China tightens up politically as its economy falters

IF YOU thought that the crisis facing China’s equity and currency markets – so evident last summer – was over, renewed turmoil in the first weeks of 2016 shows that there is still a long way to go, writes World Review guest expert Nick Fielding. Government support has helped slow the price collapse, and there have even been some scattered signs of stabilization in real estate and manufacturing. Yet, there is little evidence that the broader economy has recovered its balance or that the hoped-for growth target of 6.5 percent for this year will be reached. For all his hyperactivity and micromanagement, President Xi Jinping has failed to reform the economy in any fundamental way. In particular, the government has not dealt with well-entrenched, inefficient state monopolies. As a result, the low productivity, overcapacity and excessive debt that are endemic to China’s public sector show no signs of abating. These ailments are not simply a question of economics. Successful reform requires a political atmosphere in which issues can be raised and debated without fear of persecution. China, for now at least, appears to be moving in the opposite direction. It has been decades since any Chinese leader sought so much control over the ruling party as President Xi. Strict adherence to the party line has taken precedence over debate and discussion. There is no safe public space for Chinese to discuss, for example, the continuing unrest in Xinjiang or the mysterious disappearances of Hong Kong publishers and distributors of books critical of the Chinese leadership. Not all the problems facing China are structural. Some are self-inflicted. The Chinese Securities Regulatory Commission (CSRC) and the People’s Bank of China played leading roles again in the events leading up to the currency panic on January 7, 2016. Put it down to lack of experience or incompetence. Either way, China’s economic leadership has spooked the markets. Add to this the shortcomings of China’s monetary regime, in which central bank rate decisions must be confirmed by the State Council and exchange rates cleared by the Communist Party’s political bureau. Without an independent central bank, it will be hard to move toward a freer-floating currency and build investor confidence. Capital flight remains a distinct possibility. Beyond immediate concerns about the currency, the bigger issue is whether China can switch from an investment- and output-dominated economy to one that is centered on consumption – the magical “soft landing” that Beijing is looking for. This question is of interest not just to the Chinese authorities; it will weigh on the world economy, although perhaps not as much as is sometimes claimed. Over the past five years, China alone has accounted for about 35 percent of total global growth. That figure will decline over the next five years – but only to 30 percent. The official GDP growth target of 6.5 percent for 2016 is looking increasingly shaky. More realistic estimates suggest the actual growth rate may be somewhat less than 5 percent, and possibly much lower. There is a danger of over-emphasizing China’s economic woes and their likely effect on the global market. It is neither accurate nor useful to blame China for the dilemmas now confronting Western economies. The inadequate response by Western policymakers to the 2008 financial crisis was the main cause of the stagnation that followed, not the deceleration of China’s economy from breakneck to merely above-average growth. For all of their shortcomings, it appears that the Chinese leadership’s stimulus measures – at least in the short term - are having an impact, in the form of increased investment spending by local governments and state-owned enterprises. For a more in-depth look at this subject with scenarios looking to future outcomes, go to our sister site: Geopolitical Information Service. Sign in for 3 Free Reports or Subscribe.

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