China Economy

Political crackdown has accompanied China's slowing growth

Xi's crackdown has been so widespread that it risks paralysing both government and business

PUBLISHED : Monday, 09 June, 2014, 9:54am
UPDATED : Monday, 30 May, 2016, 5:01pm

The 25th anniversary of the Tiananmen Square tragedy got a surprising amount of global coverage, in sharp contrast to the enforced silence on the subject on the mainland. It is a reminder of another contrast between political and economic coverage of the country.

The global media has sensationally covered a political purge that brought down high-ranking party members and heads of state-owned mega-enterprises, and reported on apparent signs of tighter censorship of political expression in the recent past.

Is it rational that these same political trends are not taken into account when economists or financial commentators consider that other always-in-the-headlines Chinese news story: the fate of the world's second-largest economy?

Formation of a solid middle class …was in some ways Tiananmenrelated

At one level, yes it is. Take China's internet sector, which has developed at a sizzling rate in the past decade, even as digital content has remained tightly censored, regulated and sometimes manipulated by hired hands of the Communist Party.

This is a microcosm of China's economic vs political history in the past 30 years. The economy has increasingly liberalised, to the point where the private sector is now the biggest creator of new jobs, and large amounts of investment and tourist capital leaves the country all the time. All this, even as political rights have remained contained.

Indeed, some have argued that there is a positive correlation; that is, that the swift formation of a solid middle class since 1989 was in some ways Tiananmen-related: with national prosperity offered as a salve to political dissatisfaction.

But China's rapid-growth model is reaching its outer limits. The current leaders have already taken several tough but necessary decisions - such as reining in credit growth - that are slowing growth and cooling stock and property prices.

Now, if one believes that headstrong growth in the wake of Tiananmen was a distraction from political openness, then is the flip side that slowing growth might be accompanied by a salve of increased political rights?

This obviously does not seem to be the case. Not only has political censorship apparently hardened since President Xi Jinping and Premier Li Keqiang officially took the mantle last year, but Xi seems to be behind a political purge that has reached as high as the ranks of the Politburo Standing Committee.

What are the economic implications of this trend?

One could argue that a strongman is exactly what China needs to execute crucial but painful economic reforms.

And indeed Xi and Li have outlined a programme that rationally addresses the core issues: for example, less debt-fuelled investment bingeing and the phasing out of the "financial repression" that has benefited investment but undermined the spending power of consumers.

One could also see the anti-corruption drive as justified, as it removes vested interests that thwart competition and thus create economic inefficiencies.

But the risk is that Xi might introduce too much uncertainty or become too megalomaniacal.

"The crackdown has been so sweeping, and so without obvious pattern, that it risks producing a degree of uncertainty that paralyses both government and business," Arthur Kroeber, head of research at Gavekal Dragonomics, wrote in a recent research piece.

"Mid-level officials are now so fearful about their bosses getting caught in the corruption net that they are reluctant to take any action at all. As a result, government action in some areas has slowed to a crawl.

"This result is the exact opposite of the improvement in administrative efficiency that Xi has identified as a crucial reform goal."

Even private-sector entrepreneurs, who stand to benefit from the reform agenda, may be spooked and become increasingly cautious toward any further investment.

"Adding it all up, the story in China for the rest of this year at least, and perhaps longer, will mainly be one of pain: slower growth, more arrests," Kroeber wrote.

"The economic gain will only start to show up once structural reforms advance much further. And it will probably be years before we know the ultimate cost of Xi's heavy-handed scare tactics to the nation's political health."