China’s stock turmoil last week sent a shockwave across the globe. Many are concerned that the world’s second largest economy is on the verge of collapsing, and it may drag the rest of the world into a recession.
In an article by Wall Street Journal, The Consequences of China’s Stock Slide for Top Leaders in Beijing, Russell Leigh Moses pointed out that China’s top leaders have been sending conflicting messages regarding how to best handle the economy.
For example, the Chinese Premier, Li Keqiang, has argued that “China’s transition to a developed economy won’t happen while innovation and entrepreneurship are being stifled by too much bureaucracy; that central government oversight has given Chinese firms too little leeway in making difficult choices.”
However, China’s number one guy, President Xi Jinping, believes that “economic instability demands even tighter oversight of society, and that it’s the duty of the Communist Party to come to the rescue of citizens and companies…. Capitalism cares not for losers, only socialism can save China — and saving socialism means making sure that the Communist party is not only clean and loyal, but also willing and able to play the role of savior when the economy stumbles.”
At this point, there is no clear indication which direction the leadership is leaning.
In another article, Andrew Browne wrote that Mr. Xi is “an inveterate micromanager.”
He has kept his Premier in the back seat. As a result, Mr. Li, who has a PhD. in economics and law, doesn’t have much say in decision-making.
But Xi is not an “economic guy.” He is a politician who is “reorganizing the armed forces, leading the charge against endemic corruption (while defining a new Confucian-style morality to chasten his bureaucracy), confronting America in the South China Sea….”
Perhaps the stock market chaos reflects a lack of confidence by investors that the person in charge of the Chinese economy does not know what he is doing?
Interestingly, the real Chinese economy, which has little connection with the stock market, “is actually looking up a bit.” Consumer spending is still holding up, and inflation, although rising a little, is below the forecasted level. In fact, the latest data suggest that China’s import and export are picking up since last summer’s stock market crash. That means the economy is gradually improving. The residential real-estate market is also bouncing back.
Although there are serious challenges in the Chinese economy, there is still a lot of potential. For one, the Chinese middle class is more than a half billion strong, and should be able to generate enough demand to get the economy rolling.
The question is how to tap into that potential. It seems that China is walking a fine line between a market economy and authoritarian rule:
The regulatory confusion reflects a contradiction at the heart of Chinese economic policy making, one that has Mr. Xi’s stamp all over it. On the one hand, the Chinese leadership wants efficient markets to help pull China through the transition to consumer-led growth. Yet Beijing doesn’t really trust free markets and prefers guiding them with regulation.
As Mr. Browne pointed, out, “If he wants to stop the economy from running away from him, Mr. Xi may have to learn to give up control.”
(The original article was published on Forbes.com)