Why China’s Slowdown Will Lead to Sustainable Growth
In less than a week China’s modest, by-the-book devaluation of its currency appears to have escalated into a full-scale political crisis, complete with reports of a Mao-style purge of top leaders and tanks in Tiananmen Square. Suddenly, the world’s highest-flying economy appears headed for the brick wall of reality.
Reality doesn’t mean early onset doom and gloom.
The danger of making 2 plus 2 equal 5 or 6 in this volatile interim is all too real. So is another week of panic in the bond and equity markets—as bad as or worse than the wholly unwarranted freak-out we’ve just been through.
So costly, the incomprehension now raging through Wall Street. So revealing of the cartoonish version of China prevalent among investors since they transformed Deng Xiaoping, as hardened a political commissar as any, into an elfin magician who somehow turned the world’s largest Communist nation into a paradise of smiling free-marketeers.
Jinping isn’t leading China into some kind of Great Leap Backward.
Let us get a grip, look across the Pacific and recognize a complex political economy midway in a transition that was never going to be accomplished without difficulty.
The Cinderella of share investors isn’t about to turn into a pumpkin. Xi Jinping, a tough cookie ambitious to a fault in his pursuit of economic reform, isn’t leading China into some kind of Great Leap Backward.
Last week’s rout on Wall Street and the resulting stampede out of emerging-market bondswere bad enough as a response to the Chinese central bank’s 1.9 percent adjustment in the yuan’s trading range against the dollar. That move was motivated partly by weakness among Chinese exporters, but it merely brought the overvalued currency closer to a market-determined rate.
Reminders: We like strong Chinese manufacturers. We like floating exchange rates.
Now China’s perfectly predictable economic slowdown is supposedly so far beyond Beijing’s expectations that top Chinese leaders are erupting in internecine political battles faintly reminiscent of the late-Maoist years. So suggests The New York Times in an extensive analysis that led the paper Sunday.
No one knows how this will play out when the markets open Monday. Well or badly, it simply doesn’t add up. If this column were written on a math teacher’s blackboard, it would look like this:
Slower growth + anticorruption campaign ≠ political instability in Beijing.
Let’s separate out elements of this false equation so we can get past the muddle and see events clearly.
On the economic side, President Xi is engineering the transformation away from state controls that he promised when he came to office in 2013. It was inevitable that China would hit that moment Japan reached in the late-1970s, when the “miracle” phase gives way to the lower growth rates of a mature economy.
And here we are. A month ago, Beijing reported second-quarter growth at 7 percent, suggesting it will meet its 6.9 percent target for the year. With a target of 6.5 percent for 2016, its plain China’s years of 8 to 10 percent GDP expansion are behind it. But where’s the surprise?
Given that structural weaknesses not apparent in the headline numbers persist, Xi is falling back on some of the very interventionist policies he pledged to do away with. Bank lending policies and last month’s attempts to prop up Shanghai share prices typify the strategy.
My view of this falls between “So what?” and “Thank goodness.” It’s tough sledding now, but we’re watching a huge command economy in transition. As a psychiatrist friend used to tell his patients, Rome wasn’t unbuilt in a day.
That 7 percent GDP number is highly significant beyond the macroeconomics. Among China watchers, it has long stood as the round-number growth rate China must maintain to keep employment levels high enough to avert political instability.
This is to be watched, for sure. But if the Chinese Communist Party is adept at anything, it is surviving. My wager for years has been if the party needs growth to hover at 7 percent, it will. (I also bet that long term this will push China closer to a social democratic model than Chicago School neoliberals like to think.)
On the political side, Xi also promised to root out corruption when he took office, and he has pressed on assiduously. Categorically, no one can say how much Xi’s campaign reflects genuine concern about the extraordinary degree of corruption at senior levels of the party and government and how much it is the machete Xi wields against adversaries as he recentralizes power in his (many) offices.
Some of both is my read.
A few weeks ago, Beijing ousted a provincial party chief for the first time since Xi took office (but far from the first time ever). Since then, state-controlled media have published commentaries describing high levels of resistance to Xi’s economic reform agenda.
There’s no reason to doubt this. You find everything from neo-Maoists to Norwegian social democrats once you start interviewing party officials. But neither is there any reason to infer from this that Xi’s tight grip on power is threatened because the economy has entered a new phase in its transition.
On Sunday, I awoke to reports from two Beijing sources, both saying that tank battalions had moved into Tiananmen Square, one adding that former president Jiang Zemin and his sons “have been informally detained.”
Whoops. Along with The Times report, the markets will go berserk when this breaks, I figured.
I welcomed the clarity when it came. The tanks are rehearsing a September 3 parade planned to mark the 70th anniversary of Japan’s formal surrender on the mainland. As to Jiang, “He is 89, has had two strokes as far as I know, and is not in great shape,” a source close to the family wrote. “I seriously doubt he’s under any kind of detention order.”
So do I.
We’ve been misreading China for more than two centuries, conjuring crises from thin air from time to time. This time it’s costing us dearly.