China’s unpredictable and cumbersome governance threatens growth

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China enters 2022 with slightly less boast than a year earlier. A roaring economic comeback was then sparked by Covid-19 lockdowns, energy shortages and a cooling real estate market. Falling births and deteriorating international relations cloud the long-term outlook.

But what worries some keen observers of the Chinese economy is not one of those challenges: it is the government’s unpredictable and brutal process of dealing with it. Over the past year, this has manifested itself in sudden and disruptive online tutoring bans, campaigns against effeminate celebrities, intermittent restrictions on coal burning, and regulatory assaults on mainstream internet companies.

Certainly, coming data should show that China again saw solid growth last year. And the Chinese leadership seems to have gained the benefit of the doubt. With their mix of state and market, dubbed “socialism with Chinese characteristics,” they have presided over spectacular growth since 1978.

However, it is important to understand why. This did not reflect the enlightened interventions of state overseers, writes Barry Naughton, an economist at the University of California at San Diego, in “The Rise of China’s Industrial Policy, 1978-2020”. Throughout this period, “industrial plans and policies were proposed, only to be dismissed as unrealistic, impractical or dysfunctional”. On the contrary, expanding market forces have fueled China’s rapid growth, he writes. “Direct government intervention in the economy… was reduced to almost nothing during the years 1998-2005”.

Chinese President Xi Jinping, who has consolidated power in recent years, delivered his New Year’s speech in Beijing on December 31.


Photo:

jade gao / Agence France-Presse / Getty Images

As Chinese policymakers experimented endlessly – Supreme Leader Deng Xiaoping called it “crossing the river, feeling the stones” – they were determined to achieve the goal, Mr. Naughton said in an interview, “Growth. It replaced everything. This is one of the things that Japan, South Korea and Taiwan have in common earlier: They were companies that were looking for growth.

Since 2006, however, the Communist Party has changed course and increasingly sought to lead China’s development. Under President Xi Jinping, Beijing’s goals have multiplied, from decarbonization to increasing childbirths, so far without the tools to achieve them, Naughton said.

A prime example is Mr. Xi’s “common prosperity” campaign against inequality. Western market democracies have developed systems of progressive taxation and social transfers to reduce inequalities. China’s income tax generates relatively less income and barely affects capital income, Naughton noted. In 2014, China announced its intention to reform this system, but never came to fruition.

China saw a sharp economic slowdown in the third quarter as its pandemic rebound wears off – and now Beijing is tackling longer-term issues including household debt and energy use. Anna Hirtenstein of the WSJ explains what investors are watching. Photo: Long Wei / Sipa Asia / Zuma Press

Meanwhile, Beijing has not increased transfers to reduce the rural-urban divide and has only taken small steps to improve the tax resources of poor provinces, Naughton said. A speech by Xi last year captured this ambivalence. He called for “the equalization of basic public services”, while warning that a welfare state raises “lazy”.

In the absence of such tools of redistribution, the Communist Party instead turned to crackdown on wealthy business leaders, many of whom announced large charitable donations to appease Beijing.

The contradictions run through other policy initiatives: Beijing’s crackdown on real estate is in part aimed at keeping housing affordable, but it destabilizes real estate developers and threatens growth. Coal supplies have been curtailed by carbon emissions targets, increased mine inspections and an informal ban on Australian imports. But the price cap prevented many power plants from passing on the resulting higher coal costs, so they shut down.

While China lacks elections and institutions for liberal democracies to correct political failures, it had, since Mao Zedong’s death in 1976, developed its own self-correction mechanism through collective decision-making and limits. mandate in the upper echelons of the Communist Party.

The construction site of a development of the China Evergrande group in Wuhan last month. Beijing’s crackdown on real estate has destabilized real estate developers.


Photo:

Andrea Verdelli / Bloomberg News

But as Mr. Xi abandoned term limits and consolidated power, the policy increasingly reflects his personal judgment, without intermediary of influence from other parts of government or the private sector. Mr Naughton said, “Xi Jinping’s idea of ​​reform has always meant shorter and clearer chains of command. He defines an effective state as the effective transmission of a directive from the government. Other companies have tools to manage the trade-offs between competing goals, he noted. “But Xi Jinping behaves as if there is no compromise. ‘That’s just what I’m saying.’ “

The Wall Street Journal reported that Xi is keen to roll back China’s development towards capitalism, which he sees, as Mao Zedong did, as a transitional phase on the road to socialism. He is also a micromanager who intervenes often, unpredictably and sometimes vaguely in political issues large and small, the Journal reported. One of the results, some Chinese observers say, is a risk-averse bureaucracy that amplifies rather than moderates Xi’s interventionist impulses.

“One of Xi’s legacies has been to make officials err on the side of rigor in enforcing controls, so party officials are now trying to prove that they are more Marxist than the general secretary.” , Dan Wang, who analyzes China’s tech sector for Gavekal Dragonomics, a research service, written this week. “It’s a safe bet that the government will control too much rather than too little. “

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This poses two distinct sets of risks. The first concerns the economic dynamism of China. China’s commitment to “let liberal market forces determine the results” is losing credibility, said Dan Rosen, partner in charge of China research at Rhodium Group. “They say more and more that political decisions will be made, regarding market share, access to capital, control of all these industries that are re-regulated. All indications are counterproductive.

Mr. Wang is less worried: “It will take more than this regulatory campaign to defeat the dynamism in China. In retrospect, we might consider this summer to be China’s culmination in taming the excesses of its own golden age. “

The second risk is for the world. China’s policymaking becomes more opaque and less predictable when its size and connections to the world are greater than ever before, much more than in the 1970s, when one-man rule under Mao Zedong prevailed for the last time.

Write to Greg Ip at [email protected]

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