President-elect Donald Trump and President Xi Jinping have more in common than they currently realize. Both want to make their countries “great again,” and both need to demonstrate that they can create jobs for the large segments of their population that have felt left behind by globalization. President Xi’s challenge is more immediate, because President Trump will get a honeymoon period from the public. The expectations the Chinese people have placed on Xi, however, are high, and his options for generating growth are politically riskier than those pursued by his predecessors. Recognizing this, before he allows any new market-oriented experiments, Xi seems to be tightening control over Chinese society to build a firewall against internal instability as he also attempts to make his position as China’s new paramount leader unassailable within the Communist Party.
When Xi’s predecessor Hu Jintao came to Washington in April 2006 to meet with President George W. Bush, the President asked Hu what kept him up at night. Hu replied that the need to create 25 million jobs a year was his greatest concern. As the President’s East Asia adviser, I remember how large an impression that made on President Bush. It was an honest answer that explained a great deal about Chinese economic behavior. What was particularly striking about this candid answer was that Hu was presiding over the golden years of Chinese economic growth. Indeed, the year before Hu’s visit to Washington, the Chinese economy had grown by a blistering 11 percent and would achieve almost as great success in 2006.
Fast forward to the present and we see that President Xi’s situation is more tenuous. Since his accession to power in 2012, Chinese economic growth has slowed to official rates of less than 7 percent annually, and many economists believe these figures are artificially inflated. China artificially “pegs” its annual unemployment rate at between 4 and 5 percent, making it impossible to assess how many people the slowing growth is affecting. However, we do know that the restructuring of the inefficient state-owned enterprises (SOEs) has already put tens of millions out of work. The Chinese leadership has tried to lower public expectation of any quick remedies by explaining that, in the wake of the global financial crisis and the maturing of the Chinese economy, the new normal will be less spectacular but higher quality economic growth.
Xi’s problem, similar to that faced by President-elect Trump, is that those who felt left behind – as others in society visibly attained financial well-being from economic globalization – are impatient for solutions to their economic woes. A case in point is the plight of China’s military officers and soldiers who have been demobilized as a result of the series of reductions in the size of the Chinese ground forces. On 11 October, an unprecedented protest by more than 1,000 ex-soldiers wearing camouflaged fatigues occurred in front of China’s Defense Ministry in Beijing. From available photographs and news reports, it is clear that these are working-age men in their prime productive years looking for meaningful employment not handouts. However, China’s SOEs that traditionally absorbed the demobilized soldiers are struggling with overcapacity, and some of these veterans are in danger of losing their new state-sector jobs because of further downsizing. State media chose to blame the veterans' protest on corrupt local officials who have not honored their obligations to the soldiers, but the problem seems far more structural and potentially explosive.
A more rapid shift to a service-oriented economy, away from a dependence on industrial production, is clearly a key to solving China’s job creation problem, but such a shift involves major economic reforms that go to the heart of Beijing’s desire to keep central authority strong. Today, SOEs employ only about 13 percent of the workforce, but they still absorb about half of investment. Beijing and its state-owned banks need to become more flexible about taking risks on loaning to new, startup small and medium-sized enterprises. But Chinese economic officials at the local levels, already feeling the heat of Xi’s intensive anti-corruption measures, are risk adverse and would need strong signals from Beijing that experimentation would be protected and rewarded. Moreover, Chinese leaders must loosen their regulatory grip and ease the barriers that foreign investors face to entry into sectors such as telecommunications.
Perhaps now that President Xi has been anointed the “core” of the Chinese leadership, in a similar vein to legendary leaders such as Mao and Deng, he will begin to calculate that economic experimentation can begin anew. After all, Deng had to ensure that he had solid political control before he began the historic economic reforms in 1978. One signpost to watch for in the coming months is the type of officials he selects to join the Politburo Standing Committee, Politburo, and Central Committee at the 19th Party Congress next fall.
In their first meeting, President Xi and President Trump could easily begin by comparing notes on the issue of job creation. Xi may find that Trump, with his extensive business background, will have some useful advice for the Chinese leader about how to create a vibrant services sector. Xi could provide best practices from China’s massive infrastructure spending during the past few years. Their first meeting could be constructive if focused on economic issues that they each are wrestling with in this time of great change.
