CHINA POLITICAL ECONOMY BRIEFING CHINA S ECONOMIC AGENDA UNDER Xi

Transcription

1 CHINA POLITICAL ECONOMY BRIEFING CHINA S ECONOMIC AGENDA UNDER Xi OCTOBER 2018

2 This Report is the first in a series of private papers prepared by PLMR which will look at the challenges and opportunities presented by working with and in China in 2018 and beyond. For further information please contact Kevin Craig Chief Executive kevin.craig@plmr.co.uk PLMR COMMUNICATIONS WITH IMPACT Public Affairs - Political Campaigns Public Relations Crisis Management - Planning & Development Digital Communications & Media Training Church House, 29 Great Smith St, Westminster. SW1P 3BL

3 1/14 EXECUTIVE SUMMARY Xi s role in leading the economy is unprecedented China s macroeconomic conditions include low capital and high debt Geo-economic considerations include China s growing role in international economic system and risk induced by a growing trade war with the US Policy makers strive to balance contradictory growth patterns and economic tensions The CEWC is China s primary economic event The Politburo economic work meeting takes place in July to assess economic conditions and adjust the approach China s current policy mix combines prudent monetary policy with proactive fiscal policy Stability is the key theme for the second half of the year indicating a subtle shift in the face of uncertainties in the external environment Xi Jinping s economic ideas formally recognized as his power extends to the economic domain Xi to preside over a new period of economic transformation Xi s approach emphasizes quality of growth over pace More qualitative growth metrics are introduced and quality is to be delivered through supply side structural reforms There is an ambition for China to move up the global value chain through innovation in high quality industry and services Xi directs implementation of measures to combat three critical challenges to development poverty, financial risk, pollution There is continued commitment to opening up to market forces and to foreign participation as well as increasing domestic demand BRI serves China s growth, reputation, and security agendas

4 2/14 CONTENTS INTRODUCTION SETTING THE SCENE Macroeconomic context Geo-economic factors Paradoxical pressures KEY EVENTS AND POLICY OUTCOMES China Economic Work Conference Politburo economic work meeting Policy approaches XI JINPING ECONOMIC THOUGHT Shifting responsibilities The new era REFRAMING GROWTH TARGETS Delivering on the quality quotient ECONOMIC PRIORITIES, CHALLENGES TO DEVELOPMENT Eliminating poverty Preventing financial risk Controlling pollution ECONOMIC INITIATIVES

5 3/14 INTRODUCTION Xi Jinping is serving in his second term as President of the People s Republic of China (PRC) and has held the title of General Secretary of the Communist Party of China (CPC) since During his time in office he has consolidated his power base and amassed so many job titles that he has earned the tongue in cheek moniker Chairman of Everything. In an unprecedented move, during the course of his power accumulation and redistribution, Xi has secured ultimate command of the economy and the role of the Premier has diminished. China s economy has been a priority for the country s leadership since the start of the opening up period under Deng Xiaoping in the late 1970s. China has become central to the global economy due to its focus on export driven growth in the globalized world. Now within the context of Xi Jinping s drive for China to claim a place as a leading global power in the international system, China is an increasingly vocal and active participant in global economic governance. Major decisions are increasingly made by the Central Leading Group of Financial and Economic Affairs which is headed by Xi with the State Council taking more of an implementation role. Xi and his advisors have developed a clear forward leaning line on China s economic agenda which takes global factors and the country s engagement with foreign economic affairs into account. Numerous contradictions underlie the country s core economic interests and impact China s economic development. They are a consistent cause of tension between domestic and foreign economic policy goals, between reformers and more conservative voices as policy makers attempt to chart a course between them. This PLMR briefing - the first in a series - addresses the country s economic conditions, Xi s commitment to a new development model, and the prioritisation of key development challenges.

