Beijing’s policy hampers China’s efforts to stimulate the economy

Chinese President Xi Jinping delivers a speech during a reception at the Great Hall of the People to mark China’s National Day on September 28, 2023 in Beijing, China. Jade Gao/Pool via REUTERS

A decade ago, there were more than 200 members Central Committee of the Communist Party It met in Beijing for the “Third Plenum,” a quinquennial gathering traditionally devoted to economics. The plenary pledged to give markets, not the state, a “decisive role in resource allocation”. It is true Xi JinpingChina’s president since 2012 has not accepted that pledge, which explains the disillusionment with China’s economy over the past decade.

But the immediate state of the economy is different. The problem this year is not that the state has played a more decisive role at the expense of the market. A more pressing difficulty lies in the mobilization and allocation of resources Neither the market nor the state is decisive enough.

Consumers have lost faith. They are reluctant to spend or invest money and prefer to accumulate money in bank deposits. They are especially careful to buy properties that were once the backbone of the economy. This is impossible for real estate developers like this Evergrande Find their way out of bankruptcy.

Coupled with a drop in exports, this consumer reluctance is hampering the economy’s post-pandemic recovery. Data released from May to August showed, among other things, industrial production, retail sales and exports were much lower than expected. A slowdown in growth coincides with a fall in prices.

In the past, China’s government has responded strongly to such crises. When the global financial crisis hit the country in 2008, officials enacted a wave of borrowing and spending that quickly restored growth, even as the rest of the world faltered.. But facing a recession this year, the government is as hesitant and fearful as its consumers. Their reluctance now exposes some of the political and ideological limitations that hinder China’s provocation efforts.

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In most economies, the central bank is the “first responder” to a recession. China’s Monetary Authority cut interest rates in June, but not by much. It cut its seven-day rate by 0.1 percentage point, following a second cut by the same amount in August. (Many Western countries are raising rates because of concerns about inflation, a problem China does not have.)

Policymakers and implementers in China, like their counterparts in other emerging economies, worry that deep cuts in interest rates could undermine confidence in the currency and erode banks’ profitability. But there is another element to this moderation. China’s political system has no place for activist and heroic central bankers. There is only one “master” in the country (to use a term once given to the head of the US Federal Reserve). That is Mr. G. To preserve any autonomy, China’s central bankers must exercise caution.

File photo. Men work at the construction site of an apartment building in Beijing, China. July 29, 2023. REUTERS/Thomas Peter

Responsibility for the economy traditionally falls to China’s No. 2 official, the prime minister. Those who previously held this position have the influence and courage to protect themselves from disaster and revive growth. When the Asian financial crisis hit China in 1998, Zhu Rongji He boosted morale by promising to keep growth at 8%. Compared to The current Premier, Li Qiang, is weak. Installed in March, he owes his position entirely to Xi. Its mandate – to protect prosperity – is crucial. But in a broader sense, it often plays a secondary role in securing security. Mr Li is energetic and knowledgeable. However, he views the State Council (China’s cabinet) as the implementer of the Party’s ideas rather than the source of them. Wu Guoguang from Stanford University.

Perhaps the biggest concern is the once booming real estate market. It has been in crisis since mid-2021, when regulatory limits on excessive developer borrowing began to take effect, pushing Evergrande and others into default. These limitations are not simply a technical measure. They were part of a harsh, quasi-ideological campaign summed up in Xi’s slogan: “Home is for living, not speculatingr”.

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That campaign has been very successful. Property sales in August were 47% lower than in August 2019. Until the market stabilizes, the economy remains vulnerable. But still Ideological propaganda is hard to reverse. Regulators have loosened the definition of a first-time home buyer, allowing people to benefit from easier mortgage terms. People have reduced the cash advance they have to give. Some cities have deregulated prices on apartments. The 24-member Politburo, which helps set policy, removed Xi’s slogan from its manifesto in July.

But neither Shi nor his subordinates can easily admit that their campaign has gone too far. They cannot loudly defend an alternative slogan that can rally the market without causing surprise. Hence, the impact of perception persists. On September 22, Evergrande said disappointing sales forced it to delay a debt restructuring plan. Trading in Evergrande shares was suspended on September 28 Bloomberg The chairman of the group revealed, Hui Ka Yan, is under police surveillance. The well-connected Mr. Hui is the author of the group’s misfortune and the key to its recovery. None of this inspires confidence in the credibility of other struggling developers.

China’s successful promotion effort in 2008 was led by local governments, not Beijing officials. By the time Xi came to power, the model’s successes were overshadowed by its excesses. Previously, local governments competed with each other to promote development within strict financial constraints imposed by the central government. Agitation upset this delicate political balance. Local governments borrowed heavily through “off-balance-sheet financing vehicles,” freeing them from their fiscal crunch and allowing them to make more costly mistakes. Their appetite for credit is solid. These vehicles now owe about 60 billion yuan (over $8 billion).Goldman Sachs Bank says.

File photo of a person looking at screens with quotes at the Shanghai Stock Exchange, China. February 28, 2020. REUTERS/Aly Song

Xi is determined to keep local governments under tight financial control. That means they are in no position to lead to another round of stimulation. On the contrary, the central government can do much more on its own. Some economists have urged him to give consumer vouchers or donations to the poor. But the government is reluctant to help families directly.

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This may reflect the view that alternative methods of boosting the economy, such as public investment or tax cuts, have a dual effect: they stimulate demand and improve the supply side of the economy, either by building infrastructure or stimulating business vigour. The lack of enthusiasm for donations may also reflect Xi’s personal distaste for “welfare,” which he warns could lead to laziness..

In recent weeks, China’s government has begun to respond more strongly to the slowdown. He has extended tax relief to people who trade in their old homes for better homes. He has talked about revitalizing so-called “urban villages”. In August alone, local and central governments issued about 1.2 trillion yuan ($165 billion) worth of bonds, more than twice the average for the first seven months of the year.

The economy also seems to be in the doldrums. Exports in August were higher than the previous month. Growth in retail sales and industrial production improved. Consumer prices have stopped falling. Recently, China’s economic data began to beat lower expectations.

To raise those expectations, Xi could spend the next full session revising and clarifying his economic philosophy. It can promise a higher priority to the market than the state, to prosperity over security, to openness over austerity. Meanwhile, his subordinates must continue to do so.

© 2023, The Economist Newspaper Limited. All rights reserved.

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