It is a commonly held misconception (one fed by numerous portrayals in the media) that the American president is all-powerful), when in fact the Constitution has actually imposed substantial limits on their fiat. For example, while he (or she) may enjoy near-limitless scope in matters of foreign policy and defence, they actually have very little legislative brawn when it comes to domestic affairs (where persuasion, horse trading, politicking, even threatening are the most effective tools at their disposal). Rare then has been those presidents who have been able to accomplish much in both areas.
This is an entirely different story in contemporary China. Xi Jinping, hailed as “the most powerful man since Mao Tse-Tung’ (often by the very same media as previously referenced), is now into his unprecedented third five-year term, with nary a rival in (obvious) sight. Both theoretically and in reality he seems to be in a position of supreme authority and unlike the US president, his prospects for what passes as ‘re-election’ seems nothing but pro forma.
Yet the hazards of supreme power are as great as the benefits: the trouble with being seen as THE guy in charge is that one gets accolades aplenty when things go well, and the brickbats when they do not. And right now, it’s not quite going according to plan.
As China celebrated its Golden Week holiday and marked the 75th anniversary of the People’s Republic on October 1st, the Communist Party rolled out a slew of measures aimed at boosting its economy. These plans included aid for the country's crisis-hit property industry, support for the wavering stock market, as well as cash handouts for the poor and more government spending through the infusion of capital into the system. Initial effects from these announcements brought record gains to shares in mainland China and Hong Kong.
But there is concern among economists that the policies may not be enough to fix China's economic problems. This is actually the fourth time in 16 years when Beijing has been spooked by faltering growth into adopting an array of economic stimulus measures designed to reset the economy. It didn’t work for long in 2008, 2015 or 2021, and the “bazooka”or “spaghetti” (as in toss it against the wall and hope something sticks) measures announced above are unlikely to do the trick.
Some of the measures announced by the People's Bank of China (PBOC) on September 24th were aimed at the country's beaten-down stock market. The new tools included funding worth 800bn yuan ($114bn; £85.6bn) that can be accessed by insurers, brokers and asset managers to buy shares. – Pan Gongsheng, the PBOC governor, committed the central bank to offer support via these financing facilities to allow listed firms to buy back their own shares, and non-bank financial firms to buy equities in addition to announcing plans to lower borrowing costs, while allowing banks to increase their lending.
On the Monday before the nation booked off for a weeklong holiday, the benchmark Shanghai Composite Index jumped by more than 8%, in its best day since the 2008 global financial crisis. This capped off a five-day rally that saw the index jump by 20%. The following day, with financial markets closed on the mainland, the Hang Seng in Hong Kong rose by over 6%. It was easy to see that investors plainly welcomed these measures.
Stock market sentiment has cooled since. The strategic reality set in that while direct equity market intervention and easier monetary conditions bring relief, they do little to address deep-seated economic flaws. Most of the measures announced were either extensions or variants of pre-existing policies that haven’t had great traction. China is in a so-called liquidity trap, where cutting interest rates is not really effective. It is quite likely that stock market gains will dissipate unless the authorities act to improve the sustainability of the economic growth, and company earnings.
It's an especially sensitive time. The PRC marking its 75th anniversary means it outlived the only other major communist state (the USSR, which collapsed 74 years after it was founded) and by so doing passed a milestone which has long been a consideration for China’s leadership. Such validation now needs further reinforcement by the need to boost confidence in the broader economy amid growing concerns that it may miss its own 5% annual growth target. In China targets, especially ones set by the central government, must be met -- by any means necessary and in the case of economic goals for the year, there is the belief that failure to do so might exacerbate the public’s already low confidence and the economy’s increasingly low growth.
Fundamentally, confidence is important, but the bulk of household wealth resides not in stocks but in the beleaguered property market where prices are falling, and in low-yielding bank deposits. Therefore, confidence to spend requires a more stable property market, stronger income growth and a more robust jobs market.
It’s been no secret that one of the main drags on the world's second-largest economy has been the downturn in the country's real estate market, which actually began three years ago and reached its crescendo with the collapse of giant companies Evergrande and Country Garden. In an attempt to cushion the blow, aside from policies aimed at boosting stocks, the recently unveiled stimulus package also targeted the real estate industry, including measures to increase bank lending, mortgage rate cuts and lower minimum down payments for second-home buyers. The authorities lowered interest rates on market instruments and mortgages, banks’ reserve requirements, and the minimum down payment on second homes. They increased the subsidy to state enterprises to buy unfinished homes, which loom heavily over the real estate market. The stock of unsold homes, disproportionately situated in smaller towns and cities, is estimated to amount to about three to four years of sales at current rates.
