Five years after Xi Jinping’s China pledged to let market forces play a “decisive role,” it’s time to wonder if Beijing understands the concept.
Since Xi grabbed all top governing portfolios, the financial press has indulged in a tantalizing narrative: the strongest Chinese leader in decades will sort out all Beijing’s excesses. At the close of every National People’s Congress, headlines declared an end to credit and debt bubbles.
Xi, they declare, has the courage to tolerate less gross domestic product, a necessary precondition for big reforms.
When that didn’t happen in 2013, the media said, no worries, 2014 is the year. Then it became 2015, then 2016 and 2017. Here we are in the summer of 2018 and investors are again buzzing about – wait for it – Beijing ramping up credit to maintain rapid growth.
All the while, those above-mentioned market forces are savaging share prices in Shanghai and Shenzhen – and not to Beijing’s liking. Donald Trump’s trade war, meanwhile, also may be sending a bit too much market reality China’s way. Taken together, these narratives may be reducing confidence to retool the economy.
In recent days, Beijing rolled out a package of moves to keep growth from sliding too much: tax cuts: infrastructure spending; new business loans. The People’s Bank of China is lending about $75 billion to banks to boost the money supply and spark business activity.
All told, more evidence that strongman Xi harbors the same weakness for Beijing’s 6.5% growth target as his predecessors.
The 13% drop in Shanghai shares this year – down 16% in Shenzhen – is a warning sign. So is the 5% drop in the yuan. The message: for all Beijing’s rapid growth and global ambitions, the economic foundations underpinning it all are not ready for primetime.
China will be even less ready, though, if Xi indulges in the same stimulus-at-all-costs strategy that got Asia’s biggest economy into the hot water it’s in today. That makes for a worrisome bookend in a year that marks the 40th anniversary of China’s market-opening reforms.
In 1978, the year Deng Xiaoping became paramount leader, China began its journey from socioeconomic basket case to surpassing Japan’s GDP. Deng tossed aside Maoist egalitarianism and introduced meritocratic forces. He decollectivized agriculture, loosened price controls, allowed entrepreneurs to start businesses, welcomed foreign investment and set the stage for China to become a global manufacturing phenomenon.
Xi pledged to accelerate and broaden Deng’s pro-market revolution, only to fall short in the eyes of many. Here’s how sinologist Bill Bishop of Axios frames the debate: “Some experts now say that economic reform is dead under Xi. He and the Party, of course, say both reform and opening are moving forward with urgency. Who is right?”
Well, if we take a look-at-what-Xi-does-not-what-he-says approach, the skeptics have it.
In today’s China, rapid GDP is actually bad news – a sign Xi is still focused on optics, not building on Deng’s successes. Since 2013, the year Xi formally became president, Lawrence Summers and other prominent economists have highlighted the “regression to the mean” risk. It means, on the one hand, that credit-fueled expansions end at some point.
And that once technocrats get under an economy’s hood, GDP slows drastically. Only once Chinese GDP heads toward 5% or lower can we conclude Xi is dusting off Deng’s playbook.
Sadly, Xi is putting the cart before the proverbial horse. Economic strength begins at home. Xi’s “Belt and Road” and Asian Infrastructure Investment Bank initiatives speak to the grand scale of his global ambitions. But Beijing’s projection of potency rests on feeble foundations.
Shadow banks continue to add to imbalances. The state-owned enterprises that enrich many Communist Party bigwigs remain dominant. Local governments are still borrowing with abandon to gin up growth and placate Xi’s inner circle.
The People’s Bank of China is opening the credit spigot anew despite heady growth rates. At the same time, the yuan drop is increasing the risk of corporate defaults on dollar debt and the odds Trump will blast Beijing for currency manipulation.
Granted, Trump’s trade war is an exogenous threat Beijing doesn’t need. But China’s 6.7% growth rate in the second quarter should embolden Xi’s men to get under the economy’s hood. Instead, they’re ramping up stimulus. Deng must be rolling over in his grave.