Just about everyone has a view on China’s economic troubles. Its deepening property crisis, deflationary currents, and increasing protests are all Asia observers can talk about.
Yet one very important voice is barely saying a word about the state of Asia’s biggest economy: President Xi Jinping.
This is true both rhetorically and by way of policy actions. The deafening silence on the latter front is especially perplexing as virtually every Chinese growth engine—from investment to exports to household spending—sputters.
Less quiet are commodity traders bidding down prices of oil, copper, and other commodities as China turns further inward. Hopes for smoke signals from Beijing that fresh stimulus might be coming are being dashed day after day. And keeping global markets on edge.
What gives? Hubris, for one. Like investment strategists sticking to their house view no matter what, Xi and Premier Li Qiang argue that China’s economic trajectory isn’t nearly as dire as naysayers think. A strong recovery, they seem to think, is just around the corner.
Also in the air is fear that Beijing might squander success in deleveraging the economy. In the years after the 2008 Lehman Brothers crisis, China built countless growth-generating roads, bridges, ports, skyscrapers, six-lane highways, international airports, white-elephant stadiums, sprawling shopping districts, and amusement parks.
Along with an explosion of local-government debt, that ethos played a key role in creating the property overhang now imperiling the economy—and social stability. In the second quarter, China saw an 18% jump in protest events year on year.
Unsurprisingly, the latest China Dissent Monitor report from U.S. advocacy group Freedom House finds that 44% of the dissent cases were labor-related. And 21% involved homeowners aggrieved over unfinished properties or plunging real estate values. Many of the protests are in the southern province of Guangdong, a manufacturing hub, and Xi’an, where the property crisis is leaving many construction workers jobless.
Looked at one way, Xi’s reluctance to unleash new stimulus to stabilize growth is laudable. For years, the U.S. Treasury Department and International Monetary Fund urged his Communist Party to recalibrate growth engines so that China grows better, not just faster.
Yet Xi appears to be missing the moment, and perhaps badly.
The relax-and-give-China-room-to-raise-its-competitive-game take would be more credible if Xi were freeing the private sector and scaling back the dominance of state-owned enterprises. It would land better if Team Xi was acting boldly to cleanse property developers’ balance sheets to avoid defaults.
“The fading of the drag on growth from property would in turn make China’s economic dilemmas much easier to manage,” says Andrew Batson, an analyst at Gavekal Dragonomics.
But, Batson notes, “given the government’s demonstrated reluctance to deal forcefully with the intertwined problems of poor developer finances and low household confidence, the housing bust seems more likely to end through its own exhaustion rather than through a policy intervention.”
The optimistic view on reform might get more traction if Beijing made it clear the crackdowns on internet platforms–starting with Jack Ma’s Alibaba Group in late 2020–were finished. And if Xi were less aggressive about policing cyberspace and silencing academics and media platforms.
With China’s youth unemployment rate above 17% in July, Beijing is dealing with something of a hashtag uprising. “Young Chinese are taking relief in social media buzzwords highlighting the deep economic and social problems that authorities try to mask with censorship and statistical tweaks,” says Diana Choyleva, chief economist at Enodo Economics.
Optimism might be more fitting if “Made in China 2025,” Xi’s scheme to move upmarket into higher-value sectors, had gained more traction. China is indeed making notable progress. But nearly 10 years on, it’s nowhere near where its leaders hoped to be in dominating the future of renewable energy, electric vehicles, aerospace, biotechnology, artificial intelligence, green infrastructure, and robotics.
Sadly, China Inc. is also becoming more of a black box even as Shanghai and Shenzhen exchanges try to woo global capital. A recent move to obscure data on overseas fund flows as stocks slide hardly dispels worries that China is “uninvestable.”
The costs of these missteps are adding to the damage from a real estate reckoning, trade wars, and wealth-destroying tech crackdowns. They are threatening China’s four-decade rise in living standards. Weak pricing trends also raise questions about whether Xi is making an epic mistake, policy-wise.
Economists have been urging Beijing to unleash a sizable fiscal jolt. The People’s Bank of China, meanwhile, has been surprisingly timid about cutting interest rates even as consumer prices slide.
PBOC foot-dragging is largely about politics. Gov. Pan Gongsheng can only dream of enjoying the autonomy afforded to Federal Reserve Chair Jerome Powell and Bank of Japan Gov. Kazuo Ueda.
The problem: Xi’s party, Pan’s overlord, is more concerned with keeping the yuan stable than adding much-needed monetary stimulus. This tradeoff is delaying a full-on assault against deflation.
If Japan taught the world anything it’s that falling prices must be addressed with overwhelming force and without delay. Twenty-five years on, Tokyo still hasn’t officially declared an end to deflation.
A Chinese economic blunder will have vast global implications. Right now, falling oil and copper prices are getting the attention, as is the overcapacity narrative spooking both developed and emerging economies.
The bigger risk, though, is the feedback effects on the U.S., Japan and Europe. Slowing Chinese growth could add to headwinds bearing down on the U.S. It’s an added pressure on Europe’s flatlining economies. Underperforming Japan is watching anxiously as its top trading partner slow-walks stimulus.
Time is not on China’s side. Achieving this year’s 5% growth target is beside the point. The longer-run challenges posed by stagnant wages, weak consumer demand, high youth unemployment, and weak investor confidence will be with China for a long time if Xi’s inner circle doesn’t get busy–and fast.
Putting political control over reforms to build a more productive and dynamic economy has its costs. In China’s case, though, it will be the entire global system that pays it.