China's Downward Economic Trend is Unstoppable


2015.07.03
china-xi-jinping-military-officers-jan19-2015.jpg Chinese President Xi Jinping (C front) greets military officers at a meeting in Beijing, Jan. 29, 2015.
Xinhua

To start with, I'd like to correct a notion that has been going around since the [ruling] Chinese Communist Party's 18th Party Congress [in November 2012], which is that of [Premier] "Li Keqiang economics."

It means not using stimulus measures, but paying off debts and structural economic reforms instead.

This idea has been shattered pretty quickly, because, as we have seen since, the traditional "two-man chariot" leadership model in which the president takes care of politics and the premier of economics has already been broken down by [President] Xi Jinping.

Therefore, there is no such thing as Li Keqiang economics any more. There is only Xi Jinping economics.

And Xi Jinping economics consists entirely of old wine in new bottles.

We know that one of the most prominent characteristics of China's economic growth is that it is investment-led.

Investment in key infrastructure projects sparked a property development boom. At the same time, local governments began to drive investment in property, hungry for new sources of funding in the wake of tax reforms, thereby accelerating the shift to an economy that relies heavily on infrastructure investment and exports.

The results of all of this investment-led economic growth seemed dazzling, but it was a recipe for disaster. In the medium-to-long term, the main problems are overcapacity, a decline in the efficiency of investments, inefficient infrastructure, a rise in non-performing loans in the banking sector, and so on.

The years of Wen Jiabao's administration [from 2003-2013], during which the government committed to the "Four Trillion" fiscal expansion in a bid to stave off the global financial crisis, have born the brunt of criticism for this.

Although these measures led to a recovery in China's economic growth in late 2009, they also led to new problems, including an excess of debt, a surplus of real estate, and the exposure of local governments to greater financial risk.

'New normal'

When Xi Jinping came to power, he came up with his "new normal" economic development slogan, the main thrust of which is to do away with the old focus on blindly boosting GDP growth through stimulus measures, and to allow economic growth to stabilize gradually around a lower growth rate of seven percent, focusing instead on economic restructuring and adjustments that would strengthen the role of the markets.

This is the basic proposition of Xi Jinping's economic policies, which he outlined as distinct from the previous model of fiscal expansion used to stimulate economic growth.

It sounded pretty good when he said it. But has he achieved this "new normal" in economic development?

According to official Chinese media reports, China's producer price index (PPI) has fallen for 34 months in a row, putting China at its largest ever potential risk of deflation.

Actually, this is quite an old problem, caused by excess capacity and insufficient demand. Japan's economic priority during the past three lost decades has basically been the battle against deflation.

Judging from China's past experience in fighting deflation, basically we are now in the mire of deflation because of the road we took with our fiscal and monetary policies.

No new solutions

So what is Xi Jinping to do? Does have any new solutions? No, he doesn't.

For a start, investment in infrastructure is still the strongest force when it comes to resolving the problems of overcapacity.

Last year, China's State Council approved funding of more than ten trillion yuan (U.S. $1.6 trillion) for seven key infrastructure projects, seven trillion yuan (U.S. $1.1 trillion) of which is to be invested this year.

Secondly, the People's Bank of China [China's central bank] has cut interest rates three times, and cut bank deposit and reserve ratios since last November, in order to stimulate investment growth.

Thirdly, and this is their most recent idea, they artificially ramped up share prices, to the extent where we can say that they deliberately created a share price bubble.

These three arrows in Xi Jinping's economic policy quiver all target fiscal stimulus. So it's clear that Xi Jinping's economic policy is more of the same.

'The end of deep reform'

In reality, the shift from "Li Keqiang economics" to "Xi Jinping economics" means the rolling back of structural reforms so as to go back to the old road of quantitative easing to stimulate economic growth.

It spells the end of deep economic reform.

If things continue down this path, not only will the old problems not be solved; they will continue to build.

It wouldn't be so bad if these economic stimulus policies could rescue China's economic growth from this downward pressure. But if Wen Jiabao's four trillion couldn't solve the problem, will Xi Jinping's 10 trillion? Of course not.

HSBC announced [last month] that China's industrial purchasing managers' index (PMI) rose to 49.6 in June from a base of 49.2 in May. This comes after consecutive declines over the previous four months, and is still below the 50 index level that denotes economic prosperity, showing that the Chinese government's relaxed monetary policies of the preceding period were having a very limited effect.

As for the bullish stock market, it made very little impact on consumer spending. It is estimated that in the period where the stock market rose by 10 percent, consumer spending rose by just 0.2 percent, which is a drop in the ocean.

In summary, China's downward economic trend is unstoppable.

Translated by Luisetta Mudie.

U.S.-based historian and veteran dissident Wang Dan served a total of four years' in prison for his leading role in the 1989 student-led pro-democracy movement on Tiananmen Square.

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