LDN - Business

Why is China not rushing to fix its ailing economy?

[August 17, 2023] By Laurie Chen and Yew Lun Tian

BEIJING (Reuters) - With China at risk of tipping into prolonged stagnation and a spiralling property crisis threatening financial stability, there is growing unease over why its leaders are not rushing to revive the world's second-largest economy.

Even in a country known for opaque and drawn-out decision making, investors, analysts and diplomats are pointing to signs that Beijing seems hesitant to deliver the bold policies needed to prop up an ailing post-COVID recovery.

This is not just an economic problem but a geopolitical one.

U.S. President Joe Biden - at loggerheads with China over hot-button issues like Taiwan, the democratic island Beijing claims as its own - last week called China a "ticking time bomb" due to its economic ills. "That's not good because when bad folks have problems, they do bad things," Biden said.

So why has China's response been so tepid?

The view of several China watchers is that President Xi Jinping's focus on national security is restricting and working counter to the economic effort, scaring off the money Beijing says it is seeking to attract.

"The core problem this year is that the leadership has given vague, high-level instructions for officials to balance economic development against national security," said Christopher Beddor, deputy director of China research at Gavekal Dragonomics.

"If officials are unsure what the leadership wants them to do, they're likely to put off any action until they receive more information. The result is policy paralysis, even if that comes at a substantial cost."

Others say the Communist Party's ingrained hesitancy towards measures that could shift power from the state to the private sector, and a government stacked with Xi's loyalists, may be stifling the policy debate and stymieing the response.

To be sure, change in China can take time, as demonstrated by its insistence on maintaining economically damaging COVID-19 restrictions through most of last year, even as the rest of the world opened up.

China has shown timely resolve in the past, responding comprehensively to stem growth worries during the 2008-2009 global financial crisis and a capital outflow scare in 2015.

Major policy change is often also heavily choreographed, with a December economic meeting usually the venue to formulate such resolutions.

Economists say China needs measures to boost consumption and business confidence, such as tax cuts or government-funded consumption vouchers, but add that unlike previous slowdowns, there is no quick fix.

China has hit back at criticism of its response.

"A small number of Western politicians and media amplify and hype up the temporary problems existing in China's economic recovery," foreign ministry spokesman Wang Wenbin told media on Wednesday.

"They will eventually be slapped in the face by reality," he said.

Wang's comments came after weak economic activity data on Tuesday fuelled concern that China is heading for a deeper, longer slowdown.

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People wearing face masks hold shopping bags as they walk under a giant screen showing a news footage of Chinese President Xi Jinping during a meeting, at a shopping area in Beijing, China July 31, 2020. REUTERS/Tingshu Wang/File Photo

'PERCEPTION GAP'

The government has also suspended publishing data on youth unemployment, which has hit record highs in what analysts say is partly a symptom of regulatory crackdowns on big employers in the technology, education, real estate and finance sectors.

Without giving details, the State Council on Thursday said it would "optimize" the environment for private firms and make greater effort to attract foreign investment. The private sector accounts for 60% of gross domestic product and 80% of urban employment, officials say.

But there is a growing disconnect between officials calling for investment and a sweeping national security crackdown that is denting business confidence, diplomats in China say.

One example was a recent anti-espionage law, accompanied by raids on some foreign consultancy firms, that sent waves of anxiety through the foreign business community.

The commerce ministry met foreign businesses in July to say the law provided assurances for firms operating in China and that it should not be of concern, according to a diplomat and another source briefed on the meeting. Both declined to be identified.

But the assurance only underlined a "significant perception gap" between the government and foreign businesses, the diplomat said. The ministry did not immediately respond to a request for comment.

"What people are really hearing is 'we're open for business, but only on our terms'," said Lee Smith, a trade attorney at Baker Donelson who previously worked at the U.S. Department of Commerce on trade policies affecting business with China.

There may be more deep-seated reasons leaders are not rushing with measures to bolster confidence in the private sector, said Xu Chenggang, a scholar at Stanford University's Center on China's Economy and Institutions.

"A perennial fear of the Chinese Communist Party is that it could be overthrown if capitalism and the private economy grow strong enough," said Xu.

Xu said such thinking had been conspicuous under Xi, who has snuffed out dissent during his decade in power and stacked his government with loyalists after securing a precedent-breaking third term last year.

A day after this week's dire data, the Party's official journal published a speech from Xi in which he warned against Western capitalist economic models. The speech, delivered in February, made no mention of structural imbalances or how to solve them.

"We may all have to live with a less vibrant economy for a long time," said Xu.

(Reporting by Laurie Chen, Yew Lun Tian and Martin Quin Pollard in Beijing; Writing by John Geddie; Editing by Robert Birsel)

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