China needs economic-policy overhaul at party congress
When the Chinese Communist Party holds its quinquennial national congress from Oct. 16, it should seek to undertake a major shift in the nation’s economic policy.
The recent stagnation — symbolized by the rise in youth unemployment — stems from the policies of the administration of President Xi Jinping. China‘s growth has been driven by free market principles. If those principles were to be sidelined, the country would inevitably fall into a policy-induced recession. Without drastic changes, China’s economy is unlikely to recover.
In the name of “preventing the disorderly expansion of capital,” Xi has led a campaign to pressure fast-growing private companies like Alibaba Group Holding. These measures are tied to the president’s “common prosperity” initiative aimed at reducing inequality.
Officials also abruptly announced restrictions on video games and a ban on for-profit tutoring services at the compulsory-education level — moves that have spooked the private sector.
Particularly serious is the housing and property market recession. Housing sales in January-August were down 30% from the same period last year. Both construction starts and land purchases have fallen. The tumble began when Xi commented that “housing is for living in, not for speculation,” in an effort to tame skyrocketing prices.
Drastic policy changes were introduced, shattering the myth that home prices will always rise. The very premise of the private housing market — which emerged at the end of the 20th century — has collapsed.
People who bought homes with expensive loans will not be able to reap the massive profits they had envisioned through resales. Instead, many are struggling to repay their loans because of declining property values.
Local governments are reeling from the side effects of these policy shifts. Municipalities used to raise significant sums of money by selling the rights to use state-owned land to housing development companies. However, the housing slump has forced these companies to limit their land purchases.
This fiscal mechanism, which had supported the Chinese economy for the past two decades, is no longer viable. Drastic, if painful, measures are necessary to break the downward spiral.
China’s zero-COVID policy is also weighing on the economy. A private survey in early September found that about 20% of China’s population is subject to lockdowns and movement restrictions. Beijing faces the challenge of implementing a phased easing of these measures based on scientific expertise.
The country’s August manufacturing purchasing managers’ index remained below the boom-or-bust threshold of 50. If this continues, achieving the 2022 growth rate target of “around 5.5%” will be difficult.
The current economic slump cannot be resolved by traditional tools such as increased infrastructure investment. The only way forward is a clear shift in policy. Xi is seeking an unprecedented third term as head of the Chinese Communist Party. Should he continue to hold power, the onus will be on him to use his authority to put China back on a track of stable growth.
Source: NIKKEI Asia