The emergence of divergent prescriptions for China’s slowing economy has fueled speculations of a feud among Beijing’s top leaders. China economy expert Osamu Tanaka takes a sober look behind the headlines to analyze the likely directions of Beijing’s economic policy.
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As the Chinese economy enters a period of more moderate growth, many media reports have increasingly pointed to what appear to be cracks in the Beijing consensus. There is an element of sensationalism in such articles, though, and in the following I will examine whether a leadership struggle really exists with reference to recent economic performance.
A Look at the Numbers
Let us first take a quick glance at the major economic indicators for January–August 2016 released by Beijing. China’s gross domestic product for January–June grew in real terms by 6.7% over the same period the previous year. The breakdown by quarter is 6.7% for January–March and 6.7% again for April–June. Most leading industrial democracies release quarter-on-quarter statistics, though, and if this is applied to China, the economy grew by 1.6% in January–March over the previous quarter and by a slightly higher 1.8% in April–June. The higher figure for the second quarter comes from the fact that the implementation of projects earmarked in the fiscal 2016 budget and the latest five-year plan covering 2016–20 began in earnest in April following deliberations at the National People’s Congress in March.
Per capita disposable income, meanwhile, grew by 6.5% in real terms—a slightly lower rate than GDP. Until last year, Beijing sought to keep personal income growing faster than the economy with a view to raising labor’s share of the economic pie and encouraging personal consumption. But since this year, attention has shifted to lowering business costs, such as by limiting hikes in the minimum wage. Should this trend continue, there could be a dampening of growth in personal consumption.
The economic indicators that Premier Li Keqiang considers most important are those for employment. In January–August, 9.5 million new jobs were created, putting the annual target of 10 million well within reach. The official registered unemployment rate in major cities at the end of June, meanwhile, was 4.05%; this, too, is within the target of keeping the jobless rate under 4.5%.
Industrial output in August was 6.3% higher in real terms than year-ago levels; while overall growth has been hovering between 6.0% and 6.9% since March, auto production, in particular, grew by 24.7%, reflecting the introduction of preferential taxes on low-emission vehicles in October 2015.
As for consumption, total retail sales of consumer goods in August grew by 10.6% over the same period the previous year. Consumption has been rising by over 10% since the beginning of the year, with sales in the auto and ecommerce sectors increasingly robustly by 13.1% and 26.7%, respectively.
Fixed asset investment in urban areas in January–August increased by 8.1% over the same period in 2015. Growth rates have been in single digits since January–May, despite the fact that infrastructure investment rose by 19.7%. This is seen as being due to the easing of property development investment from 7.2% growth in January–April to 5.4% and the sharp slowdown in private investment from 10.1% last year to just 2.1%.
Exports in August continued to decline, shrinking by 2.8% from year-ago levels, while imports edged up 1.5% for the first rise in 2016. This suggests that domestic demand is firming, leading to higher imports of crude oil in volume terms. This could lead to the lowering of the trade surplus, possibly further dragging down the growth rate.
As the above overview of various indicators shows, there are both positive and negative factors in China’s economic outlook. The numbers for employment, industrial production, consumption, and infrastructure investment are relatively strong, but there are weaknesses in personal income, private investment, and external demand. All in all, the economy’s momentum may be flattening out—a phenomenon that has been described as an “L-shaped” curve.
Signs of Discord
Many media reports have speculated on a souring of relations between Xi Jinping and Li Keqiang, as evidenced by the fact that the two leaders failed to shake hands following the latter’s delivery of the Report on the Work of the Government at the National People’s Congress in March 2016. Even more telling than such outward signs of discord were the conflicting explanations given on supply-side structural reforms at the NPC, revealing a rift in the two men’s thinking on policy.
