Consumption-Driven Growth: Already Yesterday’s News? — China’s Economy After the “Two Meetings”

First things first: So much attention has been focused on China’s debt explosion–400% or more of GDP according to at least one credible estimate–that it would be impertinent not to begin by mentioning it here. Rising indebtedness, compounded by the burden of amortization, is undoubtedly not how China’s leaders would like to see their country’s “new normal” (新常态). But what other options do they have? The most recent annual round of high-level political meetings, held in Beijing (the Two Meetings/两会), gave observers little sense that any significant changes in China’s political economy will be forthcoming. What this means, as we covered several months ago when looking at the current Five-Year Plan in its draft stages, is:

  • Greater attention to the rural economy and issues of economic equality, a particularly with respect to financial reform in the countryside and expansion of the social safety net.
  • Prioritization of wages/consumption and national growth.
  • Articulation of Xi Jinping’s New Development Concept (新发展理念), which is now understood to consist of some combination of acceptance of lower growth rates; supply-side reforms; and emphasis on innovation rather than consumption.
  • Efforts to nationally coordinate reforms to reduce overcapacity, competition, and reduplication of and among initiatives.

Here we want to point out clearly that the transition being narrated here by China’s own government is not primarily one of “consumption-driven” growth a la Russia, whose own economic reforms primarily focused on wage increases. The government is scrambling to inject competitiveness into its state-owned enterprise (SOE) dominated economy through mergers, loans, investment, and introduction of private sector-style management (though, as ever, under Communist Party supervision and guidance). The viability of SOEs is not only an economic issue but also an employment and state legitimacy issue. China’s leaders are very clear about what investors “want” from China. Increased leverage and deficits accompanied by only modest spending cuts thus signal that the government has determined that its only recourse is kicking the can farther down the road.

As also covered here, one underappreciated result of supply-side reforms based on public-private partnerships is that they are likely to reinforce the clustering of the most dynamic sectors of China’s economy along the coast. This is already happening in Guangdong, Jiangsu, and Zhejiang provinces, and it is happening as a matter of policy, meaning that as a trend it is highly improbable that it will be reversed in the short to medium term. What this means for the thesis that middle- and lower-tier cities away from the coast represent the future of China’s economy–a thesis which rests primarily on the narrative of rapidly increasing middle-class consumption–remains to be worked out. Going back again to January (when excerpts from a key October 2015 meeting speech were released), in a highly Deng Xiaoping-like pronouncement Xi Jinping declared that not only would China’s growth slow, but that gaps between urban-rural and regional growth rates would not immediately disappear (Deng: “we should let some people get rich first”).

In other words, and despite his much ballyhooed return to Maoist authoritarianism, as an economic leader Xi is much closer to predecessors Deng, Jiang Zemin, and Hu Jintao than has been noted by those focusing on the “control” side of Xi’s presidency. The past week has made this clear. Along with higher levels of SOE indebtedness it is thus possible to speculate that another specter from the Jiang Zemin years–inflation–may begin appearing more widely than expected as well.

FURTHER NOTES: DEBATES ON CHINA’S GEOPOLITICAL RISE, GOVERNANCE, AND THE STATE OF THE ECONOMY

To put it quite simply, Russia, India, and Southeast Asia are stealing China’s headlines, though China-watchers do not appear to have noticed this. Intense conflict in the Middle East and “surprise to the upside” growth rates have been the main reasons. However, pessimism concerning China’s state-led ODI plans across the African and Eurasian continents have also diminished China’s luster somewhat. Updates on the One Belt, One Road (OBOR) initiatives express doubtslinked to more general unease concerning the global economy. On the military and security side, China’s plans for global military expansion and power projection are seen as undermining efforts to build a “softer” image internationally. Expansion in the South China Sea and refusal to work multilaterally to alter the tense status quo on the Korean peninsula have also dashed any hopes for greater Chinese cooperation in the Asia-Pacific. The United States is already punishing China with increased restrictions on technological exports and, along with Japan, has expressed complete unwillingness to accommodate China’s insistence that its vision for a new international system replace the existing “global order” (a term which China’s spokespeople use to critically refer to the post-1945 U.S.-led system). Chinese banks and enterprises continue to find opportunities in the Middle East and Africa, but what these stories–“local” in global terms–mean for international futures remains unclear.

In terms of China’s domestic politics, Xi’s government appears unpopular with observers writing from across the English-speaking world, but there is evidence to suggest that Xi’s already-forgotten policy of creating a “law-governed country” or “country governed based on laws” (依法治国) is leading both to a boost inexperimental surveillance and, less sensationally, the creation of a more efficient system for reporting crime and reforming and expanding the work of the judiciary. While restrictions on media and VPN use were the big stories of the week, these overshadowed more substantive and potentially narrative-transforming items concerning progress on the legal front. These latter items strengthen our case that, in addition to corruption and media/information control, one of the main planks in Xi’s domestic platform is the integration of local governments into a centralized system of court-based “checks” which–along with strengthening of internal security forces and the CCP’s own internal disciplinary apparatus–will increase the effectiveness of the Politboro as a governing body.

Finally, the economic picture: China is in uncharted territory, meaning that even while political stability may prevail, how China’s leaders will use this hard-won advantage to revive an obviously sputtering economy is far from certain. There is no long-term plan, only vague goals for what Xi and the CCP hope to achieve by 2020 and the hundredth-year anniversary of the PRC’s founding in 2050 (in dynastic terms, reaching one hundred years would put the CCP on par with the Mongol Yuan dynasty, but still well behind the Ming and [Manchu] Qing in longevity). China’s export data looks bad. Reserve levels appear shaky. On the other hand, barriers to the bond market may be falling, growth in business services seems promising (as does the inspiring success of Lipton in a country known for tea), and venture capital funds are raising significant assets from abroad. Here again, the latter stories have been crowded out by more sensationalized pieces insinuating that China is relying on home purchases by lower-middle class workers to “save the economy.” This is not a correct assessment–there are clearly other options–but the fact that such claims are capable of gaining traction goes to show how uncertain China’s economic futures currently appear. And that, if anything, cognitive distortions are once again trending towards the linked poles of fear and catastrophe.

(Originally published September 16, 2016, https://corintconsulting.com/2016/03/16/1718/)

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