Maria Mazurek, Next.gazeta.pl: On Tuesday, after a week-long break in China caused by the Christmas break, the so-called golden week, the chairman of China's National Development and Reform Commission, Zheng Shanjie, appeared at a press conference and made words that did not cause much enthusiasm. We heard that China is “fully confident” that it will be able to achieve its annual economic development goal of GDP growth of around five percent. At the same time, he emphasized that the country faces many challenges. Such a general, unspecific message was disappointing. So why did China decide to release it?
Dr. Michał Bogusz, analyst at the Center for Eastern Studies*: Because they have nothing else to put on the table. There will be no larger stimulus package because there is no way to create it. Secondly, decision-makers were apparently afraid of the sheep rush stock exchangesthat an inflated balloon may burst and spill. This probably won't happen, nothing will happen here, but the expectations were really high, so you could be scared.
The Chinese authorities did nothing to boost the economy for a long time, so there was an expectation that they would eventually be forced to take radical action. This was supposed to be this moment, but the party is not ready to take such radical actions, so they basically only repeated that they would try to do something. Such generalities must have been disappointing. Besides, those who spoke at the conference are too low in the hierarchy to be able to offer anything specific. All the stock market enthusiasm that has been building in China for over a week – completely incomprehensible to me – will be exhausted in the next few days, or weeks at most.
How do you assess the economic stimulation program announced last week? Is this a realistic plan that has a chance to support the recovery, also at the level of consumption, which is probably what the Chinese would like most?
Some Western commentators believe that Beijing is seeking to increase domestic demand and consumption. I do not share such a belief, in fact, since the beginning of its existence, the People's Republic of China has pursued only a supply-side policy. It does not stimulate demand, and I don't even know if Beijing could do it or know how to conduct such a policy. There is still an obsession with stimulating supply, both in Xi Jinping and in the broader ruling camp.
To increase demand, it would be necessary to give Chinese families a larger share of GDP consumption. It is now very low, even for a developing country, let alone one that aspires to catch up with developed countries. This share will not increase because there is no de facto functioning social security system in China. The level of social services is so low that it forces families to save heavily. The Chinese must save for old age, because the pension will be very low, for illness, because insurance covers only very basic services, for children's education, which is only theoretically free, and then to help children start their adult lives.
As a side note, it is worth remembering that China is very diverse internally. The economic situation of the inhabitants of, for example, Shanghai is drastically different from that of smaller cities. Shanghai, Beijing, Guangzhou – these are economic islands, first-class centers. Most Chinese live in tertiary and fourth tier urban centers, where incomes are relatively low compared to expenses.
I must admit that you surprised me a bit by saying that China doesn't really care about stimulating domestic demand, because I had the impression that that was what they wanted to do. Build a second strong economic leg, next to the industrial and export one. Especially since the situation in the world is changing, protectionism is coming back, tensions in international trade are not decreasing (or even increasing), and globalization is slightly retreating. Isn't that what the Chinese authorities are talking about?
This is just talk. Besides, even if you listen to Xi Jinping, he does not say directly that domestic consumption needs to be increased. He says: let's increase internal demand, but then adds that it's about replacing the machinery, supporting the replacement of the commercial fleet and so on – it's about creating demand from enterprises, not the population.
So how does China want to recover economically if it still uses the same methods and the environment has changed?
In my opinion, they have no idea how to rebound. Most economists and people in power are aware of what would have to be done: stimulate consumer demand among the population, stop transfers from the population to the industrial sector. That is, completely reverse the logic of the functioning of the PRC economy. Since the 1980s, China's economy has been based on a quite simple mechanism: it is forced by appropriate social policy (or rather the lack of appropriate social policy) to have a high savings rate among people who deposit these funds. Either directly in banks or through investments stock exchangesor through the so-called institutions shadow banking, very developed in China. The state takes over this capital and redirects it to investments, for example infrastructural ones, as well as indirectly by granting them loans developers to develop the real estate market.
However, this market has been in serious trouble for years. Large developers are going bankrupt, some of them need to be rescued, and local governments are also having problems with this.
