Persistently high levels of leverage have become the number-one source of financial risk in China, a senior official in the nation’s top economic policy body wrote in an article in the People’s Daily. Zhu Dantao said that made it impossible to rely on real estate development or Keynesian demand-led strategies seen in the West for growth.
While much attention has been given to the curious coexistence in China of excess capacity with insufficient supply, this is just a superficial symptom of the challenges facing the economy. The root of the problem, Zhu said, is the failure to let market forces take their full effect. This enables all manner of twisted policies and bureaucratic arrangements to flourish, sending price signals haywire and blocking the free flow of basic elements in the system. In sum, it is this that created the misallocation of resources we see in China today.
The article most likely reflects the views of President Xi Jinping himself, given that Zhu oversees economic analysis at the Central Financial Work Leading Group. With Xi as group captain and his close confidant Liu He in charge of day-to-day operations, this unsexy-sounding committee is seen as the highest body for setting issues to the Chinese economy. As such it’s an echo chamber for promulgating Xi’s ingrained ideology on supply-side structural reform.
Unlike inflationary fiscal and monetary policies that buy short-term stability at the expense of long-lasting side effects, Xi’s supply-side reforms aim to cut back “ineffective supply” and boost “effective supply.” Which, in plain English, means getting domestic companies to produce goods and services that Chinese consumers actually want – and at the quality they want.
Could this suggest more glitzy fashion labels, luxury motor marques and makers of exquisitely engineered watches are being groomed in the heartland? Zhu didn’t elaborate, but it sure looks easier for China to buy its way up the value chain than to build it link by link – just today, Fortune Fountain Capital agreed to pay about US$184 million for 88.8% of Baccarat. The French maker of high-end crystal products says it takes its craftsmen about 15 years to master the techniques of the company’s glassmaking tradition stretching back more than 250 years.
To get China’s economy – and companies – pointed in the right direction, Zhu said at least for major obstacles must be removed. Outdated facilities that churn out unwanted products and sustain a sclerotic army of zombie companies; a housing market that’s turned topsy turvy nationwide; stubbornly high macroeconomic leverage that refuses to yield; and the choking of businesses by red tape.
While the task ahead might sound less appealing than getting the wrinkles out of a pair of cute sha pei puppies with a boiling-hot steam iron, bear in mind that Xi will be wanting to deliver some feel-good treats to the public in time for 19th Party Congress. That’s the year-end gala at which he’s expected to cement his power and influence over the ruling Politburo Standing Committee – and a gusty tailwind of public approval would give a massive boost to his cause.