Top 10 Challenges That Communist China Will Face in 2019

Applicants look at recruitment information displayed at a labor market in Yiwu, China, on Feb. 19, 2016. (VCG/VCG via Getty Images)

In his 2019 New Year address, China’s paramount leader Xi Jinping used one key word that didn’t appear in his 2018 New Year address: “challenges.”

He also used a famous slogan from the Mao Zedong era, at a time when communist China—then an isolated, poor, closed country—vowed to catch up with the UK and the United States in 15 years: “Rely on ourselves, live a plain life, and struggle hard.”

Xi also said, “Taking a broad view of the whole world, we are facing a period of drastic and unprecedented change that has not been seen in 100 years.

“No matter how the international situation changes, China’s confidence and determination in defending its national sovereignty and security will never change.”

For some savvy China observers and experts, what lies between the lines of Xi’s speech are his realization of how seriously bad the situation in China is now, and that an “arduous struggle” lies ahead among unprecedented “challenges.”

While Xi didn’t identify any specific challenges, commentators and experts around the world have helped him to name a few. And the following are some of what they listed.

Challenge 1: Mounting Pressure of Trade War

In a shocking internal speech on Dec. 15, 2018, Xiang Songzuo, the former chief economist at the Agricultural Bank of China, former deputy director at the People’s Bank of China, and deputy director and senior fellow of the Center for International Monetary Research at China’s Renmin University, sharply criticized the loud claims made early in the year that “Americans are lifting rocks, only to have them smash their own feet.”

Xiang asked, “Where are those people now?”

According to Xiang, the Chinese regime made grave misjudgments about the trade war and needs to think hard about it.

A cargo ship is seen at a port in Qingdao in eastern China's Shandong Province on Oct. 12, 2018. China's trade surplus with the United States ballooned to a record $34.1 billion in September despite a raft of U.S. tariffs, official data showed on Oct. 12, adding fuel to the spiraling trade war. (STR/AFP/Getty Images)

“As a matter of fact, the trade frictions, the trade war between China and the U.S. is no longer a trade war, or an economic war, but a serious conflict between Chinese and American values,” Xiang said. “We can be very assured that the China–U.S. relationship is now at a crossroads and is under a tremendous and historical test. So far, I don’t think we’ve found a real solution.”

Xiang said: “We used to have a phrase, ‘The strategic favorable stage for China’s economic growth.’ Do we still have a ‘strategic favorable stage’? I personally think it’s fading very quickly.”

Many economists believe the trade war’s negative effects on China’s economy are yet to be seen.

Challenge 2: Economic Plunge and Poorly Performing Stock Market

In the same speech on Dec. 15, Xiang made another shocking statement that, according to “an important research institute,” China’s GDP growth wasn’t the officially claimed 6.5 percent, but was as low as 1.67 percent. Using another system of measurement, the GDP growth was negative.

Cheng Xiaonong holds a doctorate in sociology from a Chinese university and studies China’s politics and economy. He wrote in a Chinese commentary piece that the “important research institute” referred to by Xiang couldn’t be any company or bank, as they wouldn’t dare to do such research or release such figures.

The source would need to be a governmental body higher than the National Bureau of Statistics, and might be the Office of the Central Leading Group for Financial and Economic Affairs of the Central Committee of the Chinese Communist Party.

An investor stands in front of a screen displaying stock market figures at a securities company in Hangzhou in China's Zhejiang Province on June 19, 2018. Shanghai and Hong Kong stocks plunged on June 19 on investors' fears that the U.S. and China could be heading for a full-blown trade war following tit-for-tat tariff threats. (AFP/Getty Images)

Cheng said that for any country, the three main engines that drive an economy are consumption, investment, and export.

Before 2009, export had been the major engine for the Chinese economy, but that engine has since slowed. Even without the trade war, it wouldn’t work well with costs rising and a large number of factories moving out of China.

Since 2009, investment has been the biggest driver of the Chinese economy, but that also has come to a dead end, with enough newly built buildings to satisfy market demand for the next 20 years, Cheng said.

At the same time, the actual growth rate of consumption dropped to 2 percent in 2018 from 24 percent in 2005, and that trend is set to continue.

Cheng says that with all three engines performing poorly, the Chinese economy has nowhere to go except downward.

With a $2.4 trillion loss, China’s stock market earned the title of the “world’s worst” for 2018.

Tang Hao, a Chinese commentator, wrote in an article that, with the real economy slumping, long-term jitters could be the new norm for the Chinese stock market in 2019.

Challenge 3: Huge Waves of Enterprise Bankruptcy and Unemployment

On July 25, 2018, both Xinhua and People’s Daily carried a story headlined “Preliminary Statistics Show that the Number of People in Our Country who Returned to Their Hometowns to Start New Businesses Has Reached 7.4 Million.”

Virtually anyone who speaks Chinese knows this meant 7.4 million peasant workers had lost their jobs in cities and had to return to their hometowns to try to survive.

According to a report by China Times, a mainland Chinese-language media outlet, huge numbers of announcements of dissolution and liquidation could be seen in major newspapers for several months in a variety of cities.