1. The Economic Report by the National Development and Reform Commission
Supply-side structural reforms were proposed by President Xi Jinping in November 2015 during a meeting of the Communist Party of China’s Central Leading Group on Financial and Economic Affairs, and the details were worked out during the Central Economic Work Conference in December. They formed the basis of the structural reforms that were announced at the NPC on March 5 by the National Development and Reform Commission, as outlined below:
(1) Cut overcapacity
Support will be provided in helping turn around and upgrade the steel, coal, and other industries, with priority being given to ensuring that workers who are laid off are resettled and provided with employment.
(2) Lower business costs
Efforts will be made to reduce transaction costs imposed by government, labor costs, the tax burden, financing costs, energy costs, land-use expenses, and logistics costs. The possibility of reducing social insurance premiums will be explored by streamlining and consolidating old-age insurance, medical insurance, unemployment insurance, workers’ compensation, maternity insurance, and the housing provident fund.
(3) Reduce commodity housing stock
Rural migrant workers will be encouraged to purchase homes in small and medium-sized cities, and the housing rental market will be developed by encouraging individuals and investors to purchase commodity housing stock.
(4) Strengthen points of weakness
The task of poverty alleviation will be integrated with efforts to support the upgrading of equipment and technology in enterprises, working to reinforce points of weakness in both hard and soft infrastructure. Education will be comprehensively developed, and the capacity to conserve ecosystems and improve the environment will be increased.
(5) Guard against and defuse financial risks
Sound anticipatory mechanisms for monitoring, assessing, and responding to financial risks will set up, and contingency plans for handling risks in the stock market, foreign exchange market, and bond market as well as the mechanism for financial institutions exiting the market will be improved. Banks will be supported in writing off nonperforming loans, and there will be a harder crackdown on financial fraud and illegal fundraising.
2. Report on the Work of the Government by Li Keqiang
The NPC in March also heard a report from Li Keqiang on the Work of the Government, which cited six supply-side structural reforms that were at variance with the substance of the proposal issued by the Central Economic Work Conference:
(1) Deepen deregulation
The requirement for government review and operating permits will continue to be cancelled for more matters.
(2) Implement strategies to release the whole nation’s potential for starting businesses and making innovations
Additional tax deductions for research and development by enterprises will be implemented, and mechanisms will be built to help people to pool their ideas for business startups and new innovations.
(3) Cut overcapacity, lower costs, and improve business performance
The overcapacity in the steel, coal, and other industries facing difficulties will be cut in a focused manner. The issue of “zombie enterprises” will be proactively addressed by using measures such as mergers, reorganizations, debt restructurings, and bankruptcy liquidations. Measures will be taken to reduce the transaction, logistics, financial, and energy consumption costs of enterprises.
(4) Improve the supply of goods and services
The quality of consumer goods will be improved, manufacturing will be upgraded, and the development of a modern service sector will be accelerated.
(5) Push for progress in SOE reform
State-owned enterprises, especially those managed by the central government, will be prompted to make structural adjustments so that some will be developed through innovation, others will be reorganized or merged, and still others will exit the market. Steps will be taken to diversify their types of equity, reform their personnel management system, and relieve them of their obligations to operate social programs.
(6) Energize the nonpublic sector
Restrictions on entry into markets such as electricity, telecommunications, transport, petroleum, natural gas, and municipal public utilities will be significantly relaxed. Private companies will enjoy the same treatment afforded to SOEs in terms of project verification and approval, financing, fiscal and tax policies, and land availability. In accordance with the law, equal protection to the property rights of entities under all forms of ownership will be provided.
The General Office of the Central Leading Group on Financial and Economic Affairs is headed by Liu He, who is also vice-chairman of National Development and Reform Commission. He is, moreover, a top economic adviser to Xi Jinping, so it is no surprise that the commission’s economic report at the NPC faithfully reiterated the five major tasks for supply-side structural reform identified by Xi. What is surprising that there should be discrepancies with the Report on the Work of the Government by Li Keqiang.
