China Sends Mixed Messages About Economic Policies

By FeaturesDow Jones Newswires

President Xi Jinping is coming into 2018 with Mao-like powers, a stronger-than-expected economy and an ambition to turn away from rigid growth targets that have tied the hands of government.

In other words, conditions appear perfect for Mr. Xi to embark on much-needed economic overhauls.

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But will he?

"That of course is the million-dollar question," says Anne Stevenson-Yang, co-founder of J Capital Research in Beijing. "What happens with all this power?"

All of Mr. Xi's official pronouncements indicate that he intends to stay the course of strong state control of the economy, with some nods toward giving market forces more room. Complicating his plans is the need for continued strong expansion in the near term to reach some Beijing-set milestones that could increase risks of a prolonged slowdown down the road.

An economic plan for 2018, released in December, officially made "Xi Thought" the guiding principle for the world's second-largest economy. First and foremost, "Xiconomics," as Mr. Xi's economic theory is known, means strengthening the Communist Party's clout.

Even though Mr. Xi and his economic deputies have talked up the idea of letting the market play a "decisive" role in the economy -- a maxim Mr. Xi embraced early in his first term -- recent history suggests the plans won't stick.

For instance, in 2015 China briefly moved to let the yuan trade more freely in a bid to get it into the International Monetary Fund's elite basket of reserve currencies. Those plans derailed in August of that year when the central bank devalued the yuan.

The surprise move sent a shock wave through global markets, and drove China away from its plans to liberalize the currency and cross-border capital flows. An unprecedented effort ensued to prop up the yuan, which involved heavy central-bank intervention in the currency market, new capital controls and higher interest rates to keep money at home.

Today, the yuan is officially in the IMF's reserve-currency club, but the Chinese government no longer lists freeing up cross-border capital flows as a policy objective.

A new path forward

So, talk of reform in China these days is more about fine-tuning a government-led economic model than the kind of drastic liberalization seen in the era of Deng Xiaoping. Going into his new term in office, Mr. Xi has talked about the need to focus less on the pace of growth and more on the quality of growth -- such as moderating expansion to slow the growth of debt, and reducing the country's levels of pollution.

There are some encouraging signs. In late December, China published a new "green" index as a way to pressure local governments to reduce pollution and create more sustainable economic development. And across the country, authorities are using tougher environmental standards to force producers to upgrade their facilities or risk getting shut down.

Some of China's large metal producers, including Jiangxi Copper Co. and Tongling Nonferrous Metals Group Co., have temporarily suspended production. "Pollution control is a main economic task for 2018," a Jiangxi government official says. "We're all very serious about it."

Figuring out the right path for economic growth will prove much more difficult, because the country can't afford to pull back too far. Beijing still needs a certain pace of growth to ensure employment and overall social stability. In fact, many government advisers and economists don't even expect the leadership to lower its growth target for 2018 from the 2017 goal of around 6.5%.

The fact that growth for last year came above that, at 6.9%, actually complicates matters for Beijing: The economic strength in 2017 -- powered by state investment and a still-booming property market but also by improving global appetite for Chinese exports -- means a bit of a decline in growth in 2018 could look embarrassing for the party.

Meanwhile, government officials themselves seem to be sending mixed messages about tempering growth. Advisers and economists point to the call for "reasonable" credit expansion in the plan for 2018 as an indication that Beijing, for all its talk about quality, still prioritizes a relatively high rate of growth.

Stubborn debt

In addition, over the past two years, Mr. Xi has made reducing debt a centerpiece of his economic program. But not only has debt continued to rise, there is now a growing realization within the government that it is in fact impossible for China to cut debt levels without hurting growth. The goal to deleverage has been softened into a mission to control the growth of debt.

Also complicating Mr. Xi's effort to de-emphasize the rate of growth is his own pledge to reach a number of broad milestones in the next decades, goals outlined as he opened the October party congress that kicked off his second term. Among them: build a "moderately prosperous society" by 2020, and achieve "socialist modernization" to join the world's most innovative countries by 2035.

The objectives effectively mean China's growth needs to stick fairly close to the current pace for years to come.

"What's the best rate of growth?" asked Liu Shijin, vice chairman of the China Development Research Foundation, at a December forum in Beijing. He said that based on his analysis, China's economy needs to grow 6.3% a year to achieve the government's goal of doubling GDP in 2020 from a decade earlier.

"What's crucial is the speed of growth after 2020," he said.

Ms. Wei is the leader of The Wall Street Journal's Economics Team in China. Email lingling.wei@wsj.com.

(END) Dow Jones Newswires

January 22, 2018 15:26 ET (20:26 GMT)

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