The problems come from the fact that it is an overheated market. China is estimated to have already built enough living space to house about two billion people – that's 600 million more than the country's population. Many of these apartments are empty, they were built as investment properties and were purchased for this purpose.
I will repeat, the mechanism is this: the state forces people to have a high savings rate. Thanks to this, it captures capital, which is redirected, one way or another, to investments. This mechanism has exhausted itself for various reasons: demography, the international situation, and China's economic advancement. This development model made sense when China was starting from a low base and starting to climb up supply chains. After reaching a certain level of development, it no longer fulfills its function.
So why isn't China working to change this model?
Because we would have to focus on internal consumption, and the problem is, and this is primarily a political problem, that Beijing controls the provinces by controlling the flow of capital from the population to the elites. Similarly, local party structures control local economic elites. The power of the Chinese Communist Party is based on two legs. One is the coercive apparatus, and the other is the control of capital flow.
If this were reversed, capital was left in people's hands and market mechanisms began to operate, it would suddenly turn out that the party is only able to control China through violent means. This is not enough for such a large country. In my opinion, this is the essence of the problem. Everyone sees what needs to be done, but the party is afraid of it because it knows that it would lose an important mechanism of control and power over the country. When Xi Jinping came to power in 2013, he also announced reforms, but later became afraid of them. He understood that this would mean the party losing some control and serious political problems for him.
Is China doomed to decline economically?
They will certainly lose their growth dynamics. Moreover, the high dynamics of development cannot be continued indefinitely; at some point there is stabilization and slowing down, which does not yet mean regression. But the mechanism that works in China is like riding a bicycle. You can slow down, but you can't go below a certain speed because the bike will fall over. China is now testing how much it can slow down without crashing.
You talked a lot about maintaining power through capital control, and I wanted to ask about the second element of power, which is through violence and increasing social control. There have been reports – the Financial Times wrote about it – that the group of people who must surrender their passports and therefore cannot travel freely is being expanded. This applies, for example, to teachers. Where does this increase come from?
This process was launched already in 2014, but some acceleration is visible. The screw is being tightened and the scope of people to whom these restrictions apply is being expanded. Administration employees are forced to surrender their private passports and are issued business passports – but they are deposited with the employer. Most people in China cannot have two passports, a private one and a business one. The latter has a limit – you can only go abroad for two weeks and only on a business trip. The group of people affected by this process is expanding. It includes teachers, including primary school teachers, who do not receive service passports and their private ones are simply taken away. These are no longer thousands, but millions of people.
It looks a bit like a return to the past, reminiscent of times that seemed to be gone.
Under Xi Jinping, such a return to the past can be observed. In the case of officials, this concerns, among other things, the fear that they may be on time holidays obtained by intelligence services of foreign countries. Teachers are an ideological issue, after all, they are “soldiers” fighting on the ideological front line who are supposed to shape the new generation. In my opinion, limiting their trips abroad is primarily intended to limit the possibility of learning about alternative ideas and points of view, and to limit the contamination of young people with Western thinking. Moreover, those who are dissatisfied with their passports being taken away will leave the teaching profession. This way you can get rid of potential troublemakers and those who are already ideologically contaminated.
Finally, I would like to ask you to summarize China's economic situation. What is the condition of this country's economy, generally speaking?
First of all, there is a problem with data – we do not have all of them, the Chinese have been systematically limiting access to them since 2013. So we don't really know what's going on in this economy. The data that's coming in shows that it's not that bad. There is an obvious slowdown, but it is not a crisis. Another problem with the assessment is that China is a very large, complex economic entity. The fact that we have signals that there is a fire somewhere does not mean that we know the scale of the problem. However, there is certainly a loss of economic dynamics, a serious slowdown, but there is no crisis yet, and the party has many tools to prevent it. At the same time, it does not have the tools and is not ready to stimulate the economy and give it new dynamics. This situation may last for quite a long time.
*Dr Michał Bogusz is an analyst in the China Team of the Center for Eastern Studies. He graduated in political science from the University of Gdańsk and international relations from the People's University of Beijing, then worked in this city and in Guangzhou. He spent eight years in China. He is also the author of a blog Beyond the Great Wall.