China’s economic turmoil isn’t a mistake — it’s part of Xi’s new grand plan


David Scutt, Business Insider Australia

China’s communist party (CCP) has come in for some stark criticism this year. Lousy economic data, a sharp slowdown in the economy (at least by non-official measures) and a bungled attempt to rescue the stock market after the state-sponsored bubble popped has led to many outside the nation to question the leadership of president Xi Jinping.

Not only have doubts over Xi’s handling of the economy grown, but they have weighed on global markets. Weakness that started in China spread to Asia and eventually to Wall Street. While Chinese weakness was not the only reason for its decision, it did contribute to the US Federal Reserve holding off on lifting interest rates at its September FOMC meeting.

The world, let alone the markets, is nervous about what’s truly going on within the economy. As the chart below shows, recent economic data out of China has hardly been stellar.

But perhaps there are other factors at play which those anxious about China’s slowdown need to consider. Xi, unlike his predecessors, is not a reactionist. He doesn’t rush to turn on the stimulus taps at the first sign of economic weakness, avoiding the trap of stimulating the economy to ensure short-term growth targets are met without considering the long term consequences. No, maybe what we’re seeing today is Xi playing the long game, taking short term economic pain to ensure long term economic gain.

According to Evan Feigenbaum and Damien Ma, writing on Foreign Affairs, there is a method to Xi’s disorienting economic approach.

“Far from ‘mismanagement’, as some commentators have called it, the turmoil in China’s economic policy process seems instead to be the deliberate byproduct of the leadership’s emphasis on politics and party-building,” write the pair.

“The leadership’s efforts to fix the party have come, in effect, at the expense of their predecessors’ long-standing and singular focus on near-term growth. But that is not all: Xi’s team is also choosing, as a direct consequence of this focus on rectifying and rebuilding the CCP, to constrain the government’s capacity for economic management, not least by pulling China’s technocratic bureaucracy into the whirlwind of elite politics.”

They suggest that the fear over recent actions taken by China’s political leaders have been “badly misunderstood” by markets, something that is due to investors and businesses growing accustomed to the ways of Xi’s predecessors who had a tendency to bolster investment and stimulate growth by pumping more money into the economy at the first sign that the economy was weakening.

Despite the slowdown in the economy, the pair note that China’s leadership seems comparatively relaxed about recent developments in the economy, a response at the polar end of the spectrum compared to global financial markets.

Feigenbaum and Ma attempt to explain the vastly different response.

“Barring an economic implosion (which is not on the horizon), the leadership is content to pursue its principal goal of rebuilding the CCP. And some important reforms are proceeding—for example, the September decision to liberalize dozens of prices and to rely on the market to set natural gas and power tariffs,” they write.

While the pair admits that more difficult and politically fraught reforms have been shelved or postponed while the CCP attempts to repair itself – allowing market forces to play a greater role in the stock market a case in point – they do not believe what is currently occurring in the economy is unplanned, or the result of a policy misstep. It’s merely part of a deliberate plan to bring the Chinese economy into the 21st century.

China’s has changed the way it responds to economic fluctuations, and perhaps it’s time the markets did likewise. Yes, its economy is slowing, but there’s no sign it is falling into an abyss.

While that will not help to boost economic growth globally over the short term, it certainly reduces risks of a more significant hard landing in the future. That, alone, should be enough to calm long term market nerves.



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