6 4/14 SETTING THE SCENE Macroeconomic context As of 2017, China has the world s largest banking system in terms of assets. It is a significant holder of foreign currency reserves. Although China meets Basel III 1 conditions regarding minimum capital requirements, its capital levels are still considered low and its leverage position is considered high in comparison to wider international practice. It holds substantial debt with levels standing at almost 40% of GDP. Local government borrowing has exacerbated the deterioration of the country s fiscal outlook. High capital spending and credit expansion have hampered competitive forces in the market. Export oriented sectors have formed the foundation of China s development however during Xi s time in office there has been an emphasis on bolstering service industries, increasing domestic consumption in order to address the global versus domestic demand balance, and achieving a better import/export balance. Imports of commodities such as iron ore and oil as well as increased spending on foreign financial and software services in 2018 are triggering a change in the balance towards imports over exports. There is a dramatic inequality gap between China s rural and urban populations with considerably different living standards. Internal migration from rural to urban areas has resulted in a vast population living outside of the system. The country s aging population and shrinking workforce are concerning factors in its economic outlook. Slow but sure progress has been made to integrate into the international system, however China is still relatively closed and cautious with regards to opening up and adopting international economic practices. The 2008 financial crisis served to confirm and further provoke China s concerns regarding the stability of the international system and the integrity of prevalent global processes. Geo-economic factors China has been a strong proponent as well as a benefactor of globalization. It continues to push for a globalized economy and over the past few years has been increasingly outspoken at the international level on economic and financial matters through participation in the International Monetary Fund (IMF), the World Economic Forum (WEF) at Davos, and other high level fora. Climate change initiatives, economic globalization and trade initiatives are all seen as opportunities to exercise China s stated ambition to be a responsible global power. In its role as a power, China has expressed commitment to international cooperation, global economic integration and the developing world. The Chinese leadership sees Trump s administration as a protectionist threat to global development and to the stability of China s economy. The ongoing China-US trade war has not only received considerable media attention but also weighs heavily on the minds of China s policy makers. With substantial reciprocal trade between the two countries, and tariffs being bandied about on both sides of the struggle, China s policy makers are having to think carefully about balancing against the economic impact of a prolonged or escalating trade war. Paradoxical pressures China s economic circumstances and agenda are characterized by competing and contradictory tensions. 1 A global and voluntary regulatory framework developed in response to deficiencies in financial regulation as exposed by the 2008 financial crisis. The aim of Basel III is to reinforce the international financial system via increasing bank liquidity and decreasing bank leverage.

7 5/14 Officials with conservative tendencies continuously push for enhanced support of the state industries while reform minded officials are more supportive of withholding stimulus, dealing with the debt crisis slowly and trusting in market opening. Contradictions in growth patterns include excess capacity in some industries and shortages in others. The ongoing policy debate over the degree of importance that should be placed on supporting growth versus reducing debt has strong support on both sides. At the core of this debate is a question of social and political stability in the short and long term and views differ on how these are best prioritized and achieved. As policy makers search for a middle ground policy direction changes frequently in response to specific events.

