Written by 7:22 pm Wealth Building Views: [tptn_views]

Opinion | The Problems With China’s Economy Start on the Top

This is a deadly moment for China. The numbers portray a stalling economy, but there may be a much more profound concern. Chinese consumers and businesses are losing confidence that their government has the power to acknowledge and fix the economy’s deep-seated problems. If President Xi Jinping’s government doesn’t tackle this fundamental issue, another measures may have little impact in arresting the downward spiral.

Mr. Xi’s government has prioritized state enterprises, which hew closely to the Chinese Communist Party line and are under direct government control, over the private sector. Technology firms, including highflying fintech businesses like Ant Group, that were seen as having grown too big and powerful have been forced to interrupt up into smaller units and are actually subject to more state control. The crackdown, which intensified after Mr. Xi tightened his grip on power late last 12 months when the legislature amended the Constitution, allowing him to increase his reign, has also enveloped private firms in education and other sectors. In addition, the federal government’s apparent hostility toward foreign businesses amid rising geopolitical and economic tensions with the United States and other Western countries — which could affect China’s ability to keep up access to global markets and technology — are worsening the lack of confidence.

The government’s unwillingness to switch its increasingly untenable “zero Covid” policy, followed by the abrupt reversal of that policy last December, further undercut confidence within the policymaking process. This confidence problem is obvious in the tepid private investment and weak household consumption over the past 12 months. Reflecting their concerns about economic prospects, households are saving more and spending less on big-ticket items like cars. China’s currency, the renminbi, is depreciating in value as capital flows overseas and foreigners change into less willing to take a position in China.

The worrying cognitive dissonance between the federal government and entrepreneurs became apparent during a recent trip I took to China. It was striking how officials in Beijing seemed relatively sanguine in regards to the economy and argued that, in recent months, enough had been done to reassure entrepreneurs that they were seen as making necessary contributions to the economy. Entrepreneurs, alternatively, thought that the federal government’s actions spoke louder than its words and that actions taken to chop successful businesses right down to size were clear indications of its hostility toward private enterprise.

The reality, which Beijing seems to acknowledge only grudgingly, is that the private sector is crucial to maintain the economy chugging. The labor force is shrinking, which leaves productivity as the important thing driver of growth. Private enterprises, which made the country a worldwide leader in digital payments as an illustration, have tended to be far more progressive and productive than doddering state enterprises. The government’s desire to encourage domestic innovation and shift the economy toward higher-tech and green technologies cannot rely just on large state enterprises.

Small- and medium-size firms, particularly within the more labor-intensive services sector, are necessary for employment as well. Despite rapid growth in gross domestic product in recent many years, the Chinese economy has not been able to generate many latest jobs, because much of that growth has come from manufacturing investment, and the federal government has been attempting to cut jobs from bloated state enterprises. At a time of slowing growth this becomes a specific concern, as evidenced by the surging youth unemployment rate, which poses risks to social stability.

The increasingly centralized and infrequently wayward nature of policymaking under Mr. Xi has also hurt confidence. One example comes from the property sector, which Beijing has long relied on as a pivotal source of growth — and which had change into marked by speculative activity, partially because of presidency policies that increased the supply of mortgage financing. The Chinese government has rightly let some air out of this bubble, including by limiting financing for multiple home purchases and by tightening eligibility restrictions.

Some property developers told me that they understood the rationale behind the federal government’s actions but not the abrupt way during which some policy changes were introduced, leaving them little time to regulate. This has reportedly led to a pointy fall in housing prices and construction activity, which the federal government has now tried to compensate for by reversing some of the restrictions. Such abrupt policy shifts hardly encourage confidence. One view is that officials in Beijing “live above the clouds,” lacking a full understanding of how their attitudes and policies affect businesses.

Private enterprises see worrying signs of rhetoric that would have practical consequences. Mr. Xi’s “common prosperity” initiative, introduced in 2021 and officially described as an effort to quell public disquiet about rising income and wealth inequality, has been interpreted by successful entrepreneurs as being directed squarely at them. The initiative, which has spurred regulatory and anti-corruption crackdowns, has served as a cudgel against private businesses in addition to banks and even government officials straying from the party line.

The government’s response to the drumbeat of concerns about rising youth unemployment was to wash the discharge of those data. In doing so, it seems to consider that the spread of bad news is behind the lack of confidence. Similarly, whilst it becomes apparent that prices for goods and services are falling due to weak demand and excess capability in some industries, the federal government has pushed back against talk of deflation. Investors and analysts outside China have said that they’ve recently been denied access to a few of the services provided by Wind Information, a personal database with corporate and financial data that had been used to flag concerns about China’s financial markets.

While it has not publicly acknowledged the severity of the economic situation, there are signs that the Chinese government is aware that the confluence of domestic and external difficulties is making a deflationary spiral that can change into increasingly difficult to reverse.

The central bank recently cut rates of interest, but cheaper and more plentiful credit won’t get households or private businesses to spend more in the event that they are anxious in regards to the future. The move could also worsen currency depreciation and capital flight. Measures to chop income taxes and strengthen spending on health and education could help marginally bolster household consumption. Still, such measures may not amount to greater than Band-Aids.

The real challenge is for the federal government to explicitly recognize that and not using a strong relationship with its private sector, its hopes of remodeling the economy right into a high-tech one able to generating more productivity and employment growth are unrealistic. It must back this recognition up with concrete measures to support the private sector, including financial-sector liberalization that can help direct more resources to non-public businesses somewhat than state-owned ones. Transparency about information and about its policymaking process will help the federal government so much more.

President Xi might favor a command and control system, but he’s learning that private-sector confidence is the toughest thing to manage. And yet it’s critical for realizing his visions for the Chinese economy.

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Eswar Prasad is a professor within the Dyson School at Cornell University, a senior fellow on the Brookings Institution and the writer of “The Future of Money.”

Source photograph by Phill Magakoe/Agence France-Presse — Getty Images.

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