Misunderstanding how China thinks about its own transition

According to this article, China's continued use of heavy monetary and fiscal intervention to shore up its economy is the best evidence that its economy has already failed. Other than relying too much on the old argument that Beijing is effectively making up its growth figures, it betrays a fundamental misunderstanding of how China actually thinks about its own transition.

The crux of the argument is as follows:

Instead, it seems as if China is using Keynesian economic tools in an entirely appropriate way: to prop up a failing economy. The only missing element in this equation is an open admission by the Chinese government that its economy really is failing. But if the economy is succeeding, China's current economic policies make no sense.

In the first place, the old growth model based on investment and exports has only "failed" in the sense that it grew bigger and ran longer than it should have. From Beijing's point of view (and indeed the whole world's), it was in fact a stupendous success - so much so that this itself reached the brink of becoming a "failure."

The transition China is trying to make now is not to undo a past failure, but to move on before the deadweight of staled "success" becomes a true failure indeed.

Secondly, whatever "failure" threatens China is not seen as the fault of the central government per se: rather, it was the inability of the central government to rein in the misallocation of capital and economic resources at the provincial, municipal, and local levels under the previous generation of leadership, which was hampered by a weakness of central party and state authority under Hu Jintao on account of a decade-long power struggle with his predecessor Jiang Zemin. Jiang's "Shanghai clique" had leveraged the massive crisis-response stimulus of 2009 to deliberately devolve economic decision-making to the provinces, localities, and segments of the state-owned enterprise (SOE) system. (It has been suggested, too, that Jiang patronized the princeling Bo Xilai, disgraced ex-party secretary of Chongqing, as Hu's successor in lieu of the favored Xi Jinping.)

As of today, however, the center seems to have reversed this decline in its efficacy. In 2015 Xi Jinping's anti-corruption campaign has apparently become a permanent, institutionalized party and state function nationwide; the merger and consolidation of redundant SOEs was accelerated, bolstering a more centralized supervision of the state-run economy; through such methods as new bond issuance by the central bank (PBOC) to local governments and appropriation of local budgets in troubled areas, Beijing began a process of financial and fiscal reconsolidation; to top it off, 2016 began with a long-awaited overhaul of the PLA, dissolving the disjointed, even centrifugal structure of semi-autonomous military regions, replacing this with a more streamlined and centralized top-down command structure.

Rather than simply too much control, regulation, or intervention, Xi and co. believe China suffers from too patchy, too inconsistent or self-contradictory, or even too little of it. And while their long-term goal is clearly stated to be as little regulation as possible - i.e. give "market forces" a decisive role in the economy - they firmly think that China can only get there with more intensive party and state direction in the near term - specifically, more cohesive execution of the center's policies by its constituent parts.

Whether or not they're right is the Great Question of our time - and this blog is devoted to following the course of events that will answer it. But as far as they're concerned, right now, China has most certainly not "failed" - and that's why they feel no need to admit it.

(It's also useful to keep things in perspective. This report, cited by the above article as proof that consumer confidence in China is collapsing, still shows figures that are probably enviable by comparison with the world as a whole. Indeed, it cites that disposable income and consumer spending grew by 7.4 and 11 percent respectively in 2015 - that's not an economy on the verge of recession, and it's actually initial proof that the new government "stimulus" focused on consumption, launched mid-2015, is already working. The effect is particularly pronounced in the auto market: auto sales grew nearly 8 percent in January, an impressive clip for the world's largest vehicle market, and continuing a rebound since October.)