Most China analysts would acknowledge that under President Xi Jinping, the Chinese state and Communist Party has sought to assert more control over its citizens.
In general, they have been more relaxed about the economy remaining on its reformist track. Yet this almost settled view may be facing something of a backlash.
There has, of course, been a great deal of attention paid to Xi’s determination to crack down on corruption in the party, local government and business. Investors have also paid close attention to China’s plans to rebalance its economy away from heavy industry towards a more consumer-driven economy, while the Belt and Road initiative has been analysed at length across the world.
However until now, the statist approach was not widely seen as a particular risk to the economy. That may be be changing with the publication of two books.
The Peterson Institute has just published a book by senior fellow and former Yale Professor Nicholas R. Lardy linking China’s recent economic progress or lack of it to “resurgent state dominance”.
In ‘The State Strikes Back: The End of Economic Reform in China?’, Lardy argues that China’s trend growth is now declining meaningfully for the first time since reforms were launched.
He adds that “State control driven from the top has begun to diminish the vital role of the market and private firms in China’s economy”.
The view chimes with that of George Magnus, economist and associate at the China Centre, Oxford University, who published ‘Red Flags: why Xi’s China is in Jeopardy’, also published last year.
“In a recent blogpost, Magnus wrote: “During 2018, private companies in China, the mainstay of the country’s economic resurgence in the last decades, were hit by a slump in the stock market, the on-going credit crunch and the trade conflict between China and the US. The government took measures to help them, but entrepreneurs have concerns that run much deeper, namely that the government’s industrial and economic focus on the state sector is at their expense.
“Even though it has become accepted widely that China’s private sector has been the driving force in the country’s economic eruption, clouds have been gathering over this dynamic part of the economy since Xi Jinping came to power. Lately, private enterprise has not only been flagging but it has also been the focus of great controversy and uncertainty.”
Lardy for his part does not suggest China’s decline need be inevitable. Speaking to Chinese website Xinhua he said: “If they are successful in shifting towards more consumption, private consumption, I don’t think there’s a conceptual reason why they couldn’t continue to grow fairly rapidly for another 10 years,” Lardy said, suggesting that disposable income would be one of the most reliable indicators to gauge China’s economic growth going forward.
“One of the most important pieces of data that doesn’t get enough attention to is the growth of disposable income, because ultimately that’s the driver of consumption and we’re now in an environment where consumption is the dominant source of China’s economic growth.” Investors may do well to keep their eyes on the politics as well the economy.