FINANCIAL TIMES
19-1-16

China’s Xi turns to Reagan and Thatcher for economic inspiration
 

Tom Mitchell in Beijing

At the outset of his presidency, Xi Jinping billed himself as a transformative leader in the mould of Deng Xiaoping, the Chinese strongman who set the country’s economic rise in motion in the 1980s. Now Mr Xi is turning to two more political giants of that decade — Ronald Reagan and Margaret Thatcher — for inspiration as he seeks a “supply side” revolution for China’s economy.

Like the late US president and UK prime minister before them, Mr Xi and his premier, Li Keqiang, want to reduce taxes and red tape for businesses as they seek to cushion the decline of heavy industry with the rise of the consumer and service sectors.

On Tuesday China’s National Bureau of Statistics said there had been further progress in this direction as it reported a 2015 economic growth figure of 6.9 per cent, in line with the government’s full-year target.

Chinese analysts and government officials say the emphasis on supply-side reforms stems from the conviction that the economy is failing to meet the new demands of middle-class consumers — and also a recognition that the country’s large debt burden has reduced its capacity for additional demand-side stimulus.

“It’s not that Chinese consumers don’t have purchasing power,” says Cao Heping, an economics professor at Peking University. “China just hasn’t produced the products that are suitable for its own consumers.”

Such products range from education and healthcare services to fancy Japanese spray toilets that many Chinese now go abroad to acquire. According to the China Tourism Academy, Chinese tourists were expected to spend Rmb1.1tn ($167bn) overseas last year — equivalent to 1.6 per cent of gross domestic product.

If only more of this demand could be met at home by an economy that has traditionally been better at producing more coal, steel and flats than it needs, officials argue, future growth would receive a huge boost.

“We should retune the supply side of the economy [so] the products, the services produced can meet changed demand,” a senior Chinese official said last month. “There’s increasingly a realisation that there’s a limit to how much demand-side policy that you can use.”

However, supply-side reforms with Chinese characteristics differ from those implemented by Reagan and Thatcher in important respects.
While the Chinese government is promising greater tolerance for private sector companies and foreign investors in some areas of the economy, there is no appetite for wholesale privatisations in areas traditionally dominated by the state. A series of recent shipping and rail restructurings amounted to little more than a reshuffling of assets from one state entity to another.

“We will have some tax reductions to reduce the burdens that firms face but we will not have the kind of privatisations that [the UK] had,” the official added. “We will have deregulation [so] more Chinese and foreign firms can enter into different sectors.”
While there is no denying the dynamism of China’s consumer and service sectors — many of them dominated by private and foreign enterprise — the government has not traditionally been willing to take decisive action to reduce industrial overcapacities.

“Mergers and acquisitions rather than bankruptcy and liquidation would be the [government’s] preferred approach to ‘zombie companies’,” Tim Condon, ING chief Asia economist, wrote last week. “The industrial restructuring debate frequently pits Anglo-Saxon restructuring, where costs are recognised up front, against Japan-style restructuring where concessions and debt relief spread the costs over time. We see the [Chinese] authorities adopting an in-between approach.”

Andrew Polk, China economist for research institute the Conference Board, argues that Beijing has promised to tackle industrial overcapacities for years with little effect.

“My view with supply-side reform is that it is the same old bag of tricks by a new name,” he says. “Unless they have made a decision that they cannot push this off any longer and are finally willing to accept much lower near-term growth, then I don’t think there is any reason to expect that this new name for an old programme will be any more successful than the old names.”

Other analysts say the current downturn for China’s heavy industries is so savage that the government simply cannot save them even if it wants to. Thomas Gatley and Rosealea Yao at Gavekal Dragonomics, a Beijing consultancy, call 2015 a “year of historic declines in China’s output of coal and steel” as steep price falls rendered production “economically irrational”. On Tuesday the NBS reported that China’s steel industry, the world’s largest, recorded a year-on-year production decline last year for the first time in a quarter of a century.