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.
And a UK MP, married to a Chinese lady (she obviously larges something larger) cant tell the difference between Jap & Chinese. If they all look the same to him…..
Yes, China will collapse any day now. In the meanwhile real wages will increase ~10% annually while ~20km of high speed rail will be laid today.
But if China has to keep growing at 7% to keep unemployment and iscontent low ?
Richard Truong Bad mouthing smurfs ?
Not about 5 years, it’s about 50yrs. If China’s rise is inexorable, why are you so bothered ?
So the current vacinne scandle, tainted milk, China breaking the rules on banned CFC’s, these are all W propaganda.
The simple fact is in the race to modernise your cities are choking, your ladies dont want to have your children, while we have cheap gee-gaws.
Of course they can explain it, it’s called cheap labor, cheap currency.
Not that I know whether this stuff is true or not, but I do know that the writer is only quoting a few Western sources, and none at all from within China. Hope springs eternal in the American capitalist breast.
Its all about who controls money machine, the rest its just cheap talk, https://www.youtube.com/watch?v=pE7-yf7vJ6A
This article is very interesting for discussion.
"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."
That’s not the narrative within China. Nobody there adores Xi Jinping as some kind of guru. From what I see, the Chinese just realized the era of 10%+ annual GDP growth has ended, and now is the time to add value to production. (the link the author provides is from the SCMP, a pro-West newspaper, far from the Chinese majority opinion).
"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."
Well, that’s true. Xi Jinping changed the narrative when GDP growth begun to slow down. But, as I said before, the Chinese don’t see him as some kind of God, but simply as their chief of State. Had GDP growth continued to be at 10%, he would continue with the old plan, because the old plan would still be useful; when reality changed, he changed course. Weird and absurd would be if he continued with the old narrative when reality changed (a thing that is happening in the West, where the establishment is still trying to revive the corpse of neoliberalism).
"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."
This is absolutely not true. First, China was not a "basket case" when Deng took over: during Mao Zedong, the economy grew at a 5% average, and structural, long-term reforms were made. So it was definitely not Venezuela. Second, the Communist never discussed society in terms of "egalitarianism vs meritocracy" — this is a liberal rationalization, a division that only exists in the Western imaginary. Third, Deng Xiaoping didn’t decollectivized agriculture! He simply stablished a national security quota and everything that exceeded this quota could be freely commercialized by the peasants. The peasants could invest this excedent freely, either in automation of agriculture or in manufacture. But agriculture continued to be collectivized — there’s no plantantion or agrarian elite of the Latin American type in China.
"Shadow banks continue to add to imbalances."
This is HS. The country with the largest shadow banking system is the USA, and it hasn’t stop it from prospering.
"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."
This is a matter of morals. Those state-owned enterprises are very prosperous (see those Forbes lists), so, if there is corruption, it isn’t stopping them. Also, many things Westerners call "corruption" and "bribe" for the State sector are actually common practice in the private sector. For example: "bribe" to a state official in a state-owned enterprise can easily be translated into a participation bonus for a high ranking director in a private multinational.
"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."
That probably won’t be a problem because Chinese business are not indebted in dollars, but in yuan (the so-called "internal debt"). Besides, it is rumoured China owns something like US$ 11-13 trillion in American Treasurty debt bonds. The US Treasury could pay them off by printing dollars, but at the cost of the rest of the world and of its own financial dominance.
It is sad that world’s two biggest economy are getting into a trade tariff war. We need to understand that this will slow growth worldwide. In the end there will be no winners.
Calling Gordan Chang, Calling Gordan Chang——-please report on the double to Mr William Pesek office——–he needs your wisdom on the impending collapse of the Chinese economy!!!
US is only about 25% of China export. And many goods that are hit with punitive tariff, the US consumers will pay for them.
Dreams are beautiful…
Bad-mouthing is part of the Western culture.
China should focus on developing the home market. With 1.4 billion people (consumers), China could grow a lot just on the back of that market.
As though Western economist can even explain how China did it – 30 odd years of high speed growth (today about 1/3rd of the world’s growth) all without a recession. If Westerners know how to do it, you’d thunk America would be growing at 4.1% for 30 years. Well, never say never, perhaps this is the beginning of a beautiful thing.
THESE WESTERNERS ARE NOW DREAMERS DREAMING ABOUT BAD THINGS UPON OTHERS EXCEPT THEMSELVES
Western media has been breathlessly warning the coming collapse of China’s economy for the past 15 years. Hint to author: Use of the word "strongman" to describe President Xi is a clear sign of your neocon bias.
If China is not doing well, why did USA start the trade war to impede China’s 2025 objectives?