8 6/14 KEY EVENTS AND POLICY OUTCOMES China Economic Work Conference (CEWC) The CEWC is the most important economic event in China s calendar. It is at the CEWC that overarching aims and objectives are boiled down into specific and actionable policy choices and China s national economic agenda is set. It is typically a two to three day, closed door affair. Discussions are summarized and made available to the public in a communique published after the event. Participants comprise the Central Committee of the CPC as well as a considered list of invited delegates such as former Politburo members who still hold sway within the Party. Detailed policies and tasks are ascribed to the ministries and provinces at the CEWC. The conference also serves as a forum within which ministries and regional CPC cadre representatives can be challenged on underperformance or pushed to meet targets. The most recent CEWC was held on 18 to 20 December 2017 and it reinforced the messaging of the 19th Party Congress in October 2017 regarding priority areas, Xi s position in the Party record, and the Party s position in steering the State. Politburo economic work meeting The July meeting of the Politburo concentrates on analysing the economic performance and conditions in the first half of the year and articulates the approach for the second half. It is an opportunity for China s top leadership to reassess and reemphasize priorities. The most recent economic work meeting was held on 31 July Policy approaches In the first half of the year, China s macroeconomic policy mix comprised prudent monetary policy with proactive fiscal policy as advocated at the CEWC. Monetary policy aims within its neutral approach include controlling monetary supply as well as facilitating measured growth in credit and social financing. There will not be a full opening of the capital account by international definition despite commitments to allow a greater role for market forces in the economy. Proactive fiscal policy is calibrated to optimize the structures of fiscal spending. The RMB exchange rate is set to remain reasonably stable and despite some recent depreciation, the PBOC is confident that it will not be exposed to significant fluctuations. Stability is the central theme for the second half of the year as reflected in the Politburo s key message from the July economic work meeting that the economy should be underpinned by stable employment, stable finance, stable foreign investment, stable investment, and stable expectations. The Politburo s strive for stability indicates an attempt to counterbalance the unstable external economic environment with particular regards to the unpredictable nature of the US trade stance which makes internal demand increasingly critical. A readout of the economic work meeting highlights a step towards even more proactive fiscal policy measures with increased funding to counteract a fast and steep fall in local government investment which has taken place and to maintain ample liquidity 2. This has prompted unwarranted assumptions that the second half of the year is set to see a pivot to a stimulative policy approach however in reality it will not be wholly stimulative. It does reflect an attempt to limit downside risk for the economy by stimulating some demand but without abandoning the stance towards deemphasizing the acceleration of growth based on huge credit expansion. Experts indicate that efforts have transferred to pursuing a leveling off of the debt ratio rather than increasingly steep decline. Structural 2 The State Council has previously advocated for emphasizing these measures

9 7/14 deleveraging and reducing debt held by companies with low productivity will remain a cornerstone of the agenda. Strengthening regulation around local government debt remains front and centre in Xi s plans and there is a move towards an increased focus on policy coordination and flexibility.

10 8/14 XI JINPING S ECONOMIC THOUGHT Xi s economic doctrine, Xi Jinping Thought on Socialist Economy with Chinese Characteristics for a New Era 3, was formalized at the CEWC in December 2017 consolidating Xi s position as the definitive authority on economic matters. Xi s Economic Thought outlines a new development concept and simultaneously restates a commitment to market liberalization and the CPC s leading role in managing the economy. Xi s economic framework has been labeled Xiconomics by the western media. In a marked move away from the pursuit of increasing pace of growth, the prevailing strategy, Xi has placed quality of growth at the heart of his agenda by making it an unconditional requirement for development. Issues within the remit of Xi s Economic Thought include a view of China s economic position (the new economic normal ), development oriented around people taking societal factors into account, a move to change the management of distribution of resources to be more influenced by market forces, and a supportive stance on supply-side structural reform. It is based and expands on economic development efforts outlined and implemented during Xi s first term in office. Shifting economic responsibilities Somewhat controversially, Xi s new economic ideology clearly states Party authority over economic affairs. It represents the first time since the People s Republic of China was established that the General Secretary of the CPC has assumed ultimate command over economic affairs. In the past, this distinction has fallen to the State Council and more specifically to the Premier. Over the course of Xi s time in power, he has shifted policy making to the Leading Small Groups that he has created and often heads up 4. This certainly holds true for economic policy matters. The incumbent premier Li Keqiang has seen his authority diminish as a direct response to Xi consolidating his power base through the Leading Small Groups. Li has been further sidelined by the moves in 2017 to populate key financial and economic roles with Xi loyalists. Xi s new guiding principle for China s economic and fiscal policy approach notably expands his control from the political realm into the economic sphere. The new era A new era 5 sets the stage within which Xi s economic ideology will flourish, but what exactly is meant by new era? Insiders suggest that the implication of this phraseology sign posts a new period of economic transformation and is a move to establish this period in China s communist history with recognition akin to, and as highly regarded as, those established by Mao Zedong and Deng Xiaoping. The Maoist Era which ran from the 1950s to the 1970s is the first, Deng s era post 1976 is the second, and Xi s is therefore to be considered the third notable chapter in the story of modern China 6. The first chapter was defined by the pursuit of economic self-reliance and a focus on becoming a heavy industrialized economy. The constraints of being planned economy combined with political movements guided China into the second 3 To accompany Xi Jinping Thought on Socialism with Chinese Characteristics in the New Era which was introduced at the 19th Party Congress in October Leading Small Groups are outlined on p14 of the June briefing The Chinese political system an overview 5 The new era was first outlined at the 19th Party Congress in 2017 and included in the resulting Work Report published on 18 October Mao and Deng are not the only leaders that China has had since the rise of the CPC and before Xi s time in office however they are the most revered in the Party s record for presiding over periods of economic transformation

