China is planning a new relaxed approach to growth
As China’s top leaders tallied the cost of another year of debt-fueled growth at a December meeting, the imperative for stability as a leadership reshuffle loomed later this year prompted an unexpected conclusion.
The price was too high, the leaders agreed, according to a person familiar with the situation. The buildup of debt used to fuel smokestack industries from steel to cement had helped win the short-term battle for growth, but the triumph itself undermined the foundations of long-term expansion, the leaders decided, according to the person, who asked not to be named because the meeting was private.
What followed was an order to central and local government officials that if they are forced to choose this year, stability must be the priority while everything else, including the growth target and economic reform, is secondary, said another four people familiar with the situation.
Other concerns aired at the meeting that contributed to the policy shift were the short-term risk of a confrontation with the U.S. under President-elect Donald Trump over trade or Taiwan, and longer-term challenges including how to spur the innovation needed to prevent economic stagnation as well as cleaning up toxic air that enrages and poisons citizens, said the person. Left unsaid was that economic growth underpins the legitimacy of Communist Party rule.
“China’s reaching the point where it has to pick its poison and giving up a half percentage point of growth would be far less politically damaging than instability in the bond or currency markets,” said David Loevinger, a former China specialist at the U.S. Treasury and now an analyst at fund manager TCW Group Inc. in Los Angeles. “Looking past the Party Congress later in the year, President Xi Jinping may realize that unlike his predecessor, Hu Jintao, he can’t kick the can to his successor, even more so if he plans on extending his term” beyond 2022.
As many as five out of seven members of the nation’s top leadership committee are expected to be replaced at a twice-a-decade Communist Party Congress later this year, a gathering that traditionally spurs a greater emphasis on maintaining stability.
As recently as a year ago a depreciating yuan and surging capital outflows from China roiled global markets as anxiety over a chain-reaction of competitive devaluations spooked investors. That followed a roller coaster 2015 that featured a shock yuan devaluation, a record plunge in foreign exchange reserves and a stock market rout that at one stage wiped out $5 trillion in market value. While policy makers quickly countered those anxieties, they highlighted the risk of China triggering global financial market shocks.
At the December meeting, officials expressed alarm over the nation’s rapid accumulation of total debt, with some present noting that other nations have experienced crises after allowing debt to climb to about 300 percent of gross domestic product, the person said. China’s credit boom may have pushed overall debt at the end of 2016 to 265 percent of GDP, according to Bloomberg Intelligence. Also aired at the meeting was the risk that China falls into the so-called Thucydides trap, a theory attributed to the eponymous Greek philosopher that says a rising power will clash with an established force.
So menacing is the array of economic and political challenges confronting the nation that some leaders at the meeting said there’s no prospect for yuan appreciation against the dollar until at least 2020, said the person.
but are the worlds economy relaxed?
“China’s reaching the point where it has to pick its poison and giving up a half percentage point of growth would be far less politically damaging than instability in the bond or currency markets,”
half a point lost or gained in growth can mean a lot of money here and there..