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| Victor Shih |
Victor Shih:
Xi’s call for the realisation of the China Dream may be creating this echo chamber of a policy environment. In order to realise this ambition, China has to maintain relatively high growth of 6 percent or above for the foreseeable future. The state media reported Xi’s remarks that “the realising of the China Dream of the great revitalisation of the Chinese people means that the state must be strong and rich, the nation must be prosperous, and the people must live well”.
Because Xi has put such a heavy emphasis on this objective, China’s technocrats cannot challenge it outright, forcing them instead to accelerate growth even as the private sector acts to slow it down. As debt mounts in the economy, indebted firms are less able to invest, which slows growth. Knowing that most firms and the government are indebted and are unable to spend much, even firms unencumbered with debt will not want to invest as heavily. This process has driven real private sector investment growth down to nearly zero.
However, such a market-driven outcome is unacceptable to China’s technocrats, who are fearful of disappointing Xi. Instead of challenging the growth objective, as advised by the IMF, they are pulling out all stops to accelerate state-backed investment in order to replace falling private sector investment. Local governments are taking on increasing levels of debt in order to maintain growth. This will create even more unserviceable debt down the track because investment by state-owned enterprises and local governments will continue to generate smaller cash flows and fewer economic benefits than the initial investment.
The combination of Xi’s rising power and his strong preference for growth will continue to force the Chinese economy to greater leveraging, making the county’s position more precarious, and ironically, imperilling the very dream it seeks to achieve.More at the Policy Forum.
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