Even as Chinese President Xi Jinping (習近平) strengthens his political grip by way of further asserting the monopoly on power of the Chinese Communist Party of China (CCP), the country’s economy is refusing to follow his political dictates. The middle of last year saw turbulence in China’s stock market raise questions about the health of its economy, and the trouble has returned.
The arbitrary measures taken to dampen down such turbulence by directing institutional — state owned or controlled — investors to buy or not to buy stocks might have worked for a while, but they failed to address the real problem: Chinese stocks are overvalued, with inbuilt bubbles waiting to bust as soon as there is an opportunity. That opportunity arrived early this month, when the economic data about weakness in the manufacturing sector was revealed.
At about the same time, Chinese authorities depreciated the yuan to give them an advantage in the export sector. Whether that will translate into more exports is an open question because this can lead to competitive devaluations by competing economies. Moreover, this tends to frighten investors, leading to the flight of capital from China. However, the Chinese authorities subsequently sought to support the currency by buying it.
All in all, this tends to raise doubts about the health of the Chinese economy, which has not been performing as well as in the past when it averaged a growth rate of more than 10 per cent. At present, its growth rate is about 7 percent, and there are fears that it might continue to fall. China’s economy is still growing well by global standards, but there are serious problems and bottlenecks that, unless resolved, could create social and economic issues at home.
After the 2008 global recession, China’s economy continued to perform well, with an expansive economic stimulus program. This was not only good for China at the time, but was also good for the world, particularly for resource-rich countries, such as Australia, Canada, Brazil and South Africa. Under its stimulus program, money poured into infrastructure projects, real estate, steel plants, high speed railways and so on.
At the same time, the feel-good effect of all the investment activity and construction pushed up the value of Chinese stocks, with the government even encouraging small mom-and-dad investors to invest in the market. Although many people felt rich and invested not only their savings, but even borrowed money to play the market, the hype about the stock market was too good to be true.
In the middle of last year, the market tumbled, with the authorities trying to create stability through diktat by forcing large institutional investors to buy more stocks to create a semblance of normalcy. At the same time, the authorities tended to suspend trading when there was too much downward pressure. When the stock-market turbulence kicked again this month, the authorities tried the same old method of imposing order, but it did not seem to work. It was clear that what worked in the political domain — ruling by diktat — was not working in dealing with market fluctuations.
There are good reasons for this. First, there is a large overhang of debt that funded the stimulus program at local, regional and federal levels. All levels of governance vied with each other to spend borrowed money to grow the economy, as it was the guiding principle of all agencies. There was an unstated compact between the party and the Chinese public — as long as economy was growing, people did not care much about the monopoly on power by the CCP.
In the process, corruption became rampant with, among other things, the arbitrary acquisition of land as long as it led to building of more apartments. Which led to a glut in the real-estate market, with rows of expensive unoccupied apartments. In the same way, over-capacity built up in the manufacturing sector, like the steel industry, with inadequate demand for construction material.
The upshot of it all was that much of the new infrastructure, real-estate construction and the like, did not generate enough income to pay off the debt that kept piling up. At the same time, with very little real information available to the public about the state of the economy, especially the mountain of debt, the stock market continued to operate as if there was no tomorrow to settle the accounts. Now, that tomorrow appears to be happening sooner than expected. The overhang of debt has to be sorted out and it can no longer be wished away.
This economic necessity of fixing the economy and, at the same time, ensuring a healthy rate of growth to maintain the CCP’s social compact with the people, has created a complex situation. China is in a transition period in which exports that had been the vehicle of its rapid economic growth have slowed down, and maintaining the healthy growth rate of the past, or close to it, will require a growing domestic market based on domestic consumer demand and growth in the service sector.
Both have yet to catch up and require a radical reorientation of the Chinese economy, and with the overhang of the debt and people used to saving and not spending as much, this is going to be a difficult task, particularly as markets do not respond well to political dictates.
As for the debt overhang, much of it is internal debt and hence not subject as much to external compulsions as foreign debt would be. However, it would need to be sorted out sooner, rather than later. Otherwise, China’s trajectory might mirror that of Japan, which is burdened with heavy internal debt and has been in a deflationary spiral for more than 20 years since its stock market crashed. If that were to happen to China, this might rupture the social compact between the CCP and the Chinese people that offers them constant improvement in their standard of living while they tolerate the monopoly on power of the party.
A slowing Chinese economy is not only bad for China; it has also been causing serious economic ripples in global markets. For instance, the international commodity markets have nosedived, as demand from China has shrunk to levels not seen for a long time.
As things stand, there is not much prospect for improvement as the global oversupply from investments in these sectors, planned or undertaken when demand for these commodities was high, keeps piling up.
Sushil Seth is a commentator in Australia.
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