The report also noted that a staff member of the Beijing Evening News said that since the previous October, about 2,000 companies in Beijing published announcements of dissolution and liquidation on average each day, and the situation in first-tier cities such as Shanghai, Guangzhou, and Shenzhen was the same.

On Oct. 22, the Chinese news website NetEase published a report titled “In the First Half of This Year, 5.04 Million Enterprises Go Bankrupt, Over 2 Million People Lose Their Jobs.” The report was deleted shortly afterward.

Tianjin Samsung Communication Technology chose the last day of 2018 to close, leaving its 2,000 employees to become the first batch of people to lose their jobs in 2019.

Similar layoffs have occurred in high-end industries such as finance, real estate, IT, and high-tech, and among the “privileged” people who had been earning 1 million yuan ($145,000) per year.

According to Wen Zhao, a Chinese commentator, the main reason why Xi Jinping was so eager to talk to U.S. President Donald Trump before Jan. 1 was the tremendous pressure of unemployment.

Xi is desperate to reach some sort of agreement with the United States in January, before the Chinese New Year in February, which is traditionally a period when large numbers of businesses close and unemployment spikes.

Challenge 4: The Bursting of Debt Bubbles

Many experts see astronomical debts as unexploded bombs ready to wreck the Chinese economy.

He Qian, vice director of China’s 11th National People’s Congress Financial and Economic Affairs Committee, revealed that total local government debt has topped 40 trillion yuan ($5.8 trillion). S&P Global Ratings has estimated that China’s hidden local government debt could be $6 trillion. This means the total local government debt may exceed $11.8 trillion.

Zhu Yunlai, son of former Chinese premier Zhu Rongji and former CEO of China International Capital Corporation, made an emotional 60-minute closed-door speech at the end of November 2018. He said that people failed to see the “asset and debt situation behind the high-speed GDP growth [of China].”

Zhu pointed out that the growth rate of assets and debts is almost twice that of the GDP, meaning that debt has been expanding at twice the speed of the GDP.

“China’s total GDP was more than 80 trillion ($11.7 trillion) in 2017, the stock of debt at the end of the year is almost 600 trillion ($87.4 trillion). Compared with other countries in the world, the ratio is very high,” Zhu said.

According to a Sound of Hope report in Chinese, just as was the case in Japan, this huge debt can be deeply “buried” when the economy grows at a high rate. However, when the economy cools, especially because of the pressure of the trade war and a large number of private enterprises being badly affected by the regime, fatal crises could occur, causing the possible bursting of the debt bubbles.

Challenge 5: Continued Downturn of Real Estate Market

The real estate market has been one of the major industries to create GDP growth for China, but is also a major source of economic bubbles. After experiencing a dramatic price rise in the past few years, it is now seeing a receding tide.

Empty apartment buildings stand in the city of Ordos, Inner Mongolia, on Sept. 12, 2011. (MARK RALSTON/AFP/Getty Images)

According to the latest report by Haitong Securities, in the first 17 days of December 2018, real estate sales growth in 41 cities had slumped to negative territory, at -1.9 percent. At the same time, the growth rate of land sales for the whole country in November also dropped to negative territory.

According to professor Gan Li of Southwestern University of Finance and Economics of China, in 2017, there were around 56 million empty apartments in Chinese cities and towns, with a vacancy rate of 21.4 percent, among the highest in the world.

Some big names in the industry, such as China Vanke, Country Garden, and Evergrande, have started to put their properties on sale at deeply discounted prices, sometimes with the promise of “buy one, get one free.”

If the current wave of unemployment continues, with the price of housing going down, more and more people would have problems paying their mortgage, or become eager to sell their properties, Tang Hao said in his article.

As a result, the real estate bubble could start to burst, which could, in turn, trigger a crisis for the entire financial system.

Challenge 6: Accelerating Internal Struggles within the Party

The high-level internal struggles within the Communist Party will not end in 2019, but will only become fiercer, according to Tang Hao.

In his speech on the 40th anniversary of China’s Reform and Opening Up, Xi Jinping emphasized “upholding the centralized, unified leadership of the Party.” Tang indicated that whenever something is emphasized in Communist China, it means that thing is lacking.

The Chinese-language news website Duowei News published an article in December 2018 headlined “Preventing Extreme Leftists from Tearing Apart China, Xi Jinping Should Be Held Responsible.”

However, after only one day, the article was changed to “Preventing Extreme Leftists from Tearing Apart China, Xi Jinping Powerfully Sets Things Right.”

Tang Hao said that unless Duowei had been hacked, or the editors were mentally ill, such a complete “U-turn” suggests how intense the internal struggles within the party are.

With the ongoing trade war, many state-owned and private businesses have been gravely affected. As a result, the vested interests of the powerful, privileged moguls have also been affected, which may lead to more fierce power struggles within the party.

Challenge 7: Increasing Anger of the ‘Ordinaries,’ Accelerating Conflicts Between the Party and the People

Beijing has long stopped publishing figures of “mass incidents” (public protests, appeals, or gatherings) in China. According to an article in The Economist, many analysts estimated that there were as many as 180,000 incidents in 2010, which equates to 493 per day.

