By Satoshi Saek / Yomiuri Shimbun Deputy Managing EditorThe administration of Xi Jinping in China has declared high-quality economic development to be the goal for its second term. Can his economic team achieve this aim? His unipolar system casts a shadow over it all.
2 major risks
“We will devote more energy and take more concrete measures to deepening reform in all areas, expanding, opening up ... [and] promoting high-quality economic development.”
This was the declaration of President Xi during the closing speech of the National People’s Congress of China on March 20. The approach of shifting the focus of economic development from growth rate to growth quality has been made clear. This can be considered a step away from the “new normal,” which assumes mid- to high-speed growth.
The economic team (see chart 1) for Xi’s second term was set up during the National People’s Congress in order to achieve this target of high-quality development. A source with knowledge of Japan and China said, “This is a lineup focused on trade relations with the United States and financial risk, which are the most important issues at the moment.”
Xi has high hopes for Vice President Wang Qishan as a negotiator with the United States. Considering that he relinquished his seat on the Politburo Standing Committee during last year’s National Congress of the Communist Party, his appointment to vice president was unusual. It appears that the plan going forward is to utilize Wang’s wealth of experience in negotiating with the United States at critical junctures to calm trade frictions.
Liu He who was promoted to vice premier, will serve as the core of the economic team.
Liu was director of the General Office serving the Central Leading Group for Financial and Economic Affairs, which led Xi’s macroeconomic policy and promoted the reform of the supply industry, such as by reducing the number of factories that overproduce steel. As a reformist economic bureaucrat who studied at Harvard University in the United States, Liu is Xi’s economic brain.
During the National People’s Congress, this leading group was elevated to become the central committee for financial and economic affairs. It is widely thought that this organization will be strengthened under Xi’s initiatives.
The other important issue is financial risk policy, and the key to this is the close cooperation between two practical bureaucrats; Guo Shuqing, chairman of the China Banking Regulatory Commission and one of the “big four” who supported former Premier Zhu Rongji, an economics expert, and Yi Gang, the internationalist governor of the People’s Bank of China.
Liu’s lecture in late January at the annual World Economic Forum meeting in Davos, Switzerland, demonstrates how concerned he is about financial risk.
He said, “The Three Critical Battles which China is determined to fight include: 1) preventing and resolving the major risks, 2) conducting targeted poverty reduction, and 3) controlling pollution.” He likened difficult issues to fortresses that cannot be conquered easily and positioned the prevention of financial risk as the first battle.
In late March, right after being appointed as vice premier, he ordered executives of institutions including the People’s Bank of China to promote the development of sound and stable finances.
Shift toward service industry
Of course, the reduction of people living in poverty in rural areas and drastic cuts to the emissions of primary contaminants are essential to high-quality development. Additionally, further boosting added value in the service industry and correcting excessive investment in factories are also required.
As demonstrated by the tertiary sector of industry occupying over 50 percent of nominal GDP for three consecutive years, the economy’s transition toward the service industry is advancing (see chart 2). Fixed capital formation against GDP is in the 40-percent range, and excessive investment in factories continues. However, if future adjustments continue at the pace of the past three years, it is expected to drop to the 30-percent range (see chart 3). If this is the case, it should contribute to sustained high-quality development. In this field, the economic team is likely to achieve results.
However, as Liu pointed out, the most significant task is to effectively control risks, such as shadow banking and hidden local government debt, so that they do not turn into problems.
At a press conference during the National People’s Congress, He Lifeng, chairman of the National Development and Reform Commission and an important bureaucrat on the economic team, stated that the situation the Chinese economy faced in 2017 was extremely harsh and complicated and that there had been “black swan” and “gray rhino” incidents (see below).
Anbang Insurance Group, which grew rapidly through mass sales of insurance products claiming high returns, was placed under public management as its methods, such as repeatedly making large investments in foreign real estate, were seen as a problem. HNA Group, which has a stake in Hainan Airlines, fell into a debt crisis. These cases were mentioned by He to illustrate black swan situations, which involve a series of incidents.
Gray rhinos can be concerns about shadow banking and the increase of debt in state-owned and other companies.
The rapid increase of P2P (peer-to-peer) financing — in which individuals lend each other money through the internet — as a result of an influx of monetary investment is another cause for concern (see chart 4). The issue of debt in state-owned companies remains a major risk. According to the government, the debt owned by major state-owned companies was over 36 trillion RMB (¥620 trillion) as of the end of last year.
Is stagnation looming?
During the National People’s Congress, the stage was set for long-term rule by Xi, including reforming the Constitution to abolish presidential term limits. A unipolar system in which power is concentrated with Xi alone, resulting in policies being executed unilaterally, is a concern for economic management. During the reign of Mao Zedong, the Great Leap Forward and other reckless policies resulted in a tragic economic collapse.
The Xi administration expressed its philosophy by stating during the National People’s Congress, that China will strengthen and increase state-owned capital. It is likely that private enterprises will become controlled by the government. Shinichi Seki, vice senior researcher at the Japan Research Institute Ltd., said, “[As a result,] private vitality will be weakened, leading to decreased economic efficiency.”
Economic activities are bound to stagnate, as people fear state power and are too concerned with Xi’s mood. In addition to one-party rule, will a unipolar system hinder high-quality development? Success or failure depends on Xi himself.
■“Black swan” and “gray rhino”
“Black swan” refers to a problem that rarely occurs and can scarcely be predicted beforehand but significantly impacts the market, such as the collapse of Lehman Brothers in 2008. “Gray rhino,” coined by U.S. author Michele Wucker in 2013, refers to a structural problem that is highly likely to exist and causes a significant impact but tends to be neglected.Speech