11 9/14 chapter which was characterized by reform, opening up and accelerated growth. The pace of growth unavoidably brought imbalance and structural deficiencies in its wake, leaving the country s capacity for sustained growth in the balance. Achieving this sustained growth capacity is the essence of the third chapter of economic transformation set to become Xi s legacy. Xi s economic agenda for the new era is categorized by key benchmarks. By 2035 it is to realize socialist modernisation by reducing wealth inequality, improving environmental factors through sustainable development, and investing in science, education, technology, and social welfare. By 2049 China will have made great strides in science and technology, improved living standards and will have a growing economy in order to be classified a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious, and beautiful.

12 10/14 REFRAMING GROWTH TARGETS China s development has been characterized by speed of growth and policy makers found themselves locked into a pursuit of ever increasing pace. As China worked to bring millions of people out of poverty and weather global financial crises, domestic and international attention fixated on GDP targets and maintaining fast levels of growth proved to be a necessary social and political stability insurer. As recently as 2016, Premier Li announced an annual GDP growth target to 2020 of 6.5% to 7%. This growth rate underpinned a previously stated goal of becoming a moderately prosperous society by the same year. At the 19th Party Congress in October 2017, Xi dropped the 2020 goal along with any reference to GDP growth rates indicating a refocus in his approach to economic targets. He has been won over by advisors who maintain that rapid growth holds more risk than reward by fueling growth pattern contradictions and negatively impacting the financial sector, resources and the environment. Insiders indicate that despite this concerted attempt to move away from the specific 2020 goal, if the previously stated GDP growth is not achieved, Xi will be held accountable and even his strong power base will not protect him. Xi is very alert to this fact however during his term in office growth has surpassed expectations and he is confident that China can tolerate a lower growth rate and still meet the 2020 goal. Xi and his advisors recognize that the complications that arise from an emphasis on growth pace will have long term ramifications and have refocused economic targets in order to tackle and build resilience against these issues. While still a priority, growth now comes with considerations. China will no longer justify anything in the pursuit of GDP targets, rather it is looking to viable and stable economic development. Guided by Xiconomics, China is looking towards high quality growth rather than high speed growth and has adopted a new, more discerning strategy. Quality growth should be sustainable rather than masked by a veneer of untenable debt. The facets of high quality growth not only include efficiency but also feature socially and environmentally friendly development measures. Qualitative metrics are taking precedence over quantitative ones and are forming the basis for new local government performance indicators. Delivering on the quality quotient Supply side structural reforms aimed at rebalancing the economy are the beating heart of China s strategy and the shining hope for delivering against Xi s economic agenda. Initial reform initiatives were launched in late 2015 and officials deem the preliminary outcomes of these reforms successful in their intended effect of delivering a reduction of excess capacity, financial deleveraging, destocking in the real estate market, and bolstering structural weak points. One result has been noticeable improvements in the supply-demand framework and higher profitability for companies. The initial reforms have laid the groundwork for deeper reforms including improvements in State Owned Enterprise (SOE) efficiency. Within the parameters of the current reform focus, China is prioritizing a transition to innovation driven economy via the expansion of the real economy, improvement of manufacture quality, upgrades to traditional industries, and the development of emerging and high-tech industries and services with a spotlight on the internet, big data and artificial intelligence. These measures are intended to effect a move up the global value chain to the mid to high end. This approach is designed to strengthen China s economic footing and resilience to risk and is communicated as such, however, experts suggest that a secondary and slightly less public driver is China s pursuit of a position of greater respect within the international system through moving up the global value chain.

