It was always the overriding question. Could an all-powerful Communist state co-exist successfully with a gigantic, cash-rich and powerful industrial sector? Or, to put it another way, could China’s Xi Jinping be both a dictator and tolerate free-wheeling, wealth-creating tycoons like Jack Ma or TikTok’s Zhang Yiming?

From events of the past 12 months, we now know the answer. Xi appears to have decisively brought the tycoons to heel (witness chastened Ma). The question ahead is whether he can further cement his iron grip on the party. That will be decided at this week’s Sixth Plenum of the Communist Party’s Central Committee where Xi is expected to unveil an innocuously named ‘historical resolution.’

Only two other Chinese leaders, Mao Zedong and Deng Xiaoping, have introduced ‘historical resolutions’ before. Both became dictators-for-life and the question is whether that’s what Xi aims to become, ignoring predecessors’ two-term examples. State media outlets are already trumpeting Xi as a “blessing” for the country. “The rhetoric for the last few months has been that given the two dynamics of the external and the domestic environment you need someone who has the wisdom, the experience, the steady hand on the steering wheel and that’s him,” says Manoj Kewalramani, Fellow, China Studies, Takshashila Institution.

Xi is currently performing the trickiest of balancing acts, attempting to keep China’s economy on course while simultaneously slashing the clout of some corporate giants. And all this comes at a time when Covid-19 has destabilised the global economy, China is facing an ever-more hostile external environment, inflation is quickening and economic growth is slowing on the back of Beijing ordering power-guzzling industries like steel and aluminium to pare output due to coal shortages.

In his first term, Xi implemented an anti-corruption campaign that devastated the party’s upper ranks, a more muscular foreign policy and put the Communist party front-and-centre. In his second term, he’s aimed to distribute wealth evenly and achieve “common prosperity,” so it’s not just a few benefiting from China’s newfound wealth. Last January, he declared he wanted to steer China onto a new development path as a “modern socialist power” with greater government economic control (already the government is occupying more board seats in private firms).

Concerns justified

Since Deng unleashed his ground-breaking market reforms, China’s been an anomaly. It’s a totalitarian system that kept its population satisfied and quiet with 40 years of uninterrupted growth, thanks to a steady evolution towards Western-style capitalism. But now there’s a worry that the tacit social compact could break down with citizens are feeling less well-off than before.

The concerns are justified. Credit Suisse says China’s Gini-coefficient, an inequality measure, widened to 70.4 in 2020 from 59.9 in 2000, making China one of the world’s most unequal big economies. Says Kewalramani: “Xi is saying, ‘I want growth. But I also want a little bit better redistribution. Better redistribution will boost better growth in the future.’”

The problem is young Chinese middle-class couples are feeling the pinch in an unprecedented way. Soaring real-estate prices are making life in big cities more expensive. India has the safety valve of elections. In China, the government has to be extra vigilant for signals of unrest.

But will the Chinese government’s corporate crackdown achieve this goal? Beijing’s clampdowns have shown even the most powerful are vulnerable. The new policy goals have also sewn doubts about China’s stability as a foreign investment destination. Consider Beijing’s actions against taxi company Didi Chuxing after it defied informal party signals and proceeded with its New York Stock Exchange listing. A few days later the government ordered the Didi Chuxing app removed from app stores.

Then it ordered ed-tech companies worth billions to stop paid tutoring services. Predictably, companies like TAL Education Group, listed on the NYSE, saw its value plunge 93 per cent. In one roller-coaster week in July, Xi’s common prosperity agenda knocked $1 trillion off Chinese shares. But there are signs that it is walking back on some restrictions. The government is now saying ed-tech companies can operate on a commercial basis for professional courses but not schoolchildren.

On another front, the government is hoping the hugely indebted real-estate sector that represents 29 per cent of China’s GDP will not default. The biggest potential defaulter here is fast-growth Evergrande. The government has signalled it’s not coming to the rescue and that its promoter must raise funds to pay off its $300-billion debt but other real-estate giants are heading towards the precipice.

Looking in a slightly different direction and Beijing’s abrupt cancellation of Hong Kong’s special status and the imposition of the National Security Law came as a shock to the world. Even the city’s billionaire property tycoons are worried they’ll be forced to hand over their landholdings to the government.

Why did the government feel it had to act against Hong Kong? Possibly, they viewed it as too great a threat. Says Kewalramani: “You had a six-year-long protest cycle demanding things your system couldn’t give. It’s impossible to have proper democracy in Hong Kong while having repression inside China.”

But the impact of the move is still reverberating. In September, investors in Hong Kong’s listed property giants withdrew their cash, causing shares to tank to five-year lows. Share prices have recovered and there’s talk the property giants will benefit from government plans to build affordable housing. Still, Hong Kong’s property czars had huge political clout that’s diminished sharply.

Uncertainty is the ruling sentiment that’s also spread to Taiwan, a country of critical importance because it’s a key micro-chip supplier. Xi has been sounding more bellicose than ever over Chinese reunification, calling it a “historic mission,” and provoking President Joe Biden into pledging the US would come to the island’s aid if it’s attacked. Biden’s statement had to be gently walked back later.

Turning to the Ladakh crisis which from Beijing’s viewpoint point is a minor irritant, China’s making aggressive moves on the Arunachal Pradesh border and leaning on Bhutan, emphasising they can’t ignore the dragon on their doorstep.

Why the all-round aggression? Says Kewalramani: “When it comes to foreign affairs there’s a feeling that whether we play nice or we don’t, we are in for a difficult time.” Some investor worries about China are possibly overdone. Many analysts predict the state will patch up with the business community next year. But there’s also serious talk that India’s time has finally come with Mark Mobius devoting nearly half his emerging markets funds to India and Taiwan. One thing, though, is clear: while China’s in flux, faint-hearted investors should be doubly careful.