Recent developments suggest that President Xi Jinping’s political downfall may be imminent due to a “disastrous” one-man rule that has led to a structural economic crisis that threatens China’s stability.

By Probe International

Rumors of President Xi Jinping’s undoing have circulated in the past, notes the New York Post, but developments of late indicate a significant shift in power dynamics within the Communist Party. The Post traces the possibility of Xi’s imminent political downfall to a “disastrous” one-man rule that has left China $50 trillion in debt (an amount that covers national, local and private sector debt that the Post notes is greater than the combined economies of the U.S. and EU), along with the near-collapse of the country’s housing market and “over 50 million unused (and mostly unusable) apartments due to government policy failures.” The country’s spiraling economy, the Post continues, has led to an exodus of wealthy Chinese and their assets, an “unemployment rate in depression territory,” and growing social unrest across the country in the form of “local riots, factory arsons and anti-government protests.” [See: Is Chinese President Xi Jinping on His Way Out?]

China’s economic crisis, however, is not simply cyclical or superficial but structural and systemic, according to Stanford University political economist Xu Chenggang. In a recent interview, Professor Xu analyzes the crisis through the lens of China’s real estate bubble. Over 70% of household wealth, he says, is tied to the real estate market. The collapse of this sector is not just a drag on GDP, but destabilizing for the country’s entire financial system.

With housing prices already down 15% from their 2021 peak (reverting to 2016 levels), Professor Xu estimates wealth decline has exceeded ¥62 trillion (RMB)—greater than the total annual income of all Chinese households combined. This has resulted in plummeting consumer confidence, intensified precautionary saving, and sharp declines in domestic demand. Even more critically, falling property values are eroding the balance sheets of banks, increasing the risk of systemic financial instability and potential banking crises.

The International Monetary Fund (IMF) recently recommended the Chinese central government inject fiscal resources equivalent to 5.5% of GDP (approx. $1 trillion USD or ¥7 trillion RMB) to stabilize the market. This proposal was swiftly rejected by Chinese authorities, citing concerns over “moral hazard” [puzzling in relation to the CCP and its capacity for generating moral hazard]. As Professor Xu notes, the root problem may be institutional: China’s authoritarian but decentralized fiscal system. Local governments hold the majority of assets and debt, yet the central government controls the bulk of tax revenue and policymaking. With nearly all local governments (excluding Shanghai) running persistent deficits and many unable to cover even basic expenditures, they are fiscally incapable of intervening in the property crisis. Meanwhile, Beijing shows little willingness to take on the burden.

Government data inconsistencies have further eroded trust. Official GDP growth is reported at 5%, but key indicators such as value-added tax revenues (down 5.6% year-on-year) contradict this narrative. Youth unemployment, previously over 20%, has been artificially lowered through the exclusion of students from the count. Foreign direct investment continues to fall—down 28% in the first five months of 2024, following an 80% drop in 2023. China’s stock market has lost ¥7 trillion (RMB) in market capitalization since 2020 and the flow of foreign direct investment is negative.

Most worryingly, China is experiencing a widespread soft budget constraint phenomenon: state-owned enterprises and banks are being bailed out rather than allowed to fail. This defers—not resolves—the underlying structural issues. Professor Xu describes this as akin to cancer being left untreated; market economies rely on the ability of failing firms to exit. Without that mechanism, inefficiencies accumulate and expand. The IMF’s concern is not merely focused on housing, but about the financial contagion that housing-induced asset deflation could trigger across the banking sector.

View Professor Xu Chenggang presenting his analysis here via YouTube [Chinese-language format with closed captions available in English].