13 11/14 ECONOMIC PRIORITIES, CHALLENGES TO DEVELOPMENT According to Xi s Economic Thought, China is currently facing three critical battles. The opponents that China must confront are poverty, financial risk and pollution. Xi believes that success in tackling these challenges is vital to economic development. As such Xi considers efforts on these fronts to outweigh annual growth targets. Eliminating poverty Millions of Chinese people have been lifted out of poverty over the past four decades however it is still a significant challenge for China s leadership who aim to eradicate it completely by With million people still below China s national poverty threshold of USD$1.00 per day, experts predict this goal is unlikely to be met and that it will take a decade to realise complete eradication. Clouding the outlook further, experts advise that the million statistic which is based on official published statistics is unlikely to provide an accurate reflection of actuals due in large part to sizable migrant populations which are difficult to account for. Xi and his advisors are undeterred by the scale of the challenge and a three year poverty alleviation framework is in place with Vice Premier Wang Yang at the helm. The framework includes a commitment from the provinces to targets set by the central government. China s top leaders are dedicated to ensuring the trickle down of national growth to the poorest members of society and improvements in inclusive finance sits at the core of alleviation efforts. It is a key undertaking of the PBOC and the objective of a five year State Council plan to Inclusive finance will work to relax credit for specific industries based on local conditions. Implementation of rural regeneration efforts is targeted towards the poorest areas. The government is encouraging some rural migration to urban areas however this is concentrated on second and third tier cities in order to prevent oversaturation in the first tier cities. Funding for infrastructure to support regeneration efforts and migration flows factors in the mix of measures. Ultimately there is an ambition to lessen the divide between China s rural and urban economies. In addition, the PBOC is working to ramp up measures that encourage lending to small and micro businesses, reinforce underdeveloped areas, and reduce financial costs by increasing relending to commercial banks. Regional development will be coordinated through integrated development zones 7. Although poverty reduction instruments will promote income generation and social safety nets in addition to infrastructure capacity, this is not a purely altruistic battle. Xi and his team have an eye on stability and sustainability. The pace of growth that China has enjoyed brought increasing inequality with it which serves as a destabilizing societal factor. Furthermore as China aims to promote the growth of domestic consumption, the spending capacity of its citizens is increasingly relevant. Preventing financial risk The Chinese leadership and economists, including former PBOC chairman Zhou Xiaochuan, have repeatedly voiced concerns over the potential for a repeat of the 2008 financial crisis. There is a level of apprehension regarding China s ability to weather another storm. Experts indicate that officials assume a repeat financial crisis could set China s development back by a decade if not more. Insiders suggest that Xi, for whom worst case scenario planning is a matter of course, had contingency plans drawn up for dealing with both externally and internally generated crises. Xi has repeatedly stressed a need for the financial sector to better serve the real economy and his economic advisors 7 For example the Beijing-Tianjin-Hebei zone which is known as Jing-Jin-Ji and which aims to maximize synergy opportunities for increased economic efficiency within the region

