Xi moves China towards softer landing

The risk of a hard landing for the Chinese economy doesn’t seem to be worrying economic commentators the way it used to. A few years ago there was a great deal of debate about whether the powers in Beijing could engineer the rebalancing of the economy — from a rapid growth, export focus to slower higher quality growth, led by consumer consumption.

In fact, it was dubbed the great rebalancing and the goals and targets were widely embraced by the public in China with typically patriotic zeal.

But with its high levels of corporate and local government debt, a building and infrastructure boom of historic proportions and vast manufacturing sector in full flight it was hard for many Western commentators — including myself — to understand how the transition could be achieved without some kind of financial crash — perhaps a property or equity market meltdown.

Now, Beijing appears to be in greater control of the economy than many in the West expected.

Of course the reality is that Beijing appears to be in greater control of everything.

For those who were hoping to see an ongoing transformation towards liberal democracy, this is worrying.

As was made very clear at the National People’s Congress earlier this month, there has been a centralisation of power back to Beijing — and specifically to one man, President Xi Jinping.

The biggest change — and the one that got the most attention in the West — was the one that effectively allowed President Xi to extend his term in office indefinitely.

But other big changes included the merger of numerous ministries and regulatory bodies, including China Banking Regulatory Commission combining with the China Insurance Regulatory Commission.

There were also many more subtle changes to wording and meanings within the constitution.

Their approval this month brings to the surface a trend which has been under way for some time.

To be fair, some Western journalists and academics operating inside China have been quietly noting the expansion of Xi’s power for several years.

Beijing based US economist Michael Pettis was one of the first to pick up on the strategy and recognise its importance to the process of economic rebalancing.

Pettis, a professor of finance at Peking University’s Guanghua School of Management, wrote last year that Xi’s strong man act may be the only logical way for China to rebalance without a calamitous debt crisis.

“China does not really need a more liberalised economy, doesn’t need to eliminate capital control. It does not need a larger degree of market role in the decision-making process. What it needs is a significant transfer of wealth, and for that we need to centralise the decision-making process,” he told the South China Morning Post.

Pettis argues that, putting aside the politics, and from a purely economic point of view, the reforms China needs require strong leadership over an extended period.

“My big fear if he didn’t have a third term is that he would be really reluctant to implement the reforms during this term because there’s almost no way you can do so without slowing the economy for many, many years,” Pettis said.

“So there’s no way he could’ve really reformed sufficiently without leaving 2022 in a pretty bad state.”

Pettis had for many years warned that China was at risk of a debt fuelled meltdown.

From a Western perspective it looked like a gloomy prognosis — because it was hard to see how an increasingly liberalising economy could reign in spending and production and rebalance.

But with Xi firmly in control Beijing has enhanced its ability to direct spending and borrowing and control production. Pettis believes it will avoid that hard landing.

This hypothesis raises difficult diplomatic questions for New Zealand.

Clearly, with New Zealand exports to China worth about $12 billion last year — plus billions more in Chinese direct investment — the last thing our economy needs is for our largest trading partner to suffer a financial crisis.

China’s economy will overtake Europe this year if everything goes to plan. And let’s face it, in China it usually does.

Bloomberg data shows China’s gross domestic product is forecast to reach about US$13.2 trillion in 2018, beating the US$12.8 trillion combined total of the 19 countries using the euro.

So we are positioned to benefit from Xi’s success.

But as Chinese interest in this part of the world grows — with New Zealand enthusiastically tacked on the end of The Belt and Road — we may have to learn to make sure our political voice is more clearly heard. Liam Dann is the Herald’s Business Editor-at-large