China's economy is in bad shape, just as Xi Jinping likes it

Xi imposed restrictive measures on three of the country's main growth engines.

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First, China's real estate market is mired in deep difficulties and the country's largest real estate developers are illiquid or insolvent. This is a huge drag on growth and a blow to China's middle class who saw real estate as a path to wealth. But the market did not collapse spontaneously. Xi crushed it, very deliberately. Houses are for living, not for speculating, he liked to say.

Second, the country's biggest billionaire entrepreneurs were reprimanded and investigated. Some were imprisoned. Apparently they were punished for corruption, but Xi reined in their capitalist excesses in pursuit of his doctrine of common prosperity. Parts of the private sector faced brutal new restrictions as state corporations expanded, shrinking the market economy while expanding the state.

Third, many foreign companies have faced intensified regulatory inspections. These are all results of Xi's lust for control.

The decades of 9 percent annual growth are over. And Xi Jinping likes it. Beijing's growth target for this year is 5 percent. Even that may prove ambitious. And certainly a disappointment for investors and exporters who are still hoping for a return to the pre-Xi era.

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But what is Xi's goal? Don't forget Xi's long-term goal, say two analysts at Garnaut Global, a consultancy for global asset managers led by Australian China expert John Garnaut and his business partner Matt Pottinger, former U.S. deputy national security adviser.

Even as Beijing drives away investors, Xi Jinping's ultimate goal remains unchanged: building an economy capable of surviving and winning in the new era of Cold War 2.0, analysts Sam George and Matthew Johnson write in a client note this month -this. This means enduring Ukraine-type scenarios and ultimately surpassing the United States, China's main competitor, in the race for Taiwan.

In other words, Xi is preparing China for war, extreme circumstances that he has repeatedly warned his people about. To do this, he wants to ensure that all sectors of the economy are adapted to centralized control. And ensure that investments and productive capacities are oriented towards the country's war needs.

For Xi, national strength emerges from technology, manufacturing and the strategic dominance of Chinese companies in the global industrial landscape, George and Johnson explain.

Xi is launching a new cry: he wants the emphasis to be placed on new productive forces. Garnaut Global analysts say: It seeks to wean China off its dependence on real estate by substituting high-quality growth from a cutting-edge industry with the dual benefit of advancing Xi's vision in matter of national strength.

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Foreign investors can still make money in China, they say. But it's going to be different. China centered on real estate no longer exists. Investors stand to gain from carefully chosen sector bets on China's real economy. They designate the pre-existing priority industries of solar panels, electric vehicles and lithium batteries, but also new ones. These include innovative medicines, hydrogen energy, quantum technology, the so-called low-altitude economy of manned and unmanned aircraft flying below 1,000 meters, commercial aerospace and new materials.

In Sydney last week, Chinese Foreign Minister Wang Yi tried to argue that China was continuing to run on the same growth engine it had enjoyed for decades. Wang pointed out that China was still only 55 percent urbanized and that another 20 percent of the population would migrate to cities, leading to rapid economic growth, according to reliable Beijing friend Paul Keating, who issued a statement after their meeting.

This is a heroic statement. China's population is shrinking and it still has millions of unoccupied apartments. Where are all the rural workers who are demanding to fill them?

John Garnaut says: “The economy is on a structurally weak growth trajectory, partly by design. It battens down the hatches without worrying about the growth in household consumption.

Indeed, if we listen to what Xi actually says instead of acting on the Pavlovian conditioning of a bygone era, we don't hear him promising more incentives to spend on housing, drinks, or appliances. Instead, he offers the Chinese people happiness through struggle.

This is not what Western businessmen want to hear.

Peter Hartcher is an international editor.