Tang Hao said, at the moment, with commodity prices and the costs of health and senior care rising, ordinary Chinese people are having a hard time making ends meet.

If the employment situation becomes worse, more enterprises will close down, more financial bubbles will burst, and a large number of ordinary citizens will lose their incomes and assets.

More activities defending people’s rights might appear throughout China, and the regime would surely use more violence to crack down, which means more frequent and violent clashes between the regime and the people.

Challenge 8: Human-Rights Crises in an Orwellian Society

With one to two million Uyghurs and other Muslims detained in prisons and re-education camps in the Xinjiang Uyghur Autonomous Region, the world has begun to see to what extent communist China has become an Orwellian society.

Through its “Skynet” system, “Project Dazzling Snow” (or “Sharp Eyes Project,” “xueliang” literally translates “to bright as snow”), “social credit” system, “intelligent uniforms” for students, and other tactics, the regime’s goal is “full geographic coverage, full network sharing, full-time coverage, and full operational control” of the entire nation.

That means the surveillance systems will be nationwide, capturing every nook and cranny, with the exception perhaps of private homes, and will be readily accessible to law enforcement on a 24/7 basis, with the push of a button.

According to research by IHS Markit, China had 176 million surveillance cameras in operation in 2016, and the speed of growth is expected to see that figure more than triple to 626 million by 2020.

While the communist regime is pushing forward its full-scale surveillance and control, and is using more ruthless means to persecute people, the world is watching and pushing back.

In 2018, a number of U.S. congressional hearings about the deteriorating human-rights situation in China were held, with a growing number of lawmakers, human-rights groups, and scholars calling for sanctions on the regime and the party officials who are responsible for the persecution.

There have also been calls to relink human rights with trade talks with China.

All these pressures will continue to be felt by the Communist regime in 2019.

Challenge 9: Increasing Tensions With Taiwan

On Jan. 2, Xi Jinping delivered a firmly worded speech to mark the 40th anniversary of the “Message of Compatriots in Taiwan” when, on Jan. 1, 1979, China offered to open communications and stop military action against the island.

The People's Liberation Army storms ashore from landing craft in an exercise on the mainland coast close to Taiwan, on Sept. 10, 1999. (STR/AFP/Getty Images)

Xi said that Taiwan’s unification with mainland China is “inevitable,” and he issued a stern warning against any “separatists” or independence attempts.

“China must and will be united,” said Xi. “We make no promise to give up the use of force and reserve the option of all necessary means” toward unification.

Taiwan’s president, Tsai Ing-wen, responded the same day, showing an even tougher stance by not only calling upon China “to bravely move towards democracy,” but also openly denouncing the “1992 Consensus.”

Tsai was referring to a 1992 understanding—whether an agreement was reached is in dispute—in which China and Taiwan agreed to the principle of “one China,” including the mainland and Taiwan, with the provision that China and Taiwan would interpret that principle differently.

In 2018, news about the People’s Liberation Army’s (PLA) air force and ships circling Taiwan, sometimes with bombers and fighters, was often reported. From a military point of view, that indicates the PLA is preparing for possible attacks on Taiwan, Wen Zhao said, so they have to become familiar with the future battleground.

To “liberate” or “unify” Taiwan has been part of the “dream” for several generations of Chinese Communist Party (CCP) leaders. How far will the Chinese regime go after the latest round of exchanging sharp words? Time will tell.

But according to Tang Hao, one thing is certain. The CCP intends to interfere in Taiwan’s 2020 presidential election, in a comprehensive and intensive manner.

How will this affect the relationship between the CCP and Taiwan? Will the conflicts be “upgraded” to another level?

Another factor is that since Trump took office, several U.S. laws related to Taiwan have been passed, including the National Defense Authorization Act for Fiscal Year 2019, Taiwan Travel Act, and Asia Reassurance Initiative Act of 2018.

These laws sent the CCP a very clear message that the United States won’t give up its responsibilities toward Taiwan, or tolerate the CCP’s provocative activities.

And that adds another dimension to the Taiwan challenge the CCP faces in 2019.

Challenge 10: Increasing Possibilities of Geopolitical Clashes with the US

Trump wrote on Twitter on Dec. 28 that he “just had a long and very good call with President Xi of China“ and that the ”deal is moving along very well.” This statement doesn’t change the fact that the values of the United States and the CCP are fundamentally different.

On Dec. 18, Xi claimed, “We will reform when we can, and won’t change anything that cannot be changed whatsoever.”

Can the clashes over basic, core values be defused in the near future?

At the same time, Tang Hao wrote that tensions in the South China Sea, and the uncertainty over the denuclearization of North Korea, may add tensions to the ongoing trade war.

Would all these factors, plus possible military friction with Taiwan, form a “perfect storm” for the CCP in 2019, and result in unexpected military tensions with the United States?

At this point, Tang comes to the same conclusion as Xi: 2019 will be a year full of risks for China and might also be a year when drastic changes occur.