Conflicting policy objectives hindered a usually very responsive economy
The problem was not so much that the CCP leadership had suddenly lost its economic touch, but that conflicting policy objectives were hindering a usually very responsive economy. Substantial reforms since 2012 have introduced market discipline, making it harder for Beijing to pilot growth in the short run: companies no longer benefit from the implicit guarantee of public bail-outs if they are aligned with state interests; real-estate prices are no longer guaranteed to only increase; the capacity of local governments to use debt-fueled financial resources to propel local growth or support local champions has been restricted.
But the resulting downward pressure on growth once again revived Beijing’s traditional trilemma – having to choose between the objectives of stable employment, better resource allocation (i.e., structural reforms) and stable public debt. Given that stable employment is the uncontestably overarching priority as the 20th CCP Congress looms, any ambitions for more structural reforms and steps towards debt sustainability have been shelved for the moment. As a result, Beijing is again looking for a quick rebound in economic growth.
A return to old stimulus methods will likely follow
A return to old stimulus methods will likely follow. One sign for that is Li using a late-May emergency meeting with thousands of local cadres to call for lowering the jobless rate “as soon as possible.” In consequence, local governments look set to go back to doing what they know best – to quickly ensure economic stability and jobs through debt-financed stimulus centered on construction, and public bailouts of struggling companies. Recently announced measures all point in that direction, while demand-side stimulus remains marginal at best.
Recent years’ hard-won improvements to internal economic imbalances – pushing back old industries, raising the efficiency of investment, getting to grips with public and corporate debt – look set to be partially reversed. The re-appearance of bad habits will delay the leadership’s preferred economic-development model based on technological innovation and economic efficiency. For sure, they will avert an all-out crash and buy Beijing time. But with a rapidly ageing population and a less favorable international environment, its economy will still quickly have to catch up with the productivity of advanced economies.