14 12/14 suggest that the relationship between them should be fostered to provide balance as the two should work in a symbiotic feedback loop with the property sector as the third factor. China is aiming to sustain prudent and neutral monetary policy, controlled liquidity, measured credit growth, and relatively stable RMB exchange rates. The 2017 CEWC communique caused a stir amongst international analysts who perceived a focus on de-risking and an omission of specific language referring to deleveraging as an indication that the Chinese leadership were less concerned with debt than the country s debt situation warrants. Attendees however, confirmed that the CEWC discussions placed significant and proportionate emphasis on deleveraging and that debt, especially local government debt, is one of Xi s key concerns. The topic of deleveraging came back with a vengeance in a readout of the July PBSC economic work meeting serving as further confirmation that deleveraging is receiving due attention. Slowing the rate of debt accumulation is central to de-risking efforts. The primary focus of leverage concerns relates to debt accumulated via the funding activities of local prefecture and county level governments for infrastructure projects where they have encouraged local state owned banks to provide funding with implicit guarantees to SOEs on poorly planned and unprofitable projects. These exploitative funding arrangements have been brought to the attention of policy makers who are taking steps to curb these activities. Tentative steps are being taken towards not helping in the face of losses. Supervision and audit is set to provide a strategic response to debt accumulation as policy makers in Beijing pledge to put accountability systems in place whereby officials will hold lifetime accountability for debt accumulated under their authority. Counter measures to systemic financial risk include a tightening of financial sector supervision to prevent illegal activities in the sector. In April 2018 it was announced that the banking and insurance regulators were to be merged under the newly formed China Banking and Insurance Regulatory Commission (CBIRC) in order to improve consistency and ensure effective scrutiny. Struggles to keep up with innovation and growth in the financial sector have been compounded by limited changes in staffing of the relevant regulators since 2007 as development of expertise in new areas came to a halt and lack of growth in headcount put constraints on workload capacity. The regulator restructures should address this. Behind closed doors, key policy makers have expressed concerns over the prevalence of unregulated finance mechanisms in China, specifically highlighting the immaturity of the relevant regulatory and legal frameworks. The failure or collapse of unregulated platforms is considered to be a potential trigger for societal instability. There is a fear that citizens will place expectations on the government expect a government provided fix, and if expectations are not met turbulence may ensue. Internationally, de-risking is focused on increased participation and a more significant role in global economic governance. China is becoming a more vocal critic of systemic risk in the global financial system and global resilience capacity and it is also a more confident contributor of ideas. Controlling pollution China declared a war on pollution in 2014, and the agenda set out at the 2017 CEWC not only confirmed that this is still a primary concern for the country but also framed it in the context of its economic development. Manufacture was a major driver of China s rapid development and this brought with it high levels of pollution. Xi and his advisors have recognized that continued growth is contingent on the health of China s people and environment. Yet again social stability factors play a role in this objective. Chinese citizens are increasingly aware of and concerned by environmental degradation and they are ever more vocal on the topic. China s leadership is proactively aligning national economic priorities with the priorities of its people. In its battle against pollution China will increasingly seek green and low carbon development in place of the traditional development model. China has vowed to reduce emissions by upgrading and adjusting dated industry facilities and

15 13/14 structures. New and green campaigns will be launched and the aim is for these environmental protection efforts to be funded by both private and public investment. The messaging employed to attract this investment asserts that prosperity can only be achieved in green zones. Audit and supervision efforts will also be intensified. China has also become a champion for the environment in the international system. In its efforts to battle against pollution and move towards a green development model, China will seek ever more international cooperation as well as a growing role in international environmental governance.

16 14/14 ECONOMIC INITIATIVES Declarations of intentions to open up to market forces have often been regarded as insincere based on the pace of development on this front and the use of contradictory intervention measures however insiders suggest that this commitment continues to be genuine. Perceptions of candor are perhaps negatively affected by differing cultural definitions of an open market. It is definitively not in China s ambitions to adopt a western approach to liberal capitalism. It will continue to keep the power of market intervention within its toolbox however there is an earnest ambition for the market role in resource allocation to be amplified. This in turn will require deeper SOE reform including the encouragement of mixed ownership. The hope is for SOE s to develop in order to challenge international and globally competitive companies. As China looks to grow internal demand, efforts to readdress the trade balance by boosting imports endure. Free trade zone pilot areas are being expanded to increase trials of new models. Opening up efforts include the push to offer national treatment for foreign firms in an attempt to drive foreign investment. More opportunities will be available as the negative list, which outlines industries with prohibited or limited scope for foreign participation, is contracting and reducing entry thresholds. Hopes that foreign firms will have confidence in engaging with the Chinese market are being pinned on enhancing rights protection laws and regulations. As a self-described supporter of the existing international system, China advocates for international trade through Free Trade Agreements (FTAs) and its Belt and Road Initiative (BRI). The BRI has been hailed by the international community as a route to new opportunities for international businesses and criticized as a geopolitical empire/power building pursuit. Chinese analysts and experts consider both assessments to be over dramatized. In truth, the BRI does seek to provide greater security for the country especially with regards to the supply of natural resources. Addressing potential energy supply issues is a key concern for the country.