Wall Street Journal
ANDREW BROWNE
Exactly a year ago, Premier Li Keqiang set out the case for difficult industrial overhauls. “This is not nail-clipping,” he warned, “it’s like taking a knife to one’s own flesh.”
The comments recalled his fearsome predecessor Zhu Rongji who eliminated 30 million jobs practically in one go in a cleanup of state enterprises in the late 1990s.
But Mr. Li has yet to follow through. The problems he was grappling with back then have all gotten much worse—colossal industrial overcapacity, soaring corporate debt, plunging profits, declining factory prices. His reluctance to draw blood underscores a critical change that has come over a Chinese leadership that once had a reputation for pursuing economic goals with ruthless pragmatism. Today, politics trumps economics.
Both high-level economic policy-making and its practical implementation, once the preserve of the State Council headed by the premier, have increasingly fallen into the hands of Communist Party committees led by President Xi Jinping.
The choices they make are shaped by Mr. Xi’s political preoccupations: to strengthen the party, primarily through an anticorruption campaign, to root out challenges to the regime and to avoid social instability that could in any way threaten the party’s hold on power. If that means delaying unpopular economic adjustments, so be it.
That’s the way to read Mr. Li’s report to the annual meeting of the National People’s Congress, which opened last weekend, calling for ambitious growth over the next five years of between 6.5% and 7%.
In setting that number, the administration intended above all to send a message of government confidence, thereby bolstering public support for the administration.
The number itself derives from a long-standing political goal—to double gross domestic product by 2020 compared with 2010 to give the nation reason to celebrate on the centenary of the Communist Party’s founding in 1921.
Yet it can only be achieved by unleashing new gushers of credit that gave rise to the recurrence of a problem that former Premier Zhu seemed to have slain once and for all: debt-laden industrial “zombies,” many of them in the state sector, that threaten China with financial insolvency and global markets with chronic instability.
Relatively rapid economic growth is at odds with industrial restructuring. The government has abandoned all pretense of corporate “deleveraging”—reducing debt—that must come one day.
Using delicate language, Mr. Li suggested in his report that corporate deadbeats should be handled “proactively yet prudently.”
He said measures should include mergers, reorganizations, debt restructuring and bankruptcy—in that order, precisely to avoid as much discomfort as possible.
Mr. Li gave no figures for projected job losses but numbers put forward so far in the steel and coal industries, the two areas worst affected by overcapacity, run to about two million, a big number in absolute terms but only a fraction of the country’s vast workforce. And while the official target to cut steel capacity by up to 150 million tons may sound dramatic, it will still leave idle capacity of some 200 million tons—more than double America’s total annual production.
Under Mr. Xi, “the objective of economics no longer has absolute priority in the economic policy-making process,” writes Chen Ling, an associate professor at Tsinghua University’s School of Public Policy and Management, in a recent study on the Chinese economy issued by the Center for Strategic and International Studies.
To be sure, the overall environment has changed dramatically since Mr. Zhu ran the economy with an iron hand. The state enterprises he went after in those days were small, scattered and financially weak. By contrast, the current crop have bulked up on bank loans, and acquired new political muscle, making them much harder to cull.
As the global economic outlook darkens, the temptation among politicians everywhere is to kick the can down the road.
Still, the fact that China’s leaders have joined the procrastinators reveals new insecurities, which may undo the regime in the long run. A large body of Western academic writing suggests that when the entire rationale for authoritarian systems turns to maintaining power, rather than facilitating change, the game is over.
David Shambaugh, a professor of political science at George Washington University, is among those who see this playing out in China. In his new book “China’s Future,” Mr. Shambaugh writes that the Chinese administration is in a state of “atrophy and ossification” as a result of its unwillingness to tolerate political change. If it maintains its current course, he writes, “I predict that economic development will stagnate and even stall, exacerbating already acute social problems, and producing the protracted political decline of the [party].”
For now, a gulf is opening between the desire of Chinese leaders to avoid painful choices, and the expectations of foreign investors who are looking for evidence of change that really hurts. So far we’re seeing nail scissors not a scalpel.
