As President Xi Jinping turns Beijing’s stimulus-industrial complex up to 11, ‘Minsky moment’ risks only increase
Suddenly, this president for life thing is looking less like a win for Xi Jinping as China loses altitude. Last year, he won the Communist Party’s approval to stay on indefinitely – all part of his plan to out-reform Deng Xiaoping.
But as the world’s second-largest economy cools, Xi seems to be losing the plot on an array of fronts.
Had he used his vast powers since 2013 to upend a state-owned enterprise model dating back to Deng’s day, China might not be stumbling into 2019.
Had his team worked harder to recalibrate engines from exports to services, China might not be such an easy target in the trade war with the United States.
Had Beijing been more confident, Xi might have realized a free press and internet are allies in eradicating corruption.
Had he walked the walk on giving market forces a “decisive” role, Chinese stocks might not be stuck in a perpetual cycle of boom-bust-government-support-boom-bust, repeat.
Now, Xi has one option, stimulate the hell out of 2019. And to do so in ways that add to China’s long-term risk profile – and the world’s.
Asia’s year ahead is darkening by the day because of Chinese data. Look no further than recent export drops in Singapore, South Korea, Taiwan and, most recently, Japan. Figures released in neighboring economies belie Beijing’s claims to have grown at 6.6% in 2018.
The slowest growth since 1990 surely understates the downshift in Chinese manufacturing. Numbers on fixed-asset investment, retail sales, property, autos (the biggest car market just shrank for the first time since 1990), construction and dollar-denominated debt coming due may have Xi wishing he had passed the baton on to another leader to eventually grapple with these, and other, challenges.
Optimistic take
There is, indeed, an optimistic take on 2019. The nation of 1.4 billion people is expanding from a much larger base than, say, five years ago.
Domestic demand is doing its part to offset a narrowing trade surplus. Xi’s team, meantime, is working behind the scenes to avoid the zombie-fication of China Inc. The bad news is these positive trends are only sustainable with the help of massive stimulus.
Conventional wisdom that Xi will tread carefully on fresh debt and credit growth misses the point. His ability to stay on indefinitely hinges on keeping wages, living standards and rapid-growth bragging rights in the plus column.
When policymakers rule out pumping a “flood” of new steroids into the economy’s veins, it’s a statement of aspiration, not reality.
Already, for example, we’ve seen a series of overlapping tax cuts, moves to boost business lending, fast-tracked construction projects and reserve-requirement cuts by the People’s Bank of China.
Lots of buzz, too, about big infrastructure spending to come. While juicing growth rates will add to the mountain of debt already worrying investors, this is a circle-the-wagons moment for Xiconomics.
It’s also a cautionary one for China in 2020. The odds of the economy falling below 6% growth in 2019, or admitting it even if it does, are low. Yet as Xi turns Beijing’s stimulus-industrial complex up to 11, “Minsky moment” risks only increase.
The reference here is to when a debt-and-credit-driven boom meets a nasty end. Examples abound: Japan in 1990, Southeast Asia in 1997, Russia in 1998, Wall Street in 2008.
By shelving efforts to beat Beijing’s stimulus addiction, Xi ensures that when China’s reckoning arrives, it will be even more spectacular and globally impactful. China’s US$14 trillion hitting a wall would make the 2008 “Lehman crisis” look like a minor ripple.
The reason global investors tend to look past the roughly $34 trillion pile of public and private debt hanging over China’s future is Xi’s resolve to sort things out. The reason global investors tend to look past the roughly $34 trillion pile of public and private debt hanging over China’s future is Xi’s resolve to sort things out.
Global Crisis
Less recognized, though, is that the bill from an explosion of stimulus after the 2008 global crisis is coming due.
In the months after the collapse of Lehman Brothers shoulder-checked the globe, Beijing pumped unprecedented amounts of stimulus into the economy. It won the government of Xi predecessor Hu Jintao plaudits.
Team Xi largely kept the spigot open. In 2008, banking sector assets in China were about $9 trillion. By 2017, analysts like Charlene Chu, of Autonomous Research Asia, were putting the figure north of $33 trillion. The epic buildup in local government debt offered its own eye-popping figures.
One key crack in the veneer of invulnerability is $3 trillion of dollar-denominated debt, according to Daiwa Capital Markets. It’s quite a vulnerability should the yuan weaken versus the dollar or Trump escalate his tariff arms race.
Another is the economic law of diminishing returns. Over time, the gross domestic product bang derived from new dams, airports, six-lane highways and other white-elephant projects lose potency.
You need to pump bigger and bigger doses into the economy, adding to debt burdens, overcapacity and environmental degradation. The PBOC needs to print ever greater piles of yuan to jolt credit conditions. All risks that will make China’s next few years dicier.
Clearly, Xi will do his best to maintain the illusion that China can beat the inevitable crash that befalls every industrializing economy. He will dazzle executives from Silicon Valley to Wolfsburg in Germany with his ambitious “Made in China 2025” scheme. But that’s putting the cart before the proverbial horse.
Nothing about investing hundreds of billions of dollars in dominating tech reduces the role of SOEs, ends graft, increases transparency, curbs the shadow-banking menace, makes corporate China more shareholder-friendly or addresses bubbles in assets, credit and debt.
Xi still needs to build strong economic foundations to underlie his grand ambitions. Unfortunately, those building efforts are off the agenda until further notice. Atimes
