The dark side of China averting a hard landing in 2016? Not surprisingly at all, more ghost towns - in other words, a reflated property bubble that's as dangerously unsustainable as ever.
The sheer scale of the small and medium-sized urban area expansion being put on the cards by local officials truly makes the 2016 stimulus seem like the next iteration of the 2009 stimulus - with potential devastating effects down the line for the real economy. China's deep structural crisis hasn't abated but deepened.
But Xi Jinping isn't unprepared for the trouble ahead. It's precisely this scale of returning to old ways of goosing short-term GDP that he was alarmed enough about back in May to openly voice discord against Li Keqiang's management of the economy - a discord that has apparently resurfaced as of early July in their conflicting signals over SOE reform.
In fact, Xi must know as well as Li that given the circumstances both domestically and internationally, a new massive wave of credit expansion was really the only way to prevent a full-blown loss of confidence in the Chinese economy. But the aforementioned figure - new urban areas for an estimated 3.4 billion people - absolutely blows out of the water any economic or commercial sense and makes his public rebuke seem quite necessary.
It's as if Xi were warning provincial leaders and their favored SOEs: "Yes, we need to give you all this cheap money now to prop up growth, but when the going gets tough again - and before long it will - don't expect the same implicit guarantees of backstops against failure."
Ideally, local governments should already know that "this time is different": they shouldn't need additional reminders that their credit-fueled expansion is merely meant to buy time to transfer wealth and income from the bloated state sector to the household sector.
In reality, of course, for most of them the stimulus has been just the vindication they were looking for that Beijing, yet again, couldn't possibly put them out to dry: instead of crafting better policies to clear through their existing housing gluts and boosting social services support for non-urban residents (thereby urbanizing them), they've instinctively poured hoards of cash into their same old crony sweetheart companies.
But this time truly is different: in a decelerating growth environment, poor investments now take far less time to go sour, and the seize-up of monetary velocity which has already all but stalled private investment is increasingly putting pressure on public investment, as well. Before long, those zombie SOEs which have yet again resisted downsizing will be deeper in the red than they've ever been, and at that point they'll be at the mercy of a stronger central party leadership under Xi Jinping's personal direction.
Since the annual "Two Sessions" back in March, provincial and local party bosses have obviously sought Li Keqiang's political cover as a shield against more aggressive streamlining of their economic activities by Xi, especially as Li could plausibly plead for easing on their behalf as necessary for economic and financial stability. But when push eventually comes to shove, that protection won't be enough against the hammer of austerity from the party headquarters of Zhongnanhai.
That's because party chief Xi has complete and ever-tightening control of the military, the security apparatus, and perhaps most significantly, the press. He hasn't forgotten the embarrassing flab of dissent which leaked out around the Two Sessions, and can only be expected to be even less tolerant of any disobedience within the party ranks - likely silencing any of it before it can possibly be expressed to the public - next time it surfaces.
China's unresolved crisis, with its looming outburst of real financial and economic trouble somewhere down the road, is better understood by Xi and his small central party leadership team than anyone else in the country (or the world) - possibly by far.
Where Western and liberal Chinese observers and analysts see contradiction and confusion in his stated intent to rein in credit growth on the one hand, yet strengthen the power and role of SOEs on the other, Xi himself is perfectly clear as to the paradox of the present juncture of China's reform and opening: the "market" is demanding consolidation of many disparate state firms scattered across myriad provinces and regions into just a handful of larger but leaner outfits which would be more responsive to central party and government edicts.
Xi has always known that further pro-market reforms are impossible on a nationwide basis except for a reconsolidation and recentralization of party and state authority back into Beijing's hands; three years of wrangling with the party's vested provincial and local interests have now only emphatically underscored what he always knew to be the case.
He can't stop most of the country - most of the party - from hitting the brick wall of yet another sputtered credit boom. If he had his way, he wouldn't have had to concentrate ever more absolute authority into his own hands. But as he sees it, the die is now cast: the raft is now barreling down to a treacherous turn of the rapids with no chance left of course correction, leaving preparation for shock the only alternative. He's tightening his grip because it's time to brace for impact: few cautions can be too excessive.
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