The economy remains largely in a less than healthy state, the property market is facing another year at least of declines, exports are at some point going to start feeling the pain of the tariffs, and consumers just refuse to start spending like it’s 1999. There are two paths forward—one is to stress economic development, the other is to stress party control—and they are incompatible. Party control has been in the ascendancy for more than a decade, and with unemployment growing, and private companies under growing pressure, the argument is that at some point, there needs to be a revised approach. For more than a year now, the Center has been signalling that things will change, honestly they will, but the fundamental things that need to be done to make a change are nowhere in sight. The next opportunity for the Center to do something arrives next week—the 4th Plenum of the 20th Central Committee, which will include the release of the 15th Five-Year Plan (FYP). Will they grab it?
The basic problem is that China’s political system is based, to a considerable extent, on state control of the economy, which stabilises the party’s position and also benefits the various elites. A thorough rebalancing toward consumption would reduce the power of state-owned firms, and diversify capital away from direct central control. Private enterprise, foreign investors and consumer need some sense of blue skies and unlimited horizons before they leap in to invest and consume, and they had that in the 1990s and after WTO in 2001, but they don’t now.
The WTO agreement was an effort to get China to compromise on this fundamental issue, and Beijing accepted many requirements, but never followed through on many of them, for the reason given above—it would tend to impact on the party’s position. And so here we are again. What we don’t know is just how bad the economic situation is, and how close we are to a brick wall, that is, an inflection point in the development process. What would be the implications of a continued unwinding of the property market, of a continued rise in youth unemployment, of a continued reluctance on the part of private enterprises, foreign investors and consumers to take an optimistic view on prospects? It is absolutely true that this system has the ability to manage such changes better than any other system in the world. Maybe it just slides slowly down towards a socialist moderately prosperous economy with fewer foreign links inside a more stable and controlled walled garden? Is that the plan, perhaps? The 15th FYP, itself an indication of the way they conceive the economy, will make interesting reading.
Have a great weekend!