wake the Chinese from their pragmatic stupor An economic slowdown could also lead to even higher taxes on the already disgruntled rural farmers, in turn leading to greater instability.

In 2010, an estimated 180,000 protests, riots, and incidents took place in China, mostly over land grabs, heavy taxation, and corrupt officials. Xia noted that China has a long history of farmer rebellions bringing about change in the country. “The economy is going down and people will finally see there’s no more opportunity to make more money,” Xia said. “They will have more complaints, and then there might be more conflicts between the people and the regime.”