Slowing in China: Not Just Economy but Political Resolve

A brittle regime lacks the determination to make painful industrial changes

Andrew Browne

SHANGHAI—China’s economic collapse no longer seems imminent. The Wall Street hedge funds who bet against the Chinese currency have taken heavy losses and battered stock markets are stabilizing.

In fact, collapse was never in the cards. Over the short term, as Beijing has demonstrated, it has enough financial firepower left to fight off threats to stability and prevent the economy from stalling.

It’s time to worry about something much more likely: political failure.

At the root of the problem is the reluctance of Chinese leaders to finally implement the economic overhauls they promised, starting with the closure of “zombie” state enterprises. There’s now a window of opportunity to jump-start the long-delayed process—but don’t bank on it happening.

What’s missing from the picture is a political resolve akin to the determination displayed by leaders in the 1990s who tore apart state-owned industries as their losses threatened a banking disaster. Then, when complacency set in again, Beijing shocked the economy by joining the World Trade Organization in 2001, exposing state enterprises to head-on competition from the world’s best companies.

Instead, Beijing offers slogans—the “new normal” is one, a defensive formula intended to explain away China’s dimming growth prospects due to massive industrial overcapacity, falling corporate profits and rapidly rising debt—and rehashed theories in fashion during the Reagan-Thatcher era. “Supply-side economics” is a favorite.

And there’s the signal accomplishment of President Xi Jinping’s administration—a campaign against official corruption that almost everybody agrees was long overdue, but which has left a lot of people asking: What’s the next chapter?

“That’s the trillion-dollar question,” says Fred Hu, the founder of Primavera Capital Group, a private-equity company, who acted as an informal economic adviser to previous administrations.

When Mr. Xi began his all-out assault on graft within the Communist Party early in his term most assumed it was a means to an end; once he had cleaned house he would get on with the real work of industrial transformation.

But it looks increasingly as though the anticorruption push is an end in itself. In tearing down hordes of officials, Mr. Xi has eliminated rivals, built up his political power and enhanced his popularity with the masses.

Mr. Hu questions whether leaders have “the political resolve and skill sets” to implement the reforms they have pledged, but hasn’t given up hope.

One promising sign, he says, would be a surge in bankruptcies among state enterprises. That would signal that Chinese leaders are at last launching reforms.

Reports filtering back from the provinces, however, suggest that what the administration has in mind is consolidation rather than mass closures. State planners are issuing instructions to leading firms in industries with chronic oversupply—cement, steel, coal, glass—to take over the operations of weaker rivals in their regions. The political preference, in other words, is for more monopolies, not greater competition.

Meanwhile, just when China needs the spark of individual creativity and social dynamism to speed a difficult transition to consumer-led growth, the country’s political system is closing up.

Mr. Xi’s personal ascendancy has been accompanied by a political crackdown across the board.

All this is starting to fuel dissent within the party. The latest evidence is a mysterious letter that appeared on a Chinese news portal this month calling for Mr. Xi’s resignation. A manhunt is under way for those responsible; more than a dozen people employed by the portal and a related company have disappeared.

Political brittleness is turning into an economic risk. The regime needs to feel secure to make broad industrial changes that would inevitably mean job losses and social turmoil. Some economists argue that rapid economic slowing would force Beijing to implement politically tough reforms, but it is just as likely to prompt an even greater dose of repression.

German President Joachim Gauck homed in on the concerns of China’s largest trading partners in the West about the country’s authoritarian turn in a speech at Shanghai’s prestigious Tongji University last week.

In a polite but forthright style rare among visiting Western leaders, who normally skirt political controversy, he described a dismal life under Communist rule in the former East Germany where “most people were neither happy nor liberated.” And he made a pitch for academic freedoms, civil society, human rights and labor unions—all areas imperiled by the current Chinese clampdown.

“Germany has an interest in China being stable and flourishing well,” Mr. Gauck told students.

So does the rest of the world. In an interconnected global economy reliant on Chinese growth, political failures in Beijing are likely to be even more disruptive than stock-market gyrations and currency scares.