5th March 2017
China’s National People’s Congress (NPC) is now sitting, and will last two weeks. It’s an annual event, attended by roughly 3000 delegates after a series of local and provincial meetings, and party rituals at which all the major business of the government is discussed and decided. They come to Beijing basically to rubber-stamp the government’s work and priorities for the coming year.
This year is a special year because the towards the end of 2017, the 19th Party Congress will be held – the half way point in the government’s period of office. As is well known, President Xi Jinping has an ambitious agenda of constitutional and personal objectives. There is speculation, for example, that the all-powerful President wants to slim down the size of the Politburo Standing Committee from 7 to 5; abandon the practice that members step down at age 68 (so that, for example, Wang Qishan, Chair of the Central Committee for Discipline Inspection, aka the anti-corruption campaign, can stay on as he is now 69); refrain from nominating the two candidates who, at this stage of the proceedings, emerge as possible future heads of state; and possibly stay on when his decade his up, perhaps for life.
At last year’s 6th Plenum of the 18th Central Committee, held in a military managed hotel, the President was in effect ‘crowned’ as the ‘core’ of the leadership of the Communist Party. This designation had only ever been applied in the past to Mao Zedong and Deng Xiaoping, and later to Jiang Zemin. Xi occupies the role of State President, Chair of the Central Military Commission, Economic Reform Commission, National Security Council, Cyber Security Commission, and Military Modernisation Commission, and Commander-in Chief of the PLA. He also chairs the most important of many so-called central leading groups that have steadily usurped power from government institutions.
Everything in China has for some time, is and will be geared towards making sure that this Congress run as smoothly as possible – and that goes especially for the economy and the conduct of economic policy. The current NPC, then, was never going to be a remarkable event. Nothing can be allowed to interfere with the smooth transition to the Congress. Indeed, if there was anything that stood out form the proceedings on Sunday, it was the outpouring of plaudits in documents and speeches hailing Xi Jinping as core leader, as central to the Communist Party, and so on and so forth. If there had been any doubts whatsoever that Xi was in a precarious position, these have been dispelled. If, as seems likely, Xi’s leadership is creating enemies and opponents , the latter are keeping their heads down and remaining quiescent, for the time being at least.
The key document released at the opening of the NPC was Premier Li Keqiang’s 43 page report on the work of the government. This document bears an uncanny resemblance in its structure, wording and content to the reports issued in 2016 and 2015, for that matter, and should be seen essentially as lengthy statement of mantras and edicts – never forgetting the inspired and reversed leadership of Comrade President Xi Jinping at the core of the Communist Party.
As was expected, it states that China’s economic growth target will be ‘about 6.5 per cent’ or higher. It also stipulates a long wish-list of things that the government wants to achieve or to which it aspires, including:
- further reductions in coal and steel capacity, an acknowledgement that subsistence allowances and re-employment programmes will be needed, but no recognition of the fudging of previous targets or the top-down system’s tendency to over-produce
- continued implementation of supply side reforms and innovation, but with no details of any particular policies
- reductions in the overhang of real estate inventory, which is a particular problem in Tier 3 and Tier 4 cities, where most of the over-building has taken place
- the need for fiscal restraint, while allowing for certain tax reductions, but no recognition that China has embarked on a major quasi-fiscal expansion by getting policy banks, like China Development Bank to act as agents of infrastructure financing, and SOE’s as contributors to the private part of public-private partnerships. By some estimates, the broadly defined fiscal deficit is nearer 13, than 3 per cent of GDP
- and last but not least, of course, a token mention for deleveraging but with no reference at all to the eruption in credit creation, especially since 2014, which continues unabated, notwithstanding incremental macro-prudential policy tightening here and there.
The most glaring problem is the juxtaposition of ‘around 6.5 per cent as a growth target with deleveraging, bearing in mind that the economy’s potential growth rate is now nowhere near 6.5 per cent. It may be no higher than 3 per cent, given demographic changes that are well known, and the desire (at least) to wean the economy away from investment-led growth.
The Communist Party, however, cannot afford politically to abandon the growth target – which would show real and powerful intent to get to grips with credit dependency. All it can do is to incrementally lower that target over a long period of time. Since the 13th Five Year Plan commits China to doubling income per capita by 2020, the inferred growth target, strictly speaking, is correct mathematically. And yet fulfilling that growth target is possible only by taking the huge risk with excessive credit creation and non-viable funding structures that is leading China to a reckoning some time in the second half of this decade.
Few people think this is likely in 2017. Many hope or think that after the 19th Congress Xi Jinping will become a born-again protagonist of supply-side, market reforms in which the credit genie will finally be bottled. Here’s a good piece that argues why this is unlikely.
Xi’s control-fetish and the refusal to contemplate a more inclusive and open institutional set-up beyond the dominance and primacy of the Party in economic and political affairs doesn’t suggest XI will preside over meaningful, as opposed to incremental, reform. He may pay lip service to it, but his actions and behaviour do not warrant optimism.