Big Meeting, Big Problems
You don’t have to hire McKinsey to sort out the inverse relationship between the number of meetings an organization has versus actually doing anything. And so, Beijing’s next big plenary to-do – the Central Committee kicked off its Third Plenum on 15 July. Historically, when the Chinese Communist party throws this fourum it charts a grand new course for the country, and some of these have been been impressive. The one in 1978 started to open up the market after the Mao era of what we might call “celebrated feudalism.”
That, sadly, was a different China. It was trying to liberalize, and it’s economy showed it. Now the 376-member gathering of the Central Committee is a Cult of Personality – there is President Xi, his thoughts and no talk of succession. Big Panda has more or less crushed all dissent and killed all the bearers of bad news over the last decade, so this isn’t really a massive committee meeting or debate. It’s a program launch.
Like the elite American University – there is only one viewpoint, and you will support it; there will be a lot of lofty buzzwords and programs that carry the whiff of incoherence, but little in the way of practical action. Nothing, probably, to the get China’s ailing economy out of the soup. Unlike America, with a dynamic model that will cycle out of a recession fairly quickly, China’s problems sit within a flawed model.
First of all, both the economy and the demographics are worse that Beijing likes to admit. Let’s take GDP; a fair way to get a picture in a reasonably equitable society, which China is not. And it’s the outliers are so immense none of it needs to be taken without a grain of that pink Himalayan salt.
Then there is the property bubble – in American this would just be a matter of speculators and creditors overextending themselves, then washing out in an embarrassing bail-out. In China, local land sales to developers was the way local governments were funded. As buyers dried up (and given the demographics, they aren’t coming back) and the value of a billion or so empty investment properties went underwater. To keep functioning, the local governments issuing debt at unprecedented rates. And they can’t really grow themselves out of the problem because attracting talent from across the country is bafflingly complicated. Under the hukou system you are essentially registered with your hometown or some particular region. You can move, but you won’t necessarily be eligible for social services in the new place unless you change your hukou – which you probably won’t be able to do because the Chinese state bureaucracy is impenetrable unless you are some elite party goon. And if that were the case you wouldn’t be moving to find work.
The powers in Beijing can continue to invest in advanced manufacturing – but that exacerbates another the core problem: The private sector, which accounts for 60% of GDP simply can’t compete with the massive state-backed firms. Beijing’s policy of using state subsidies to overproduce, and dump good on foreign markets to drive the locals out of business, is having the same effect on private Chinese firms. Arbitrary enforcement of kafkaesque regulation is a further tamp on private sector.
Big Panda has less control over exports: They are booming now but are facing a wall of tariffs from countries trying to protect themselves from dumping.
Thus far, Beijing’s response has been... curious. The People’s Bank of China is tightening the money supply in the face of a slowing economy and spooked consumers. Some 3bn yuan ($414mm) has been withdrawn from the banking system because Beijing’s latest fear is that a weakening yuan will trigger further capital flight. It probably will.
Which might explain the consumer confidence issue, which cratered to a generational low during the pandemic lockdown when the entire country was sent to its room, has not rebounded in any real way.
We can’t imagine why.