China Leaders Solicit Nonpartisan Economic Advice

Dr Ivanovitch - MSI Global
Dr. Michael Ivanovitch

“To be rich is glorious,” is a simple summary of dialectic materialism offered by China’s Paramount Leader Deng Xioping to a relentlessly prodding Mike Wallace during the CBS News “60 Minutes” interview in September 1986. Looking at his puzzled interviewer, Deng went on to amplify on his mirabile dictu by saying that “there is no such thing as poor communism,” and that “according to Marxism, communist society is based on material abundance.”

Those thoughts got Deng fired from his top leadership positions during China’s Cultural Revolution, sending him back to a welder’s job he learned in France during his “work-study” program in 1920s.

But Deng eventually won in a brutal leadership fight to take China’s helm in December 1978. Radical economic and political reforms he initiated helped China to lift 770 million people out of poverty. They also made it possible to achieve Deng’s objective of a “Xiaokang society” – “a moderately prosperous society” -- announced by President Xi Jinping on July 1, 2021.

That, however, was just “the first centenary goal.” The next centenary objective is to create “a modern socialist country in all respects.”

Stay open to trade and investments

A tall order, no doubt. So, a broad range of ideas are welcome. Xi himself chaired last Wednesday (July 25) a “focus group” of government officials, business community and economic research organizations to examine the current state of the economy and the future course of structural reforms.

That was followed last Friday by China’s Politburo discussions of the same issues.

Predictably, no details transpired about any concrete conclusions or policy measures contemplated over the near term, but it was clear that the emphasis would remain on science and technological advances to drive the next cycle of economic development.

Fundamental policy options would be roughly unchanged: Open up the economy in step with the ability of local businesses to compete, and stimulate inflows of foreign direct investments.

Progress is seen on both fronts. A 66% increase of corporate profits during the first half of this year shows that local businesses control their market shares, and a 28% increase to $91 billion of foreign investments in Chinese production facilities mean that the country continues to benefit from large technology transfers.

Previously published data also showed that the cyclical dynamics of China’s economy look sound. Since the sharp rebound in the second quarter of last year, the GDP has grown at an average annual rate of 8.2%. Barring rolling pandemic clusters in a country that has so far administered 1.63 billion doses of Covid-19 vaccines, the economy is likely to remain on an 8% growth path for the rest of this year.

And, remarkably, that strong growth has been achieved under conditions of price stability, with consumer price increases in June slowing down to an annual rate of 1.1%.

The monetary and fiscal policies are gradually returning to a more neutral stance. That’s as it should be at this stage of the business cycle. In particular, a consolidation of the public sector balance sheet should bring the deficit down from 7% of GDP to 3% of GDP observed during the pre-pandemic period.

That is very important because China’s sound public finances will have to play a key role in changing the composition of economic growth toward household consumption and service industries.

At the moment, investments are the main driver of economic activity. They rose at an annual rate of 12.6% in the first half of this year.

Get a more generous welfare state

Consumer spending is unlikely to take over as the most powerful engine of growth until welfare changes unlock the purchasing power of people who are now forced to increase their savings to pay for public services of healthcare and education.

To build a “modern socialist country in all respects,” China needs a better and a more generous welfare state. Germany can serve as an example. Berlin’s social market economy delivers free healthcare and education to Germans and all other legal residents. Beijing should match that. And it should financially support family formation in order to successfully manage its three-child population policy.

All that would boost households’ disposable incomes and increase a very low 50% share of private consumption in China’s economy. A stronger consumer spending, and a greater opening to global flows of commerce, would eventually make China a net contributor to world economic growth.

That would be a big and welcome change, because China currently lives off the rest of the world. This year, for example, nearly 2 percentage points of China’s GDP growth are expected to come from its foreign trade partners. And the fact that external demand over the last five years contributed 3.5 percentage points to China’s growing demand and output also means that Beijing should ditch its foreign policy mantra of a “win-win cooperation.”

Large trade imbalances are a serious irritant in China’s relations with the U.S. and the EU. This year, China will book an estimated half-a-trillion-dollar net trade income from those two economies on exports that are two and three times larger than what Beijing buys from them.

Those problems should have been on last Friday’s Politburo agenda. If they were not, it was a serious policy mistake. China’s economic development cannot succeed in a hugely unbalanced world economy.