China's Xi Faces Pushback on Economic Policy

An analysis by Michael Lelyveld
2016-05-31
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Chinese workers stand below a live video image of Chinese President Xi Jinping during the opening session of the National People's Congress in Beijing, March 5, 2016.
Chinese workers stand below a live video image of Chinese President Xi Jinping during the opening session of the National People's Congress in Beijing, March 5, 2016.
AFP

As China's economy struggles, officials are turning increasingly to anonymous statements on policy differences in a sign that political tensions are rising while economic growth falls.

On May 9, the Chinese Communist Party's (CCP) leading paper People's Daily carried a lengthy front-page interview with an unnamed "authoritative person," outlining the government's policies on debt risks, economic pressures, restructuring and reforms.

In one of the most widely quoted excerpts, the anonymous official warned that rising debt levels "can trigger a systemic financial crisis, cause negative economic growth and even eat up people's savings—and that's fatal."

"Big stimulus will only result in bubbles, which is a must-learn lesson," said the authoritative person in a translation by Bloomberg News.

As Bloomberg noted, this was the third economic commentary by the unidentified authority during President Xi Jinping's time in office with previous policy pronouncements in January and last May.

But the latest interview on economic policies may be more than one in an occasional series, since it follows an extraordinary open letter from unnamed "loyal party members" in March, calling for Xi's resignation and citing "consideration for your personal safety and that of your family."

The letter posted on the Canyu (Participation) and Wujie (Watching News) websites at the start of China's annual legislative sessions blasted Xi for his "excessive concentration of power" and criticized his economic program.

Xi's direct involvement in policy development had led to stock market instability and losses for "hundreds of thousands of ordinary people," the critics charged.

"Supply-side reforms" and production capacity cuts had forced layoffs at state-owned enterprises (SOEs), while his "belt and road" trade plans had reduced foreign exchange reserves and brought the economy "to the verge of collapse," they said.

Exposing cracks

Whether justified or not, the anonymous broadsides have exposed cracks in the government's facade of unanimity on economic policies as it battles to keep growth from further declines.

While the secret CPC members blame Xi for weakening gross domestic product growth, which slipped to 6.7 percent in the first quarter, the "authoritative person" appears to be blaming Xi's underlings for issuing rosy assessments and running up debts after first-quarter bank lending jumped 25 percent.

China's economic performance "cannot be described ... (as) a 'good start'," the authority argued, citing a term used repeatedly by officials and the state-controlled press.

The country's recovery will be L-shaped, or slow, "not U- shaped and absolutely not V-shaped," the person said, adding that "it is neither possible nor necessary to force economic growth by levering up."

Analysts have been divided on whether the remarks reflect the collective views of top party and government officials or those of a single leader like Xi or Premier Li Keqiang.

"Yes, the 'authoritative person' was Li," wrote South China Morning Post commentator Shirley Yam, noting the pointed denial that the first-quarter GDP was a "good start" to growth for the year.

Yam called it "a resounding slap in the face" for Vice Premier Zhang Gaoli who used the words in March to describe his expectations for the first quarter.

But the words were repeated in April by a spokesman for the National Development and Reform Commission (NDRC), the top economic planning agency, and used again in the official first-quarter press release from the National Bureau of Statistics (NBS).

On April 29, a statement by the Politburo of the party's Central Committee also described "a good start to the year" following a meeting chaired by Xi, according to the official Xinhua news agency.

An anonymous persona?

It seems possible that Xi may have spoken through an anonymous persona to push back against official optimism after the loan surge failed to produce quick results. But there is also uncertainty about who the "authoritative person" really is and what it means for political conflict over policy.

Some analysts shied away from attributing the critique to any single figure.

"It should be understood as a consensus view reached at the senior level, rather than an individual point of view," said Han Meng, a senior researcher at the Chinese Academy of Social Sciences Institute of Economics, quoted by Bloomberg News.

The mask of anonymity may keep Xi's detractors guessing about how much internal support he has for an economic policy that may be slow to produce positive results.

"Putting it in the paper as from an authoritative spokesman is an attempt to show that it isn't just Xi speaking. It's the collective leadership of the party, giving you the lowdown on what's what," said David Bachman, a professor of international studies at University of Washington in Seattle.

After the reference to "personal safety" by the "loyal party members," Xi may see the ambiguity of anonymity as preferable on several counts for some of his stronger statements.

"The slowing of the economy is creating real tension," said Bachman in an interview. "No one has a good answer for what to do about it."

"Xi has tried so hard to centralize decision making under his auspices that he has become the obvious person to blame for whatever problems there might be, even though he's trying to deflect some of that back onto Li Keqiang and some of the others," he said.

Last week, The Wall Street Journal may have added to the anonymous sniping over the economy with a report claiming that the People's Bank of China (PBOC) has secretly abandoned a policy reform announced last August for setting daily exchange rates based on market forces.

The report, based on minutes of PBOC meetings with unnamed economists and bankers, said the daily exchange rate "is now back under tight government control."

On Friday, the PBOC posted a statement on its Weibo social media account, denying the report as "fabricated" and misleading. A spokeswoman for The Wall Street Journal said the paper stood behind the story, Reuters reported.

Shifting into a higher gear

The anonymous back-and-forth may only be getting started as the government prepares to shift its overcapacity-cutting policy into a higher gear.

If the government follows through on Xi's plans to restrict lending to deeply-indebted SOEs and "zombie companies," job losses and loan defaults are likely to rise far above current levels.

So far, officials have downplayed the employment impacts and have only repeated forecasts of 1.8 million job cuts in the coal and steel industries, although many other sectors are suffering with similar overcapacity.

On May 18, a meeting of the cabinet-level State Council chaired by Premier Li decided that 345 state-owned "zombie companies ... will be reorganized or left to the market within three years," Xinhua said.

The government has tried to minimize reactions to plans for factory shutdowns by talking in terms of "supply-side reforms."

But resistance from SOEs, local officials and the unnamed party members is likely to rise as the reforms unfold, particularly if economic growth continues to fall.

Xi appears to be bracing for more internal conflict. One week after the anonymous interview, Xi called for "unswerving efforts" from "local authorities and various departments" to advance supply-side reforms, according to Xinhua.

On May 3, People's Daily also reprinted a speech that Xi gave in January at a plenary session of the corruption- fighting Central Commission for Discipline Inspection (CCDI), warning against internal dissent.

Xi said that "some officials have been forming cabals and cliques to covertly defy the CPC Central Committee's decisions and policies." They "risk compromising the political security of the Party and the country," he said.

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