Deng Xiaoping
August in China has been anything but the quiet month of myth. Developments in the equity and foreign exchange markets and even the appalling industrial accident in Tianjin might seem mere bad luck when considered individually. Together, however, they symbolise a slow-motion denouement of China’s economic and political model. The country is now going through a crisis of transition, unparalleled since Deng Xiaoping set out to put clear water between China’s future and the Mao era.
The signs are that it is not going so well. Rebooting the authority and primacy of the Communist party, the pursuit of often contentious reforms, financial liberalisation and rebalancing the economy while trying to sustain an unrealistic rate of growth are complex and mutually incompatible goals.
Deng’s task in a pre-industrial society without a middle class and social media was, in many ways, easier. Determined to avoid the concentration of power in one individual, he empowered government bodies and ministers, especially the State Council and the prime minister, and encouraged openness and a consensus-driven political model. This worked well enough until the 21st century, but gradually tended towards atrophy. The party succumbed to corruption and paid scant attention to citizens’ concerns about social, environmental and product safety. The economy built up high levels of debt, overcapacity and an addiction to misallocated and credit-fuelled investment.
To address these serious problems, President Xi Jinping has turned the clock back. He has accumulated more power than any leader since Mao and consistently emphasised the Leninist need for “party purity” to avoid the fate of the Soviet Communist party. Among his first policies was an extralegal anti-corruption campaign that continues to this day. He has usurped the authority of government institutions by establishing party bodies, known as “small leading groups”, that are more numerous than ministries and hold sway over the most important functions of the state.
There was doubtless a strong case for some re-centralisation of power in China, especially to implement the party’s ambitious reforms. Yet while some reforms have made progress, many important ones affecting the role of the state in the economy and the introduction of market mechanisms have suffered from dilution and the opposition of vested interests. The clampdown on civil society, media, legal and non-governmental institutions has not helped. A strong central authority, perversely, has stifled important reforms, removed authority and accountability from those institutions responsible for carrying them out and produced conflicted decision-making.
Xi Jinping
That is why August’s events matter. Encouragement of the stock market was supposed to be a weathervane for market mechanisms and a more efficient allocation of capital. But equities suffered a relapse, following extraordinary support measures estimated at more than $150bn. The indices are still flirting with the nadir reached in early July. Caught between its roles as cheerleader and regulator, the government has shown a lack of trust in the very market forces it sought to introduce.
This month’s mini-devaluation of the renminbi was explained officially as an incremental change to China’s financial liberalisation, designed to help the currency’s admission later this year to the International Monetary Funds’s accounting unit, the Special Drawing Right. Yet the action was communicated poorly at best. Again, the authorities have been conflicted, torn between a strong renminbi policy to help rebalance the economy, and a softer one to respond to weakening growth. Economic statistics this summer, especially for exports, manufacturing and investment, were disappointing, underscoring that weaker performance for the past four years has become impervious to stimulus measures, which this year already add up to more than 1 per cent of gross domestic product.
A central part of the challenge for China will be its ability to manage employment, a more politically sensitive indicator than GDP. The official unemployment rate, supposedly about 4 per cent over many years, is fiction. Current developments in investment and labour-intensive construction, the low registration for unemployment benefits among those without urban registration status, the weakness of the benefit system and the difficulties of finding suitable work for 7m graduates a year are among many reasons to believe that the jobless rate may not only be higher than the 6.3 per cent estimated by the International Labour Organisation but rising.
China’s economic transition was always going to be difficult, but developments this year suggest that things
are not going according to plan. The
centralisation of power is proving to be
a double-edged sword for reform, the anti-corruption campaign is choking off initiative and growth and the economy cannot be kept on an unrealistic expansionary path by unending stimulus.
The time for accepting a permanently lower growth rate is drawing closer. It will test the legitimacy and reform appetite of China’s leaders in ways that will determine the country’s prospects for years to come.
By George Magnus, MDT/Financial Times exclusive (The writer is an
associate at Oxford university’s China Centre and a senior adviser to UBS)
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