Xi Jinping faces tough economic decisions as he tries to turn the “China Dream” from fiction into reality
In 2012, when Xi Jinping became the Chinese Communist Party’s General-secretary and China’s head of state, he outlined the “China Dream” for the nation’s population of 1.3 billion. Although the CCP has a history of debuting epic names for often ineffective and sometimes even disastrous policies— Mao’s Great Leap Forward that caused a national famine and “killed 45 million over 5 years” often come to mind as the deadliest— the 18th Congress led by Xi is substantiating its lofty promises with a package of concrete economic proposals that couldn’t have come soon enough. Back in 2012, the global economy was already feeling the effects of a major slowdown in Chinese growth, the nation’s GDP growth having dwindled to a mere 7.9%– the lowest rate in 13 years. Growth continued to lag throughout 2014, when it hit a new low of 7.4%. While the onset of the economic doldrums came as a surprise to some, Xi had been aware of Beijing’s need for economic reform since he first took office.
That’s why he made a package of ambitious economic reforms the centerpiece of his plan for the “China Dream.” The new Chinese president described the policies in his speech on November 15, 2012. While eschewing mention of hard economic data, he emphasized important role consumers had to play to make sure his plan could get off the ground:
“Our people love life and expect better education, more stable jobs, better income, more reliable social security, medical care of a higher standard, more comfortable living conditions, and a more beautiful environment. They hope that their children can grow up better, work better and live better. People’s yearning for a good and beautiful life is the goal for us to strive for.”
According to Xi, to attain these goals the engine driving China’s economy had to shift from export and state investment led growth to increased domestic consumption. Premier Li Keqiang, Xi’s right-hand man tasked with managing economic issues, laid out a more specific description of the economic policies as part of his address on September 11, 2015 at the World Economic Forum’s Summer Davos Forum in Dalian, China.
First, he pledged to try to bring the financial sector into line with “market principles and rule of law” and to create “an open and transparent capital market.” Effectively, the central bank would expand capital and credit through lowering interest rates and capital controls. The government would then correspond and “lift restrictions on market access and promote fair competition,” easing barriers for its own citizens to create wealth and increase their purchasing power and consumption.
Second, Li promised to moderate, and even to decrease government spending that has boosted the economy for decades. Theoretically, state investment shouldn’t cause problems. But over a long period of time in China, it has allowed wasteful white elephant projects to flourish across the country and has led the debt of regional governments to balloon into the trillions. “Let me repeat, we will make sure that no regional or systemic financial risk will occur,” Li pledged, emphasizing the significance of the national debt problem. While the central government still has a large foreign reserve to fund growth, stemming from the longstanding practice of letting foreign businesses trade U.S. dollars and Euros for RMB to do business in China, Li seemed to recognize that this model has generated instability, especially as of late.
With the world’s largest market of consumers, China certainly has the potential to create substantial domestic economic activity. As recently as July 2015, it seemed like the nation was making a successful shift towards more robust domestic consumption. According to Bloomberg, “Consumption in China contributed 60 percent to gross domestic product growth in the first half, even as the country grew at its slowest in 25 years.” This is exactly what Xi had planned for in 2012: reduced overall growth, but an increased share of it coming from domestic consumption. These were tell-tale signs that Xi’s promise of the “China Dream” might be on the verge of coming true. But after the turbulent summer of 2015, the pace of reform has practically slowed to a halt.
There are several troubling signs that Beijing is serious about changing its course. First, and most glaring of all, is the recent Yuan devaluation in light of the stock market crash: a move that proved unpopular enough abroad, but has also undermined domestic reform efforts. The devaluation was clearly intended to boost Chinese exports, which fell in volume by a startling 8.3% from a year earlier. However, the effective decrease of domestic consumption triggered by the about face in economic policy bodes especially poorly for the China Dream. Chinese workers’ real wage increases are effectively kept down by the devaluation, and the value of their savings and properties have also declined in real terms, thus diminishing their purchasing power. All in all, the People’s Bank of China has implemented a double whammy of wage decreases and price increases, a clear affront to the original policy instituted in 2012.
Beijing has not ruled out returning to its old stimulus strategies. Domestic and international stock markets have certainly put pressure on Beijing’s policymakers to revive stimulus policies, rallying when rumors of capital injections emerged and tanking when they appeared to be false. In the same Summer Davos speech, premier Li Keqiang notes that “in recent years, China did not turn on the money-printing machine or resort to massive stimulus. Instead, we invigorated the economy mainly through deepening reform,” hinting that his policy will not change in light of the recent stock crash. Investors in his own country were clearly unimpressed by this. Immediately on the following Monday and Tuesday, the Shanghai Composite Index fell from its plateau by around 200 more points to 3,005.172, the second deepest trench since August, until being picked up by the government again.
This spells danger for Beijing and the CCP. Unlike the diversified composition of other stock markets, “individuals make up around 80% of the investors” in Chinese stock markets. As a result, Main Street was hit the hardest of all. People lost their homes, businesses, and defaulted on their debts. To remedy the situation, individual investors will look to Beijing for help and be disappointed when it does not come. The recent protest from Chinese mineral investors exemplifies this. Internationally, markets in the U.S. and other Asian nations followed suit in the plunge. Clearly, everyone is asking for stimulus.
And under such immense pressure, no longer enjoying the independence afforded by isolation, Chinese policymakers might well buckle to these forces and inject stimulus to keep the stock market afloat and economy rolling. Economically, this would be a continuation of alarming deficit spending and static living standards. Politically, ending one of Xi’s main policies would surely be a slap to his face. This is the CCP’s existential problem of the 21st century: should it continue investment for short term stability or stick to promoting the China Dream by decreasing government expenditures and pursuing long term restructuring? And would the party even exist if this restructuring was carried through to completion?
Xi should explain to China’s 1.3 billion citizens that the nation must stick together. He must admit to the people that there will be some short term downsides to withholding stimulus and allowing market forces to play out, but that this decision will ultimately stabilize the national economy and allow the China Dream to become reality. He also needs to insist that consumers spend more to shore up the economy while pushing the government to moderate or even decrease its spending as per the reforms— an admittedly difficult sell. This risky move will alarm the stock markets even more, but it’s the only path towards equipping the national economy, consumers, and firms with resilience in the long run.
Unfortunately, with double-digit growth fueled by irrational deficit spending, widespread corruption, and an immense housing bubble, the world’s second largest economy had a structural crisis coming its way for a while. And unfortunately for President Xi and his government, they have to be frank about it. Then, hopefully they will stick to their guns to restructure the economy by, paradoxically, doing less.