Last year’s report by Li initially failed to include one of the “Four Comprehensives” policy goals of Xi Jinping—specifically, “comprehensively strictly govern the party”—but was added at the last minute, so an attempt had been made to maintain a semblance of unity. The absence of such deference this year is a telltale sign of a rift in the economic policy orientations of the two men
Renmin Ribao Interview with an “Authoritative Person”
Of the five supply-side reforms in the economic report by the National Development and Reform Commission (NDRC), three (cut overcapacity, reduce commodity housing stock, and guard against and defuse financial risks) are in response to the fallout from the massive economic stimulus measures implemented in 2009–10 and are nothing new. The goal of supply-side structural reform essentially lies in boosting total-factor productivity and increasing the potential growth rate, so normally measures focus on promoting deregulation, innovation, and private-sector dynamism. In that respect, the six reforms outlined in the Li report are more in line with the stated goal than the five items on Xi’s list.
The economic report embracing Xi’s position was unclear, moreover, on how supply-side reforms would be linked to “Comprehensively Deepening Reforms,” announced at the third Central Committee plenum in November 2013. Because the bulk of excess capacity plaguing China today is to be found at SOEs, the problem of overcapacity should normally be addressed in tandem with SOE reform and the energizing of the private sector. The wording of the economic report, though, gives the impression that reducing overcapacity would be tackled first and that SOE reforms would be put off for now—suggesting a slowdown in the pace of SOE reforms. A need therefore arose to clarify how the issues of overcapacity and SOE reforms would be addressed so as to avoid confusion during the process of implementation. Such clarification was apparently the aim of the interview with an “authoritative person” that was published, without prior notice, on May 9 in the Renmin Ribao ( People’s Daily ).
Considering that priorities were worked out by the Central Leading Group on Financial and Economic Affairs, the lengthy “interview” could very well have been written collectively by Liu He, head of the group’s General Office, along with his two deputies Yang Weimin (former secretary general of the National Development and Reform Commission) and Yi Gang (concurrently deputy governor of the People’s Bank of China). The reason for this is that the article contains many technical details of financial operations, such as leveraging, and probably could not have been written by members of the National Development and Reform Commission alone, who tend to be relatively unfamiliar with financial issues. A member of the commission reportedly wrote an opinion piece in late August calling for further monetary easing but later retracted it in the face of a backlash from the People’s Bank of China. Since the interview piece is largely negative toward monetary easing, it is unlikely to have been penned by Liu He alone.
Other reports suggest that the interview was a veiled attack against Li Keqiang by officials close to Xi Jinping, but this, too, is unlikely, as it actually acknowledges Li’s policies to a considerable degree, as the following suggests:
(1) View of the economy
The “authoritative person” notes that the Chinese economy is likely henceforth to follow an L-curve trajectory, rather than a U- or V-shaped recovery. This has been interpreted by some as a criticism of Li Keqiang, who is wont to contend that the economy is on an upswing. An April 29 Politburo meeting hosted by Xi Jinping, though, also noted that the economy was off to a good start in 2016.
The reference to an L-shaped trend was first made by the spokesperson for China’s National Bureau of Statistics during an April 15 press conference announcing the GDP figures for January–March 2016, so there does not appear to be a major discrepancy in the views of the CPC and the government.
Li Keqiang, moreover, never voiced any expectations of a rapid V- or U-shaped recovery; he does not advocate short-term economic stimulus measures unless there is a serious deterioration in employment figures and favors, rather, the steady implementation of structural reforms and adjustments.
(2) Tone of policy
The “authoritative person” also comments that the employment situation is generally stable and that there are no fundamental changes. He cautions against flooding the economy with stimulus measures, which may result in short-term expansion but could later lead to the worsening of economic conditions. Short-term stimulus measures will not be implemented, in other words, as long as the jobless rate remains low.
With regard to monetary policy, the “interviewee” points to the need to completely abandon the fantasy that additional monetary easing can accelerate economic growth or lower leverage ratios through an increase in the denominator—especially as the threshold effect of expanding the money supply to stimulate the economy diminishes.
