Xi Jinping, China’s debt time bomb, and the art of saying nothing
“I need to be clear, the supply-side structural reform we are talking about is not the same as the supply-side economics school in the West ...
“I highlighted the issue of supply-side structural reform at last year’s economic work conference, and it triggered heated debate ... But some comrades told me that they didn’t fully understand supply-side reform ... I need talk about his issue again.”
President Xi Jinping
SCMP, May 11
Count me in with those comrades who don’t understand what supply side means. I don’t understand it either and I understand even less of what Mr Xi’s variant of it comprises.
From what I can make out, the conventional meaning of supply side is that if you are the boss of a country and your people don’t pull your economy along at the speed you would like them to pull, then you make them pull by going into debt and pushing down interest rates.
Leaving aside that we now have conclusive evidence on how well this theory works and all of this evidence shows that it doesn’t work at all, I have never understood how the one leads to the other anyway.
If your object is to stimulate the economy by spending borrowed money, you first have to borrow it, which means that the people from whom you borrow it will not stimulate the economy by spending this money themselves. You are thus just back where you started. Only in supply side thinking does one minus one equal two.
And while pushing down interest rates does produce a stimulus, all it stimulates is speculation in financial markets with the result that income disparity grows, investment capital is misallocated, young people are denied home ownership and only a few speculators are better off than they were before.
Mr Xi’s twist on this twisted thinking is to add the word “structural”, by which he apparently means an emphasis on reform to address inefficiencies in the economy. Economic reform, however, has nothing to do with supply side theory other than that supply side ideas contribute to the need for economic reform.
What we have here obviously is a muddle that indicates bewilderment and frustration in Beijing with a slowing economy. It also suggests discord in the top ranks of government.
First off on Monday we had a Beijing bigwig, biggest of the big we are told (although too small to put his name to his thoughts), say publicly that turning the debt tap wide open is not a good way to fuel economic growth and could undermine the health of the economy.
There was hard and timely truth in this message. A sputtering rally in industrial activity and property prices over the last few months does indeed appear to have resulted from a significant increase in debt financing and this indeed inspires no confidence as a basis for sustained growth.
If Mr Xi, however, were publicly to support the thoughts of this anonymous top of the toppest official, then the lending splurge would have to end or utter confusion would result between the sayings and doings of government.
But shutting the loan tap again would almost certainly produce a severe economic slowdown, a crumbling property market, tumbling share prices and trouble, trouble, trouble on every front. Mr Xi’s strategy is rather to keep things rolling along for the time being and hope that structural reform can save him before a debt crunch strikes.
So what was he to do?
Answer: Retread a 20,000-character speech he made in January in which he said that on the one hand water is wet while on the other hand the sun rises in the east, which means that we can move mountains if only we stay united under the firm leadership of the leadership and blather, blather, blather, blather.
And hope no one will notice that he has said nothing at all while everyone congratulates him on having laid bare his stand on China’s economy in a hallmark economic policy address, which is pretty much how our front page put it yesterday.
It’s a nothing, folks. There is indeed a debt bomb ticking away underneath the mainland economy and Mr Xi’s dilemma is that keeping it ticking while trying to defuse it only makes the clock inside it tick faster.