I’ll explain what will change in China’s economy. Speak Sisci

Despite the obvious symptoms of economic malaise, China will not collapse. A sinologist like Francesco Sisci (in the photo), correspondent for years for various Italian newspapers from Beijing and now a senior researcher at the China People's University, is firmly convinced of this, but he identifies another order of problems for the second world power: the crisis of an entire development model so far focused on the growth of the real estate market, which exploded in a sensational bubble, and on huge flows of exports today put into crisis by the western strategy of derisking. To solve this problem in a radical way, according to Sisci, the most drastic of reforms could be necessary, that is, in the words of the sinologist, "not to place the Party above the law, but the law above the Party".

Professor, there are numerous indicators pointing to China's economic malaise. Has China's economic engine stalled? Has the illusion that, after the tragic pause of Covid, the Chinese economy would experience a rebound faded?

Actually, a rebound cannot be ruled out for now, even if we don't see it yet. The indicators we are talking about are there and they are eloquent. However, the central government has implemented a series of stimulus measures in the last month. But to see the results we will have to wait a few months.

Let's take stock of these stimuli.

They are of two types: some are of a financial nature and others of a political-bureaucratic nature. For example, we have the cut of interest rates and the restructuring of local debts with securitization and sale as treasury bills. Then entrepreneurs were explicitly urged to invest more. Added to this are facilities for foreign entrepreneurs who open new businesses. The question now is whether similar measures will take effect and in how long: in my opinion, we will have to wait from three to nine months to see the results. However, this reasoning holds in the short term. If we consider the long term, however, we have another set of problems.

Which?

Initially it was believed that the problem was long Covid. Now, on the other hand, it clearly appears that the problem is not the effects of the pandemic but a development model that has entered into crisis or indeed is running out without another one emerging.

How did that model come into crisis?

To date, Chinese growth has been based on two elements: exports and real estate. The real estate has come to an end because the market is oversaturated, there are no other houses to sell. And the crisis in the real estate market has repercussions on banks and infrastructure financing, which has been the other major engine of Chinese growth. As for exports, they are suffering due to the restrictive measures taken by the US government and supported by many Western countries, the so-called derisking. The combined effect of these two factors has generated much frustration among the population who are now uncertain about the future.

So is there a real risk of a collapse?

This crisis does not mean that China will collapse tomorrow. This is because the country does not have a fully convertible currency and also has abundant reserves with which to face possible speculative attacks. However, the biggest problem remains and it is that of an entire growth model that no longer works.

If we stick to the official rhetoric of the Party, whose maximum expression are the words of Xi Jinping, this however should have been – I quote the President – ​​a period of 'rejuvenation' ( rejuvenation) .

True, Rejuvenation is a much emphasized concept. However we are talking about two things that have a relationship to each other but must be kept distinct. We are talking about the economy here, while the Chinese renaissance evoked by Xi is above all a cultural movement. It is no coincidence that the term rejuvenation has an echo with the Italian Renaissance and Risorgimento, two stories to which China pays close attention. However, it is true that without the economy, culture does not flourish.

Let's imagine that a debate has begun among the Chinese intelligentsia on the crisis of the development model and on possible future alternatives.

Yes, there is a very intense and multifaceted discussion. There are those who say that greater guarantees should be given to private entrepreneurs, who feel threatened and at risk. In fact, first the fight against corruption and then the zero-Covid policies have seen their economic activities exposed to sudden closures and reopenings, when they were not being investigated. It is therefore understandable how they are now afraid to take risks.

So what should China do?

In fact, it would be a question of giving reassurances to the productive class, a theme on which the rhetoric of the Party has been insisting lately. However, these official reassurances alone may not be enough. Something more structural would be needed, such as a more convincing defense of private property.

Or?

In practice, it would be a question of placing not the Party above the law, but the law above the Party.

Practically a pillar of the liberal state.

Let's not exaggerate. It would still be a very profound reform. I must say that this debate is not new but it has been going on for at least thirty years like a karst river that remains underground for a long time and then re-emerges. And now it's resurfacing.

A recent articlein the Economist underlined precisely this point, namely that China entered a crisis due to the authoritarian twist promoted by Xi, with steps such as the ruthless persecution of entrepreneurs like Jack Ma .

Now it seems that Xi is the problem and that before him everything went smoothly. I do not agree. I reiterate the point: the evils of China, namely the real estate bubble and the excess of exports, existed before. The problem was and remains an economic model that is no longer sustainable. That doesn't mean China is going to fail, Japan also had the same disease and resisted it for thirty years. Similarly, despite what friends of the Economist say, China is not necessarily destined to fall even if there is certainly a serious problem of the horizon.

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This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/vi-spiego-cosa-cambiera-nelleconomia-della-cina-parla-sisci/ on Tue, 22 Aug 2023 08:13:56 +0000.