Market pundits have been dumbfounded at China’s recent inaction. A macro and market version of China’s great wall has descended between investors and China’s mandarins. As the Chinese economy continues to deteriorate no major stimulus has been announced.
As the share prices of Ali Baba and Tencent, China’s tech behemoths, have continued to plummet, the litany of regulation has continued unabated. As the gargantuan property conglomerate Evergrande continues to implode and risks spill over, Beijing refuses to ride to the rescue.
It was not so long ago that policy reflected the maxims of former Chinese leader Deng Xiaoping, “Poverty is not socialism. To be rich is glorious” or “It doesn't matter if a cat is black or white, so long as it catches mice.” Economic growth no matter the means was the name of the Chinese game. The growth strategy was that utilised by other successful Asian economies such as Japan, Korea and Taiwan that repressed domestic consumption and channelled capital into one’s export industries.
New maxims are afloat in Beijing with a heavy retro flavour. China’s leader Deng Xiaoping has invoked the refrain” common prosperity,” which was originally coined by the founder of Communist China Mao Zedong. Mao, the Great Oarsman, whose quest for common prosperity infamously resulted in widespread famine.
Much of Deng’s pragmatic economic policy can be construed as the antithesis or allergic reaction to Mao’s utopian foibles. Deng and his family suffered greatly in a few Maoist escapades. Deng’s attempts at decentralizing political power, by introducing intraparty democracy, were also probably influenced by these experiences.
Xi Jinping’s Maoist rhetoric is in demand. The fruits of China’s explosive economic growth have not been shared by all. According to Bloomberg the wealthiest 20 percent earn more than ten times more than the poorest 20 percent, which is a wider chasm than that present in the United States or Europe. Xi has begun bolstering the position of low paid workers, attacking monopolies, protecting children by restricting online gaming and breaking apart private educational firms.
Evergrande is an example of moral hazard. Saving the company would send the wrong signal to China’s overleveraged property sector. However, the company may be too large to fail. The property sector may account for 20 percent of the Chinese economy and may constitute up to 40 percent of the loan portfolio of China’s banks.
Deng Xiaoping would have already acted to safeguard China’s economy. Evergrande clearly showcases that China’s threshold for acting is clearly higher than before. Saving Evergrande owner and China’s fifth richest man Hui Ka Yan is clearly an attractive proposition in today’s Maoist fad.
China’s official target is still to double GDP by 2035. Hence common prosperity still involves rapidly growing prosperity. However, some people’s prosperity may be more important than others. Xi’s predecessors Jiang Zemin and Hu Jintao served the maximum of two five-year terms in power. The maximum has abolished and next year China will decide who will rule for the next five years. Xi Jinping’s second five-year term is set to run out next year and the stage is set for him to reign another five.
Valtteri Ahti (Ph.D., Economics) started as Evli's Chief Strategist in August 2021. Read more
Valtteri Ahti
