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Global Economy / To preserve authority, Xi can’t afford 2nd-term economic slowdown

The Yomiuri Shimbun

By Satoshi Saeki / Yomiuri Shimbun Deputy Managing Editor The Chinese Communist Party’s National Congress (see below), which gathers once every five years, will meet this autumn. For the administration of President Xi Jinping, which is entering its second term, failure to manage the economy would cripple its standing. Even if it smoothly navigates the 19th National Congress, there could very well be lingering anxieties.

The operation of a new model of high-speed train between Beijing and Shanghai began in late June. The model running the line was named “Fuxing” (Rejuvenation) after Xi’s slogan of the “great rejuvenation of the Chinese nation.”

Xi enhances his image through any means possible. There is no doubt that economic policy requires scrupulous management, especially this year against the backdrop of a national congress. Under the Communist Party’s single-party rule, China’s politics and economics have become closely intertwined.

An important party meeting commenced early this month in Beidaihe, a summer resort town in Hebei Province, where party leaders like Xi and Premier Li Keqiang meet annually with retired party elders. The leadership roster for Xi’s second term will naturally dominate the agenda this year. But another major topic will likely be the current economic situation and policies for the second half of the year.

Financial risk

The Xi administration’s top priority is minimizing financial risk. In June 2015, stock prices tanked, which precipitated a plunge in the yuan (See chart 1).

When the People’s Bank of China decided to cut rates in November 2014 for the first time in two years and four months, investment funds flowed from the sluggish real estate market to equities. Government and official media recommended investing in stocks, triggering a sharp rise in the number of individual investors. The equities bubble, which expanded at a faster pace than the real economy, ended in the 2015 collapse.

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  • The Yomiuri Shimbun

If there is turmoil in the financial markets this year, Xi will lose face as supreme leader, which would severely undermine his authority and ability to drive an agenda.

Since last year, Xi’s government has focused on tightening measures against real estate investment. It continues to take steps such as raising mortgage interest rates and strengthening restrictions on the resale of houses (See chart 2).

Behind the tightening measures, there is believed to be increased concern about asset bubbles, such as a spike in real estate prices, and hikes in U.S. interest rates.

“Although there are certainly risks at present, they can be controlled on the whole.” In late June, Premier Li spoke at the World Economic Forum held in Dalian, Liaoning Province, where he announced a continuation of his tightening policy.

He also stated that “the main goal for the year as a whole can be fully realized,” predicting that this year’s growth target of “around 6.5 percent” can be achieved. For the Xi regime, achieving this year’s goal is critically important.

Overproduction

However, there are concerns about the future. Since last year, the Xi government has maintained aggressive fiscal policies to support the economy, such as implementing the infrastructure component of the 13th five-year plan (2016-20) ahead of schedule.

Nonetheless, statistics for the April-June 2017 quarter released on July 17 suggest that changes can be felt. Anxiety that the economy will start to slow down again could cast a shadow over the economy after the party congress.

Preliminary data showed a gross domestic product increase of 6.9 percent compared to the same period last year, and about the same rate as for the January-March quarter. Data from the first half of the year (January to June) likewise shows that investment in fixed assets, like urban public works and private capital investment, increased by 8.6 percent compared to the same period the previous year, a slowdown from the 9.2 percent increase seen when considering only the period from January to March. Condominium construction and other real estate development investment increased by 8.5 percent, a drop from the 9.1 percent increase in the January-March quarter. There are signs that real estate market conditions will cool down and be subject to downward pressure in the second half.

If the deceleration trend of the economy becomes too strong, there is a risk that the elimination of excess steel production and other facilities will not proceed as originally planned. There is concern that the weeding out of “zombie companies,” a pillar of supply-side structural reform, will be derailed.

Zombie companies that are effectively bankrupt due to excess production facilities and liabilities are said to make up half of all listed domestic steel corporations. If their elimination leads to a surge in unemployment, the economic slowdown will accelerate.

According to government figures, the government must prepare for the unemployment of about 1.8 million workers in the steel and coal industries alone due to adjustments in excess production capacity.

An increase in unemployment would likely lead to dissatisfaction with the regime, which could trigger riots and other forms of chaos. It is the last thing that the Xi administration, which prioritizes political and social stability, wants to see.

The Chinese government has set a goal of reducing steel production capacity by 50 million tons this year. Raw steel production capacity at the end of 2015 was 1,130 million tons, and production volume was about 800 million tons. Overproduction exceeded 300 million tons.

No matter how the government manages manufacturers’ idle facilities, some new construction will persist as well as indications that production capacity could actually increase. It is inevitable that these initiatives will stagnate, even more so if the economy slows down.

U.S.-China relationship

The United States’ posture has further deepened uncertainty. China ran a trade surplus with the United States of $117.5 billion (about ¥13 trillion) for the first half of the year, an increase of about 6 percent compared to the same period last year. U.S. President Donald Trump considers the enormous trade deficit with China to be problematic. If U.S.-China trade friction materializes, it will inevitably damage the Chinese economy.

At the Dalian forum, Li said of the global trend toward protectionism: “If we restrict free trade, we will create unfair trade. One must not forcefully make someone accept its own rules.” While he avoided naming names, he likely had his eye on the Trump administration and its “America first” policy.

One cannot truly call China’s domestic market open and free in light of its restrictions on foreign investment and vague administrative rules. Moreover, its leaders’ words ring hollow if they cannot fulfill their international commitments to rein in overproduction.

The Xi administration bears responsibility for achieving stable growth without postponing structural reform.

■ The Chinese Communist Party’s National Congress

A conference of the party’s top leadership held every five years. More than 2,000 people selected from party organizations nationwide, such as provincial and municipal governments, autonomous regions, the Party Central Committee, the State Council and the military participate on behalf of the party’s approximately 90 million members. On the opening day, General Secretary Xi Jinping will announce basic diplomatic, economic and social policies in a speech. The day after the Congress ends, top leaders are elected to the Politburo Standing Committee at the first plenary session of the Central Committee. Personnel decisions are informally arranged in advance and approved as a formality.Speech

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