Xi Jinping and the Chinese Communist Party (CCP) have fallen short—again.
For all the meetings, speeches, and upbeat rhetoric, the nation’s leadership has offered little substance to deal with China’s serious and manifold economic challenges—a metastasizing property crisis, export shortfalls, youth unemployment, depressed levels of consumer confidence, and reluctance by private business to invest in the future.
What little concrete policy Beijing has put forward to deal with the property crisis can only be described as “scraps.” For years, the authorities neglected the economic and financial fallout of the property crisis, and when they finally acted, they put forward only two small gestures.
One is a promise by the People’s Bank of China (PBOC) to cut interest rates further than it already has. Oddly enough, right after making this promise at the CCP’s Two Sessions meeting, the bank, at its own meeting, decided to hold interest rates steady. Even if the coming months see rate cuts, there is ample reason to doubt their effectiveness.
After all, the PBOC has cut interest rates five times over the last 24 months, and property markets have continued to decline. Notably, in the first two months of this year, housing sales fell 33 percent below their levels of a year ago, and new construction was down 30 percent from year-ago levels. Against such a record, it is only reasonable to ask if this policy answers the needs of the matter.
More recently, Beijing launched a program called the “white lists.” It is supposed to stabilize property markets by asking local governments to identify failing property developments for financing that the state-owned banks will provide after they review the proposal. In principle, it is not a bad idea. It has more promise than additional small PBOC interest rate cuts. It would have been more effective had Beijing instituted such a program two years ago when the crisis first emerged and had not yet had time, as it has, to undermine confidence in the future of real estate investing and in financial arrangements generally. It still might have helped if it had not proceeded on such a small scale. The $17 billion equivalent earmarked for “white lists” so far is barely over 5 percent of the $300 billion in liabilities Evergrande announced in 2021 that it could not cover, much less the failures that have followed.
Beyond these small gestures, China’s leadership seems to have turned its attention away from property problems, at least if the commentary at the Two Sessions conference is any indication. This is a shame because the nation’s property problems lie at the root of other severe economic challenges. The failures in property development have not only restrained Chinese finance and depressed housing sales and construction but have also forced down real estate values. Since real estate is the primary asset for most Chinese, the loss of value in this area has cut deeply into household wealth and is the primary cause of a loss of consumer confidence and reluctance to spend, things that have imposed a major drag on the general economy.
Rather than recognize these sorts of economic interactions and take policy beyond the small gestures outlined above, Beijing has decided simply to change the subject. All but ignoring the property crisis and the problems of Chinese households, leaders at the CCP’s Two Sessions conference talked about bolstering manufacturing. This sector, they asserted, was where China would take what they called “a new leap forward”—with the “modernization of the industrial system” through “science and education.” Speakers emphasized artificial intelligence, new energy vehicles, hydrogen power, biomanufacturing, commercial space flight, new materials, and innovative drugs.
There is nothing wrong with attention to modernization, but still, there are problems. For one, the resources allocated to this heroic effort are inadequate to make much difference. Beijing has allocated 10.4 billion yuan ($1.5 billion) for modernization and training, a pittance in an $18 trillion economy.
What is more, Beijing has offered nothing concrete about how to promote this change. Indicative are remarks by Premier Li Qiang. According to the official translation of his talk, China will “spur industrial innovation by making innovations in science and technology.” This is meaningless. It effectively says that the nation will innovate by innovating. That is not a plan. It is a logical circle.
Nor does this new emphasis make an appearance in Beijing’s only major policy proposal: infrastructure spending, China’s default stimulus for decades now. The plan calls for 3.9 trillion yuan ($541 billion) in special purpose bonds for local government to finance projects and an additional 1 trillion yuan ($138.9 billion) in bonds issued by the government in Beijing to finance other projects.
So far, Beijing has not revealed specifics on projects toward which this money will go. The fact that the financing will come from “ultra-long-term bonds” suggests that the planners do not expect an early payoff. Some suggestions of huge projects on the scale of the Three Gorges Dam development have surfaced. That project started in the 1990s and was not operational until 2015.
Whether the infrastructure spending links to the innovation push or not, a question remains of where all this new innovative manufacturing will go. Since Beijing seems determined to avoid dealing with the problem of household finances and restrained consumer spending, the only viable outlet would be exports. However, China faces significant efforts by American, European, and Japanese businesses to diversify their supply chains away from China, as well as a growing hostility to China trade in Washington, Brussels, and Tokyo.
From all these questions and loose ends, the CCP has failed to think through its plans, to recognize that the pieces of the economy link one to the other and that even a powerfully centralized state such as communist China cannot develop an area without reference to the rest of the economy. This failure all but ensures that China’s economic and financial problems will persist for some time.
