Beijing Can’t Fix China’s Economic Problems

University graduates attend a job fair in Wuhan of China's central Hubei Province, on Aug. 10, 2023. STR/AFP via Getty Images

Commentary

China’s Central Economic Work Conference was concluded in Beijing on Dec. 13. This is a yearly central planning action that the communist economists (an oxymoron) and government policymakers use to map out economic development priorities and set the tone for macroeconomic policy in the upcoming year.

Given Moody’s downgrading of China’s credit rating to negative on Dec. 5 and the accompanying bad economic news, expectations from this conference were different than the mundane affairs of past years.

Let us examine the issue.

Chinese Central Planning

After the Chinese Communist Party (CCP) took over the government of China in 1949, the communists took over most of the industry and commerce, replaced traditional Chinese household agriculture with agricultural producer cooperatives, and replaced the previous Chinese production and distribution methods with a central planning system.

As in virtually all communist countries, the Chinese regime developed a top-level planning process manifested in “five-year plans” modeled after the Soviet Union that ultimately decided what would be produced, who would produce it, and which enterprises would receive the raw materials and/or finished components required for production.

The first of those five-year plans was produced by the State Planning Commission in 1952, covering 1953–57, and was focused on the industrial sector. The “central plan” included targets for the production output of each industry as well as targets for the inputs needed to produce that output.

Since the Chinese five-year plans were first focused on the domestic economy, and the Chinese economy was isolated from the rest of the world by Mao Zedong, few foreigners paid much attention to those plans. The first five-year plans were also disrupted to the point of uselessness by the societal and economic upheaval during Mao’s Great Leap Forward and the Cultural Revolution.

Deng Xiaoping’s rise to power in 1978 resulted in the subsequent development of five-year plans focused on transforming China’s economy into one dominated by market forces rather than central plans and CCP diktats. The Chinese hit the jackpot when U.S. President Richard Nixon and Secretary of State Henry Kissinger were allowed to “open China” beginning in 1972. Their visit brought about an unprecedented era of foreign direct investment in China that continues to this day and has been the real engine of Chinese economic growth.

What the communists failed to learn was that their central planning actions—and the supposed superiority of “economics with Chinese characteristics”—were not the reasons for China’s remarkable economic growth in the 1990s and 21st century. Foreign direct investment (FDI) was the main engine behind the growth, as well as the opening of Western economies to Chinese mercantilist trade practices after membership in the World Trade Organization was granted to China in 2001.

The state-owned enterprises (SOEs) that grew up under decades of communist central planning have always been “inefficient” (for example, major sources of corruption) and continue to be major drags on the Chinese economy. The problems with SOE inefficiencies and burgeoning local government debt were allowed to fester unchecked while the economy boomed from FDI and the growing export economy.

Nevertheless, the facade of communist central planning continues with these annual conferences, as well as the trumpeting of “successful economic management by the CCP” by state-run Chinese media. However, the focus shifted from centrally planning the entire economy to setting the general direction of government fiscal and economic policy, as well as Beijing’s investment program in large public and private projects.

2023 Central Economic Work Conference

This year’s conference was no different. As part of the regular central planning process, the 2023 Central Economic Work Conference reviewed the progress of the 14th Five-Year Plan for 2021–2025, which was approved by the CCP’s 19th Central Committee in October. Problems ignored and/or exacerbated for years by communist mismanagement could no longer be ignored.

Massive Local Government Debt

Reuters reported on Nov. 14 that “Local government debt reached 92 trillion yuan ($12.6 trillion), or 76% of China’s economic output in 2022, up from 62.2% in 2019.” Bonds from local government financing vehicles comprise nearly half of China’s domestic corporate bond market, and the requirement to roll over that debt is forcing a reduction of economic development loans.

Deflation

Compounding the local debt problem is deflation. The Wall Street Journal noted on Dec. 5 that China “is battling deflationary pressures that will make it harder for local governments to keep up with their interest and principal payments.”

The Guardian reported on Dec. 11 that Chinese consumer prices “fell 0.5% percent in November, the sharpest decline in three years” while “China’s producer price index fell 3% year-on-year … which is the 14th decline in a row.”

Foreigners Withdrawing Investments

Breitbart reported on Dec. 15 that the Institute of International Finance (IIF) issued a report “that predicted foreign investors will withdraw $65 billion from China in 2024.” This follows a withdrawal of $3.7 billion in foreign investments from Chinese bonds and equities in November. Increasing business regulation and scrutiny under the new Chinese counterespionage and national security laws are convincing foreign companies to disinvest and relocate outside China.

Despite these pressing problems, the conference sidestepped them and produced mostly happy talk.

According to Global Times on Dec. 12, the conference supposedly achieved the following:

• Comprehensively reviewed the economic work of 2023.
• Conducted a profound analysis of the current economic situation.
• Made systematic arrangements for the economic work in 2024.
• Believed that favorable conditions outweigh unfavorable factors in China’s development.
• Encouraged Chinese citizens to “consolidate stability through progress.”

More happy talk on Dec. 13 from China Daily: The conference approved measures aimed at “comprehensively deepening reform and opening-up, promoting high-level self-reliance and self-improvement in science and technology, increasing macroeconomic regulation, and making coordinated efforts to expand domestic demand and intensify supply-side structural reforms.”

“Increasing macroeconomic regulation” sure seems like more central planning!

The details were left to the divination of the reader.

Concluding Thoughts

As usual, the real action took place behind the scenes. Zero Hedge noted that in November, “China’s central bank decided to inject [into the Chinese economy] the most cash via one-year policy loans on record” in order to fight deflation by stimulating domestic demand (a long-time goal of Chinese leader Xi Jinping).

China’s Ministry of Finance has allowed for special refinancing of government bonds with extended redemption periods for servicing local debt that will be combined with efforts to sell unspecified assets to pay down debts. This amounts to kicking the local government debt can down the road because the local businesses and state-owned enterprises that incurred the debt have proven to be money losers over the years, and that problem is not being addressed.

These actions aim to resolve domestic issues but are merely Band-Aids being applied to the seemingly intractable problems made possible through CCP central planning and neglect. No structural changes are contemplated, let alone being acted upon.

Will the Biden administration bail out China by priming the foreign direct investment pump much like Nixon and Kissinger did 50 years ago?

That is the CCP’s only lifebuoy in rough seas at this point.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.