A leading stateside expert on the Chinese economy says that the country’s much-vaunted reform efforts have run out of steam because of renewed conservatism on the part of the country’s senior-most leaders.
Writing for Real Clear World, Scott Kennedy, deputy director of the Freeman Chair in China Studies and director of the Project on China Business and Political Economy at the Center for Strategic International Studies, notes that Chinese productivity has collapsed in tandem with ongoing growth declines.
While Chinese GDP growth held above nine percent per annum on average during the three decade period from the launch of the reform and liberalisation by Deng Xiaoping to the turn of the current decade, its since fallen to below 7%, with 2016 posting an expansion of 6.7%.
More perturbing than declines in GDP expansion however are falls in productivity, with Kennedy noting that Chinese growth is currently dependent on the channeling of greater amounts of money and labour, as opposed to improvements to human capital or technology.
As a consequence a single unit of economic growth in China now needs three times more capital than it did in 2008, leading to an explosion in debt levels to over 280% of GDP.
Kennedy places the wreath of blame for flagging productivity at the get of state intervention, which he claims has increased since President Xi Jingping took office, despite the helmsman’s assertion that markets should play a decisive role in resource allocation which leads to a warping of incentives and wasted investment.
“Billions, if not trillions, are being thrown at strategic industries from semiconductors to artificial intelligence…that is why almost two dozen Chiense provinces are investing simultaneously in fabrication facilities to pump out memory chips [and] companies and research institutes are filing worthless patents in record numbers because they receive a fee from bureaucrats for doing so,” writes Kennedy.
Despite regular avowals by China’s leadership and official press on the need to deepen and press on with reforms, Kennedy claims that unlike his predecessors Xi is a hidebound conservative who is opposed to liberalisation, and is using the greater power he’s accrued since assuming office to oppose much-needed policy adjustments.
“Xi Jinping not only does not believe in markets…he is also far more powerful than his predecessors,” writes Kennedy. “Reform now means not marketisation but strengthening the state.”
Kennedy calls Xi a “fair-weather liberaliser,” pointing to his track record of prompt intervention as the housing sector began to weaken in 2014, as well as additional intervention during the Chinese stock market collapse the following year.
In addition to overt government intervention in the workings of the Chinese market, Kennedy also points to growing aversion to foreign investment as another sign of Xi’s conservatism, with overseas companies increasingly feeling either unwelcome in the Middle Kingdom or on the receiving end of a raw deal.
While Kennedy believes that Xi is a dyed-in-the-wool economic conservative who is unlikely to push through with urgently needed reform measures, which would include shrinking the SOE dominated heavy industrial sector, expanding the new economy of high-value added services and technologies, and reform of local government financing, including tightening of the regulation of shadow banking instruments such as wealth management products.
While dour on the likelihood of near-term reforms, Kennedy is more optimistic about China’s ability to pull through any full-blown crisis that conservatism precipitates, pointing to the country’s vast pool of savings as well as minimal foreign debt.