Troubled times ahead for China

S P SETH

The state of China’s economy, and its impact on the country’s social and political stability, continues to figure prominently, even more so in the context of the recent National People’s Congress (NPC) meeting. China’s economy has slowed down from its double-digit growth some years ago to just under 7 per cent. There are even suggestions that the real growth might be much lower, probably as low as half of that. At around 7 per cent, though, China’s economy comparatively is doing much better than most other countries. However, there are serious problems emerging and some of it were acknowledged by Prime Minister Li Keqiang in his annual state-of-the-nation report to the NPC. For instance, talking of economy in general, Premier Li said in his report that, “Domestically, problems and risks that have been building up over the years are becoming more evident.” As a result, “Downward pressure on the economy is increasing.” He, however, maintained that, with appropriate adjustments, it would be possible for China to achieve an average annual growth rate of 6.5 per cent in the next 5 years.

And what are these problems? A major problem is that over the years some crucial industries have built up overcapacity that is weighing down on the general economy. For instance, there is now a glut of coal, cement, steel and other industrial commodities. Even as these industries have created high level of pollution, their profits have declined and some are even losing money. These and other industrial enterprises would need to be overhauled/closed, leading to massive loss of jobs. And it is already happening. As Li put it, “We will focus on addressing the overcapacity in the steel, coal and other industries facing difficulties.” Besides: “We will address the issue of ‘zombie enterprises’ proactively yet prudently by using measures such as mergers, reorganizations, debt restructurings and bankruptcy liquidations.” In other words, the economy will undergo a severe shake up and the resultant loss of jobs will not be without social unrest.

The legitimacy of China’s ruling system is largely based on an implied compact between the regime and China’s masses where its people abide by the Communist Party’s monopoly power in return for a progressive improvement in their economic conditions. The government is not unaware of the social problems that might arise from loss of millions of jobs and is setting aside about $15 billion to support laid-off workers. But such economic disruptions are never easy and inevitably cause social unrest. Already, protests are happening in some regions and industries--mining for instance-- over loss of jobs and unpaid wages. The scale and management of such unrest will be an important challenge for the political system. The economic turbulence recently experienced by China’s stock market, affecting millions of small investors earlier encouraged by the government to make good money through this seemingly ever-expanding channel, is another example of the general malaise. At the same time, its exports sector, once an important source of economic growth has slowed down, which has also caused unemployment.

Faced with slow economic growth and its inevitable social consequences, the Chinese government is easing its credit policy, though it is till not sure how far to go with injecting more liquidity. Such ambivalence is the result of a mountain of debt that has piled up following the stimulation of the economy after the 2008-9 global economic crisis. The total debt is said to be 2.5 years of its economic output, and there are questions being asked about its manageability. The views on this are varied. One view is that with its monopoly power, the ruling Communist Party of China (CPC) will not allow things to get out of control in any and all spheres of national life. Which is true but we have seen that its instruments of control didn’t help much when the stock market went berserk. If anything, it tended to aggravate the situation.

It has, of course, large foreign exchange reserves of over $3 trillion. Which might seem huge, but once the draw down begins they might not last long. China has already spent some of these reserves to support its currency from falling too precipitously. Then there is the flight of capital, caused by nervousness about the economy. As one American fund manager is quoted to say in the Sydney Morning Herald, “There are 1.3 billion people in China. If 4 per cent of the population took out their $50,000 limit, the $3.3 trillion in foreign reserves is gone…” At the same time, there are said to be a trillion dollar worth of seriously bad debts on Chinese banks’ books. Developing his argument about serious risk for China’s economy, Kyle Bass, the fund manager at Hayman Capital Hedge Fund, based in Dallas, USA is quoted to say, “The Chinese financial system is overstretched [likely to be further overstretched with more easy money]. China let the banking system grow 1000 per cent in 10 years.” And he adds, “China’s [ratio of] bank deposits to resources is one of the worst in the world.” And this cannot continue without causing economic tremors.

It is not a pretty picture. Its implications are quite bad for both global and domestic economies. China’s growth is now quite enmeshed into global economy. Its stimulation after the 2008-09 global financial crisis helped to mitigate the financial meltdown. In commodity-based economies like Australia, Canada, Brazil and others, it even ushered in a period of great prosperity. And its slowdown and stock market gyrations are causing great economic distress in parts of the world because of falling demand from China for commodities like iron ore, coal, oil and gas. There is a great need for China to stabilize its economy through sensible transition from exports and construction-led phase, which is almost all it has known in the last few decades, to a consumption-led domestic growth. The government knows this but it is not working as well and as fast.

And in the interim period, the restructuring of the economy leading to massive unemployment is creating unrest. And dealing with it through rough and ready and top heavy exercise of power, that has been the feature of the system, will be quite challenging. Indeed, President Xi Jinping is busy further consolidating his power, being christened as the ‘core’ leader in the tradition of Mao Zedong.   Does it mean, by any chance, that China’s ‘supreme’ leader is gearing for uncertain times ahead?

It doesn’t’ however, mean that China’s economy or system is going to crumble. What it means is that the seriousness of its economic problems might set in motion a process over a period of time that might erode the legitimacy and durability of the communist regime and all that underpins it. 

Note: The above article was first published in the Daily Times.