21 April 2019
Xi Jinping is aware that domestic demand won't be able to alleviate the nation's overcapacity woes. However, there is no clear thinking on finding a solution to the problem. Photo:
Xi Jinping is aware that domestic demand won't be able to alleviate the nation's overcapacity woes. However, there is no clear thinking on finding a solution to the problem. Photo:

What Xi Jinping won’t tell you about the Chinese economy

Communist party mouthpieces recently carried transcripts of two speeches that President Xi Jinping (習近平) gave on the topic of economy.

Since both the speeches were originally delivered to senior party cadres, they can be a gauge of Xi’s take on the economic climate and his thinking on related issues.

The key point that he made in both the addresses is this: the new normal of economic development will mean a “spiral upward path”, a fancy term favored by communist cadres to gloss over the fundamentals that are plagued with problems and even raise the risk of a possible recession.

Xi still blames external factors for a reduced growth pace. The West’s demand for Chinese products has been on a steady decline since 2008, undermining China’s export-driven economy.

The Chinese leader aims to shift the focus from the party’s own policy blunders over the years, be it excessive birth control that led to a demographic sinkhole of weak labor supply and a rapidly ageing population, or an obsession with GDP growth that led to overcapacity and unchecked money supply.

Xi is seeking to cover up the party’s errors as he doesn’t want the regime to lose its standing in the eyes of the public.

That said, he admitted that innovation weakness is the “Achilles heel” of China despite the sheer size of the nation’s economy.

Xi also lectured his lieutenants that his latest buzzword, namely “supply-side reforms”, must be a structural endeavor, as the crux of the issue is not about the vicissitudes of growth but something more inherent.

His rationale is that the marginal effect of demand-side management, like spurring internal demand, is proving inadequate to alleviate industry overcapacity woes.

Xi’s prescription is deleveraging, destocking, weeding out overcapacity and lowering costs.

But if we take a look at western economies that had suffered slowdown or recession, the remedial measures came from manufacturers themselves, with governments having only a peripheral role.

What Xi won’t say is this: problems such as overcapacity, overleveraging and mounting stockpiles have festered mostly in state-owned enterprises and governmental agencies.

The way the party’s top leadership has handled the structural predicament is paradoxical.

In the first quarter this year, for instance, Beijing lifted the credit floodgate on a level almost on par with the one seen in 2008, putting infrastructure investment and domestic markets once again on steroids.

However, there was talk of a U-turn since April, with rumors flying that top policymakers had a change of heart against credit-fuelled growth.

Four years into his tenure, Xi has been at the helm with powers that no predecessor after Deng Xiaoping commanded.

Sadly, it appears that the Chinese leader has no clear philosophy on his mind, as he merely goes back and forth on economic policies.

Among other undercurrents that Xi doesn’t want people to know is the capital flight from the country.

Eight hundred billion dollars worth of foreign reserves have gone within the past two years, either for paying back debts by SOEs operating overseas, or due to the central bank’s extensive selling to prop up the renminbi exchange rate, or the rich and powerful taking their wealth overseas.

This article appeared in the Hong Kong Economic Journal on May 19.

Translation by Frank Chen

[Chinese version 中文版]

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Former full-time member of the Hong Kong Government’s Central Policy Unit, former editor-in-chief of the Hong Kong Economic Journal

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