China Fears Shock, Not Stagnation
For all the pressure weighing on the Chinese economy, and for all the warnings exhorting the Communist Party of China faithful to prepare for pain, Beijing has not exactly been acting like it’s a crisis.
Gross domestic product growth is quite likely to fall below 6 percent next year for the first time since Deng Xiaoping reformed the economy and opened up the country. Yet senior officials have been telling anyone who will listen that the government will not throw open the stimulus floodgates anytime soon. Chinese exports are dropping, particularly to the United States. Yet Beijing has shown near-zero willingness to make major concessions on structural issues in trade talks with the Trump administration. Private firms are defaulting on dollar bonds at a record pace, and a string of bank failures over the summer has authorities scrambling to prevent online rumours from triggering bank runs. Yet Beijing’s bailout packages have been cautious, at best, and for the first time, Beijing has been signalling a real willingness to let some investors and bankers pay the price for their imprudent decisions. The closely watched recent plenum produced no hints that Beijing is planning to change course.
This underscores three things: One, China fears shocks to the system more than a gradual loss of growth or economic dynamism. Two, its tools for staving off economic pain have become less effective, while the risks of using them have soared. Three, the worse conditions get, the more tightly the CPC will try to micromanage its way through the coming storm – inevitable trade-offs be damned.
To be clear, Beijing isn’t exactly letting a natural, cleansing recession take root. To goose growth, it’s implemented 2 trillion yuan ($284 billion) in tax cuts and pushed local governments to accelerate infrastructure spending. It’s doled out state support to more than 300 listed private companies facing a risk of default. This summer, it orchestrated a series of takeovers of ailing banks. And it’s expected to set a growth target just slightly lower than this year’s 6-6.5 percent window, despite deteriorating conditions at home and abroad. GDP figures in China are notoriously unreliable as a measure of real output. But such targets tell us quite a bit about how much economic activity Beijing expects local and provincial governments to generate – and how much it’s willing to let them binge on debt to get there.
Still, Beijing appears to be serious about breaking its habit of overreacting to the first sign of trouble, discarding painful reforms and deleveraging efforts en masse and flinging itself on the altar of debt-fuelled growth. Its fiscal stimulus this year, for example, has amounted to a small fraction of the trillions of dollars in spending it unleashed after 2008. Its monetary easing measures, meanwhile, have been aimed solely at staving off the liquidity crunch that has resulted from its crackdowns on systemic risks like shadow banking, not on turbocharging growth or staving off its inexorable structural slowdown.
The most obvious explanation for Beijing’s restraint is the fact that external conditions may very well get a lot worse in the next two years. The global slowdown currently underway is not the same thing as a 2008-style global crisis. Naturally, China is loath to use up too much stimulus firepower now – especially since it’s still cleaning up the mountain of debt and