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Nobody believes that the current outbreak of a new strain of coronavirus, so far responsible for 361 deaths, is the fault of Chinese President Xi Jingping. But he will be held responsible in China. Anger is surging against all levels of government. Video of government and military officials taking donated and more protective face masks away from doctors has gone viral. Social messages wonder if the government withheld knowledge of the coronavirus outbreak as it did the the 2002 outbreak of the SARS virus.
Nobody believes that rising pork prices or the fear of pork scarcity are the fault of President Xi. But he will be held responsible in China.
Same with the protests in Hong Kong–he will be held responsible.
And most importantly of all, in the streets and in the offices of the highest levels of government, Xi will be blamed for the slowing of China’s economy.
It’s the last audience that counts the most. The important body that will hold Xi responsible is the Chinese Communist Party.
When you successfully maneuver to get supreme power as Xi has, then everything that happens is your “fault.” Xi is arguably even more powerful than Mao, the founder of the 70-year old country. He has pushed through a repeal of the two-term limit and he can now hold the presidency for life. He has exerted his authority over the People’s Liberation Army. And he is now in charge of all the key bodies overseeing economic reform, foreign affairs, and internal security. And, just to be sure everyone understands who is boss, Xi orchestrated the inclusion of “Xi Jinping Thought” into the party’s constitution to guide the country into a “new era” of national rejuvenation.
But Xi’s power has some limits. He’s not North Korea’s Kim Jong-un, who in 2013 executed his uncle by marriage Jang Song-thaek, once considered the second most powerful man in Pyongyang. He’s not Russia’s Vladimir Putin, who rules without any organized opposition having jailed or exiled extra-party opponents and having coopted the Communist Party.
There is one effective check on his power–and that is the desire of the Communist Party and party leaders to remain in power, and the fear of those leaders that if the Communist Party doesn’t produce something like 6% annual GDP growth, the average Chinese resident will push back in whatever way is possible. If Xi can’t deliver the goods necessary to maintain Party control of China, then he will face internal opposition from the other leaders of the party. That opposition is only potential right now, but the potential does exist.
And President Xi knows it.
You can see something of what that might be like in the fallout from the Hong Kong pro-democracy demonstrations.There are senior Party officials who think that Xi has mishandled the situation. He should have been more forceful, some believe according to the little insight we have on the internal opinions of senior party leaders. There are even, apparently, some leaders who believe that Xi should have found a way to defuse the situation short of violence. In this context it really doesn’t matter that these two positions are irreconcilable. The point is that these internal critics blame Xi for the problem.
The same dynamic seems to be at work in the trade negotiations with the United States. Xi needs to fix the economic relationship with the United States–although it’s pretty clear that there’s no lasting consensus on how and that’s led to some “interesting” moments such as the rejection last May of the agreement that Chinese officials had negotiated with U.S trade officials. We know something went wrong. We know that the cover story–that there were issues with the translation–is close to unbelievable. We don’t know who in party leadership objected or why or what side Xi was on in this discussion. But we do know that there was a discussion that to some degree limited Xi’s ability to maneuver on in the talks.
But the big challenge now is how to accelerate the slowing Chinese economy. Even before the coronavirus outbreak a number of economists were projecting that growth in China’s GDP, which had already slowed to 6.1% for 2019 (the slowest growth in 19 years), would slip further. Moody’s Investors Service projected 5.4% GDP growth back in November.
And now even lower estimates are being published, even inside China. On Friday, January 30, China’s private sector Evergrande Research Institute said that it expected the coronavirus plus the trade war with the United Stated would reduce GDP growth in the first quarter to 4%–even if the coronavirus is contained by the end of April. (That would be the slowest quarterly growth rate since China began releasing these numbers in 1992 and down from 6% in the final quarter of 2019.) For all of 2020, the institute said the annual GDP growth rate will fall to 5.4% from 6.1% in 2019. Several Japanese investment banks have reported targets of 4% to 4.5% in the first quarter. In the United States Bloomberg economists are projecting that a severe but relatively quickly contained outbreak will take GDP growth down to 4.5% in the first quarter.
And it’s not just investment banks and private sector economists who are lowering their growth projections. I’m seeing new “chatter” that the country’s leaders are thinking of cutting their growth target for 2020. The target, set in closed-door meetings of the Central Economic Work Conference in December, is scheduled to be announced at legislative meetings scheduled for March. Back in December the best estimates were that the target for 2020 would be set at “around” 6%, a semantic drop from the 6% to 6.5% rate set for 2019. But now the thinking is that the target could be set as low as 4.5%. The idea is that missing the target in 2020 would be very bad for sentiment in China. Setting the rate at a level that would be relatively easy to beat and then beating it would provide a boost to sentiment.
That’s especially true since at this point no one knows what the course of the coronavirus pandemic will be. And no one knows whether the U.S.-China Part 1 trade deal might come apart over Chinese requests to delay the purchases of U.S. farm and energy goods promised in the agreement. Those two items add a lot of short-term uncertainty to any economic projections and targets for 2020.