While citing the need to reduce the number of bankruptcies and liquidations, he nonetheless calls for the courage to dispose of “zombie enterprises” when there is no way to save them, shutting them down or legally allowing them to go bankrupt rather than reflexively resorting to debt-equity swaps or engaging in “matchmaker” realignment; such attempts to deceive both oneself and others are too costly, he notes, and would sooner or later become a big burden.
The interviewee also cites the enthusiasm, initiative, and creativity of entrepreneurs, innovators, and leaders at all levels as key factors in raising productivity.
These four points are in basic agreement with the views of Li Keqiang and other reformists in the CPC.
Maintaining a United Front
The premier called a regular meeting of the State Council on May 18 to launch full-fledged reforms of SOEs under the jurisdiction of the central government, following the go-ahead for these and other supply-side structural reforms confirmed at the Central Leading Group on Financial and Economic Affairs two days earlier. Also, a May 20 meeting of the Central Leading Group for Comprehensively Deepening Reforms reached a decision to accelerate supply-side reforms, including those of SOEs
(1) May 16 meeting of the Central Leading Group on Financial and Economic Affairs
The May 16 meeting of the Central Leading Group on Financial and Economic Affairs was chaired by Xi Jinping to consider the implementation of supply-side structural reforms and measures to expand the middle-income sector. The meeting cited the views of both Xi and Li, identifying five supply-side reform priorities, such as cutting industrial overcapacity and excess real-estate inventory, deleveraging, reducing business costs, and strengthening points of weakness, while also noting that the essence of these measures were to deepen reforms in SOEs, transform government functions, and carry out overhauls in such areas as pricing, fiscal policy, taxation, finance, and social security.
(2) May 20 meeting of the Central Leading Group for Comprehensively Deepening Reforms
The May 20 meeting of the Central Leading Group for Comprehensively Deepening Reforms, also chaired by Xi Jinping, made an attempt to coordinate the two leaders’ policy positions as well. Xi noted that tools of reform must be used to promote supply-side structural adjustments and that the introduction of key reforms need to be stepped up to accelerate basic reforms in the areas of SOEs, fiscal policy, taxation, finance, pricing system, agriculture and rural areas, openness to foreign investment, social security, and “ecological civilization.” At the same time, the meeting called for the drafting and implementation of measures to address each of the five supply-side reform areas, namely, cutting overcapacity, reducing housing stock, deleveraging, reducing business costs, and strengthening weaknesses.
(3) July 26 Politburo meeting
Xi Jinping subsequently hosted a Politburo meeting on July 26, which analyzed and deliberated on economic conditions going forward and outlined the measures to be taken in the second half of the year. Mention was made of the need to continue deepening reforms in such priority areas as deregulation, fiscal policy, taxation, finance, innovation, and SOEs. In his remarks, Xi linked these reform areas with priority policy goals, noting that the key to reducing overcapacity and deleveraging was deepening fundamental reforms of SOEs and the financial sector; that the approach to reducing housing stock and strengthening points of weakness lied in organically linking the orderly process of urbanization with the incorporation of migrant rural workers into city populations; and that business costs could be lowered by enhancing labor market flexibility, suppressing asset bubbles, and lowering the macro tax burden. This was an additional attempt to link the five supply-side reforms with the comprehensive deepening policy goals.
As the above shows, what appeared to be a temporary divergence of views regarding supply-side structural adjustments and the comprehensive deepening of reforms—as espoused, respectively, by Xi Jinping and Li Keqiang—the discrepancy has now been largely eliminated through coordination by members of the Central Leading Group on Financial and Economic Affairs. Such efforts were no doubt propelled by the need to create a united front ahead of the Group of 20 summit in Hangzhou, China, especially in the face of volatility in renminbi trading.
With the CPC National Congress slated for 2017, the jockeying for top party positions is bound to intensify. Reading too much into the appearance of discord at the top, though, will only hinder an objective analysis of China’s economic policy direction. What is more important is to look closely at the decisions reached at major councils and at the statements made by top officials.
