Xi Digs In With Top-Down Economic Plan Even as China Drowns in Debt

Xi Jinping is bracing for a showdown, sticking with economic policies aimed at making China the world’s most powerful country

By Lingling Wei of The WSJ. Excerpts:

"much of China’s growth under his watch was driven by unsustainable borrowing, real estate speculation and investments in factories and infrastructure the country didn’t really need. Difficult reforms that could have unlocked more durable growth, such as steps to increase consumer spending, were neglected in favor of policies designed to bolster Communist Party control."

"China is drowning in debt, reeling from a property bust that wiped out trillions of dollars of household wealth, and verging on a deflationary spiral. Growth has slowed, Western investment has collapsed and consumer confidence is near a record low."

"He’s convinced that his top-down approach to managing China’s economy" . . . "offers the best path for China"

"What Xi hasn’t done, many economists argue, is take hard-but-necessary steps to fix the country’s wounded economy."

"it hasn’t acted decisively to clean up the troubled property sector, fully restructure local-government debt, and significantly increase consumption, which would support growth in the long run."

"“A lot of the problems are of the government’s own making,” said Richard Koo, chief economist at Nomura Research Institute. Like many economists, Koo believes China faces what he calls “a race against time” to address the country’s mounting growth problems before it slips into a long-term downturn, made worse by unfavorable demographics."

"over the past decade covering China as Xi had opportunities to fix its economy, just as previous Chinese leaders did when they faced economic turbulence. Every time, he took the fork in the road that led to more state control, and away from the kinds of changes that many Chinese economists say are necessary."

"The Xi leadership let China’s property bubble inflate for years, even though it was clear the market was overheated. Although Xi finally popped the bubble in 2020, restricting credit to overleveraged developers, Beijing still hasn’t come up with a comprehensive plan to clean up the mess. Tens of millions of units sit empty and the market continues to languish."

"By this year, local governments had taken on as much as $11 trillion in off-the-books debt to build transit systems and other projects, including many that failed. The borrowing made growth look better in the short term, but leaves China more vulnerable to financial instability."

"Yet household consumption makes up only about 39% of gross domestic product in China, relatively unchanged in recent years, compared with around 68% in the U.S."

"China could slip into a deflationary spiral—the kind of disaster that befell the U.S. during the Great Depression—if more urgent steps weren’t taken to rejuvenate growth."

"China could fall into a vicious cycle of falling prices and weak demand."

"China handled economic challenges more assertively before the Xi era. 

In the late 1990s, when China suffered from overproduction and deflation, then-Premier Zhu Rongji forced weak state-owned enterprises to close or merge, resulting in massive job cuts but also making the remaining companies stronger."