Beijing seems finally to have awakened to the fact that China’s economy needs more help.
The authorities started their effort a few months ago when they finally lifted the stifling strictures of their zero-COVID policy. Reversing a misguided policy was, however, insufficient for the economy’s needs. So more recently, they have begun efforts to restore confidence among private businesses so that they will invest, expand, and hire new workers.
Beijing’s plans will likely fail. They reek of Marxist central planning, command, and control. In other words, they repeat past mistakes by continuing to ignore market signals, which are, of course, the ultimate guide for any successful economic effort. If these new efforts have any positive effects, they will likely be short lived and instead sow the seeds of future economic troubles.
Private business in China lacks confidence for two reasons. One is the legacy of Beijing’s strict zero-COVID policy. For three years, these measures, in a seemingly arbitrary fashion, imposed a series of coercive lockdowns and quarantines that undermined any sense among individuals and businesses that they can plan, save, invest, or even earn reliably. Little wonder then that the business managers and owners have held back on putting any money at risk in new ventures.
At the same time, Chinese leader Xi Jinping and his colleagues in leadership have for years now talked up the need for China to move away from the competitive economy it had once cultivated and return to Marxist principles. Part of this public conversation has devolved into official rhetoric berating private businesses—large and small—as somehow hostile to society for following profit opportunities revealed by market signals instead of the Chinese Communist Party’s (CCP) agenda.
The effects of this behavior on private businesses have hamstrung China’s economy. In the first half of this year, even as state-owned enterprises (SOE) under orders from the CCP have added fully 4.4 percent of value to China’s economy, private companies have slow-walked expansion, adding a mere 1.9 percent. Whereas SOEs have increased their investment spending by 8.1 percent, private investment has declined by 0.2 percent. This divergence is unsustainable, as Beijing has become aware, noting that small- and medium-sized private businesses contribute some 50 percent of all tax revenues, amounting to 60 percent of the nation’s gross domestic product, apply some 70 percent of China’s technological innovation, and account for 80 percent of urban employment.
Faced with these facts and consequently China’s still-faltering economy, Mr. Xi and the CCP have changed their tune. In an implicit admission of the failure of past policies, they lifted the zero-COVID strictures in January and still more recently have begun to downplay talk of Marxist principles while reversing anti-private business rhetoric. Now, Mr. Xi refers to private entrepreneurs as “our own people.”
But as the figures quoted above show, private business has remained wary. Accordingly, Beijing has come out with a new plan to rebuild confidence among private business owners and managers. Its promise is dubious at best.
It’s hard to see how such a plan can restore business confidence. The entire program is directed by central planners from the top down, approving applicants while arranging financing. The plan does reference “listening” to the “concerns” of private business. Otherwise, it takes no account whatsoever of the desires of the ultimate consumers with whom the businesses presumably have daily contact. In other words, the direction of the effort ignores market signals entirely in favor of government-ordained and government-selected efforts.
The scheme not only will fail to inspire private investment efforts and rebuild economic momentum, but also carries all the classic risks of central planning. It will marshal tremendous resources and financing for efforts that planners and government officials want, but that have little or no relation to what consumers or other businesses want and is signaled in the marketplace. Money and effort will go into activities that effectively have little promise of adequate returns. This approach is why China today has empty high-rise apartment blocks in places where no one wants to live and a legacy of debts run up by that misguided development effort.
Government pressure and a plentitude of financing might elicit an immediate positive response to the 31-point program. Ultimately, however, it is hard to see businesses following too far along projects that have little relation to market signals and that consequently have, at best, a random chance of raising profits.
Americans might take a lesson from China’s response and its flaws. After all, “Bidenomics” is a watered-down version of what China is doing.