But those two problems are susceptible to near-term fixes. It’s the long term trend toward lower growth that is a bigger problem and that is much harder to fix, if there is a growth fix at all.
China’s incredible economic growth rate in the last two decades as been fed by two commodities that are now in increasingly short supply.
First, there’s been the huge shift in workers from agriculture to industry. Back in 1978 agriculture accounted for 69% of all jobs in China. By 2019 that figure was down to 26%, according to the World Bank. That was a huge factor in economic growth since average productivity in other sectors of the Chinese economy was about 6 times greater than in agriculture.
But even the vast pool of rural workers isn’t inexhaustible and as early as 2015 urban employers started to complain about shortage of new workers. The 2016 five-year plan addressed that issue by promoting a shift in Chinese agriculture to something more like a U.S. model where more widespread use of machinery, fertilizers, and pesticides/herbicides increased farm productivity so that more millions of people would be freed to work in other sectors of the economy. There are clearly still gains to be made in agricultural productivity that will add more rural workers to the urban workforce, but they will require investments in the farm sector over the course of a large number of years. In other words, the years of easy additions to China’s economic growth from moving “excess” farm labor to the industrial sector are coming to an end. The figure to watch here is something called the Lewis Turning Point after Nobel-winning economist Arthur Lewis. The Lewis Turning Point is the moment when moving workers from agriculture to industry no longer produces economic gains. (The society does still have to feed itself either from the labor of its own farmers or by paying to import agricultural products.) The International Monetary Fund estimates that China will reach its Lewis Turning Point sometime between 2020 and 2025.
Second, China’s economy has been the beneficiary of a demographic youth dividend that has run out or is close to running out. An economy gets a growth boost when demographics are slanted toward the young. (Lots of reasons for this. They require less spending on healthcare and pensions, for example.) In January 2020 the Chinese Academy of Social Sciences issued a report saying that China’s “one child” policy and a general decline in China’s birth rate (plus an increase in life expectancy) had sped up the aging of China’s population. In 2017 China’s birth rate fell again with 17.2 million babies born compared to 17.9 in 2016. In 2018, the total number of births fell to 15.2 million, a drop of nearly 12 percent nationally from 2017. In mid-January 2020 the National Bureau of Statistics announced that in 2019, the total number of births fell to 14.6 million. That put China’s official fertility rate at 1.6 children per women. (The fertility rate required to maintain population levels is 2.1 children per woman, a figure known as “replacement level fertility.”) As with many official statistics in China, there’s some doubt about the accuracy of this number. Yi Fuxian, a professor at the University of Wisconsin-Madison, has written that China’s government has obscured the actual fertility rate to disguise the disastrous ramifications of the “one child” policy. According to his calculations, the fertility rate averaged 1.18 between 2010 and 2018.
Do you see an easy way to reverse these two big trends and put more gas in the Chinese economic engine? No?
How about even a hard, long-term solution?
I don’t have any policy suggestions. The big economic historical picture is that as wealth rises, people have fewer children.
The Chinese government raised the limit to two children from one in 2016. That produced a brief blip in the birth rate but by 2017 the decline in births had set in again.
The fear in government economic circles in China has been that the country will grow old before it grows rich. Avoiding that trap is the challenge now.
Any real solution will have to be a long-run solution. But the pressure on President Xi is in the short run. A 4.5% GDP growth rate in 2020 isn’t politically viable. Maybe Xi and party leaders can dodge the bullet of public discontent by setting the target at 4.5% and delivering 5.5% growth.
But even that raises the issue of HOW?
The likelihood is that the first steps in any solution will look like first steps that have been tried before. The People’s Bank will flood the economy with liquidity. The central and local governments will ramp up stimulus spending on infrastructure (even though the figures show this kind of spending is producing less and less return for the yuan.) That will probably mean selling more special government bonds to raise money for local spending. And it’s a good bet that the cap on the ratio of the budget deficit to gross domestic product will move higher. (Sort of like the U.S. “debate” on raising the debt ceiling.)
Let me list a few ramifications of all this.
First, a flood of liquidity and other stimulus is likely to produce a rally in Chinese assets, such as stocks, that might look cheap to overseas (and domestic) investors after the coronavirus sell off.
Second, the stimulus and the increase in debt will send the yuan down further against the dollar and other currencies. That will be bad news for any country or company that competes with China and it is also likely to damp spending by Chinese consumers on overseas goods. That could ignite another round in the U.S.-China trade war, especially if China doesn’t deliver the buying that the Trump administration thinks China promised in the Part 1 agreement.
Third, slower growth in the world’s second largest economy isn’t good for global growth.
And fourth, adding more debt in China to the mountain of existing debt, especially at the local and corporate levels, raises the possibility that something will go wrong in Chinese or overseas financial markets. Not a guarantee and no idea on timing (which is what makes this so diffult–it could be years or years-and-years.) It certain raises the level of global financial risk.