The finance minister said government borrowing would rise for the rest of this year and that local governments, responsible for public goods and services, would be encouraged to use about 2.3tn yuan of borrowed but unspent funds. They would also be allowed to borrow to buy unused land and unsold properties, while Beijing would authorise debt swaps with local governments and fund new capital injections into large state banks.
These measures could help China to get closer to the previously mentioned GDP target for this year. However, there could be additional fiscal easing in coming months, especially if the economy remains lacklustre as winter approaches, as seems likely.
Overall, though, the government still seems focused on financial engineering within the state sector, rather than fundamental reform. The economy may benefit from as yet unspecified measures in 2025, but it is still going to slow down under the influence of misallocation of capital, limited debt capacity, long-term decline in the property sector, and weakness in household income and spending.
Will this approach be enough?
The immediate answer, despite being welcome (and somewhat overdue), is that these actions are not what is truly needed. While a Japan style “Bubble” economy collapse has been avoided, the combination of the real estate market’s woes, risings costs of living as well as the base cost of a work force that’s ever-increasing and an acute lack of jobs for graduating classes seeking to enter an increasingly less than competitively-priced work force make it very challenging for the government to shift the proverbial needle.
China’s fundamental weakness at this point in time stems not from a credit issue, but instead from a crisis of confidence; firms and families don’t want to borrow, regardless of how cheap the government makes it to do so.
These programmes have failed in the past because the government’s focus is mainly on the cyclical – or short-term – outlook. It thinks quick palliatives are the answer to systemic problems such as high youth unemployment, the real estate bust, weak productivity and deflation. China’s problems, however, require structural – or root and branch – economic reforms, which necessitate political changes that are anathema to its Leninist government.
Significantly, a measure of the leadership’s concerns was evidenced when, two days after the PBOC's announcement, Xi Jinping chaired a surprise economy-focused meeting of the country's top leaders, known as the Politburo after which officials promised to intensify government spending aimed to support the economy.
At the Politburo session, China’s top leaders vowed to go beyond interest rate cuts and tap deeper into government funds to boost economic growth. However, other than setting priorities like stabilizing the property market, supporting consumption and boosting employment, the officials offered little in the way of details about the size and scope of government spending.
The simple fact is that, like so many other economies in the world, they do not know how much is too much, and little is too little to spend. If market expectations for the totality of the fiscal stimulus are not met (and predicting such fickle reactions can be a fool’s errand even in the best of times), investors could find themselves disappointed. Moreover, there is sentiment that cyclical policy and fiscal stimulus may not address the fundamental problems inherent in a system that needs sweeping reforms.
Economists see tackling entrenched issues in the real estate market as key to fixing the broader economy: property is the biggest investment most families will make and falling house prices have helped to undermine consumer confidence. Therefore, ensuring delivery of pre-sold but unfinished homes halted by the giant firms’ collapse into bankruptcy would be a key step.
Furthermore, In order to increase domestic consumption on a sustainable basis, fiscal support for household incomes needs to go beyond one-off transfers and rather come through improved pension and social security systems.
On the day of the 75th anniversary, an editorial in the state-controlled newspaper, People's Daily, struck an optimistic tone, recognising that "while the journey ahead remains challenging, the future is promising". According to the article, concepts created by President Xi such as "high-quality development" and "new productive forces" are key to unlocking that path to a better future.
The emphasis on those beliefs reflects Xi's push to switch from the fast, easy drivers of growth in the past, such as property and infrastructure investment, while trying to develop a more balanced economy based on high-end industries. The challenge China faces is that the old and the new economies are deeply intertwined; if the old economy falters too quickly, it will inevitably hinder the rise of the new. Belatedly perhaps (but better late than never), the national leadership has come to realize this and has begun to respond to.
What remains is to see how such a state-controlled edifice can lay out a comprehensive strategy to build upon the rapid, unfettered growth of the past, and build a sustainable model. Two paths, one similar to post- ‘Bubble’ Japan and the other more like the post-2008 US lie ahead. For Xi Jinping, the accumulator of so much personal power, no cult of personality or state-driven attribution of genius or political insight can substitute for the fact that he has made himself the focus of the nation’s success or failure.
And the question should no longer be whether or not he is China’s “most powerful” leader since Mao, but rather does he have the vision, resilience and staying power of Deng Xiaoping in order to effect the changes which are needed?
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