Can Xi Jinping’s fight against corruption, inequality and mounting debt end China’s ‘Gilded Age’?

• America’s Gilded Age provides a historical lens for assessing Xi’s actions and suggests the problems facing China today do not spell doom
• Xi is trying to start China’s Progressive Era through command and control, though no government has yet overcome the side effects of capitalism by decree

Within the span of a generation, a new super-rich class emerges from a society in which millions of rural migrants toil in factories for a pittance. Bribery becomes the most common mode of influence in politics.

Opportunists speculate recklessly in land and real estate. All of this is happening in the world’s most promising emerging market and rising global power.

This is not a description of contemporary China, but rather of the United States during the “Gilded Age” of the late 19th century. This formative period of American capitalism is remembered as gilded, not golden, because many problems festered beneath the rapid industrialisation and economic growth.

Public backlash against the Gilded Age triggered wide-ranging economic and social reforms that ushered in the Progressive Era. This domestic revolution paved the way for America’s rise as the superpower of the 20th century.

China is passing through a similar phase. After coming to power in 2012 during China’s own Gilded Age, President Xi Jinping presides over a country that is far wealthier than that of his predecessors.

But he also faces a host of problems that come with a middle-income, crony-capitalist economy, particularly corruption. As he warned in his first speech to the Politburo, corruption “will inevitably doom the party and the state”.

In recent decades, China’s economy has soared alongside a particular type of venality: elite exchanges of power and wealth, or what I call “access money”.

Beginning in the 2000s, the incidence of embezzlement and petty extortion fell as the government built up its monitoring capacity and welcomed investors. But high-stakes corruption exploded as politically connected capitalists plied politicians with lavish bribes in exchange for lucrative privileges.

Along with cronyism came rising inequality. Since the 1980s, income inequality has risen faster in China than in the US. China’s Gini coefficient – a standard measure of income inequality – exceeded America’s in 2012.

Chinese wealth inequality is even wider than income inequality because those who accumulated assets during the early growth stages realised enormous gains.

A third problem is systemic financial risks. The Ministry of Finance warned last year that local governmental debt was approaching 100 per cent of all revenues combined. If local governments default, the banks and financial institutions that loaned them massive sums will be exposed, potentially setting off a chain reaction.

It is not just government finances that are in trouble, either. Evergrande, China’s second-largest property developer, is more than US$300 billion in debt and nearing insolvency.

These simmering crises should not be viewed in isolation but as interconnected parts of China’s Gilded Age. Corruption in the form of access money spurred government officials to aggressively promote construction and investment, regardless of whether it was sustainable.

Luxury properties that enriched colluding state and business elites are widespread while affordable housing remains in short supply. Those with political connections and wealth have reaped outsize profits through speculative investment.

Likewise, the digital economy that was once a free-for-all has consolidated around a few titans that can easily crush smaller players. Factory workers are being replaced by gig workers who toil long hours with scant labour protections. Fed up with excessive materialism and the rat race of society, young people are protesting by “lying flat”.

The decadence of China’s Gilded Age poses multiple threats for Xi. Corruption, inequality and financial meltdowns can trigger social unrest and erode the legitimacy of the Communist Party. These problems – particularly elite corruption, which enriches rival factions – undermine Xi’s hold on power.

Thus, Xi is determined to take China out of its Gilded Age, both to save the party and cement his legacy as the leader who delivers on its “original mission”. Whereas Deng Xiaoping aspired to make China rich, Xi wants to make China clean and fair as well.

In the past two months, Western investors have awoken to Xi’s calls for “common prosperity”. But Xi’s socialist mission began in 2012, when he vowed to eliminate rural poverty and launched the largest anti-corruption drive in party history.

Xi has maintained these campaigns despite the pandemic, and last year he proudly proclaimed that his poverty alleviation targets had been achieved on schedule.

More recently, these campaigns have extended into a wave of regulatory crackdowns on Big Tech companies, bans on private tutoring, caps on housing prices and a clampdown on celebrities. Meanwhile, Xi has exhorted the rich to share their wealth with society.

America’s Gilded Age provides a historical lens for assessing Xi’s actions. All crony-capitalist economies, no matter how fast-growing, eventually run into limits. If US history is any guide, the problems facing China today do not necessarily spell doom. Much depends on what policymakers do next.

But whereas the American Progressive Era relied on democratic measures to fight crony capitalism – for example, through political activism and a “muckraking” free press that exposed corruption – Xi is attempting to summon China’s own Progressive Era through command and control. The world has yet to witness a government overcome the side effects of capitalism by decree.

Mao Zedong tried to command rapid industrialisation and failed disastrously. The lesson is that because top-down orders can and do backfire, they must not be relied on to solve all problems. If excessively and arbitrarily applied, bans and edicts will diminish investor confidence in China’s commitment to rules-based markets.

Progressivism in America laid the foundation for the country’s rise in the 20th century. Whether Xi can order China out of the Gilded Age will determine the continuity of China’s rise this century.

Author: Yuen Yuen Ang, SCMP