In 2017, Xi Jinping consolidated his control over much of the Party and State apparatus, culminating in October when “Xi Jinping Thought on Socialism with Chinese Characteristics in the New Era” was inserted into the Chinese Communist Party (CCP) constitution. In late December, Xi’s leadership was extended into yet another domain: economics. At the Central Economic Work Meeting (CEWM) held December 18–20, Party authorities saluted “Xi Jinping Thought on Socialist Economy with Chinese Characteristics for a New Era” (习近平新時代中国特色社会主义经济思想) as the sole guiding principle for financial and economic decision-making (Xinhua; Global Times, December 20, 2017). The CEWM, which is convened every December to set directives for the new year, said in its communiqué that all cadres were committed to “upholding the party’s concentrated and unified leadership over economic work.” Xi’s economic thought—dubbed “Xiconomics” by some Hong Kong and foreign media—must be closely followed so as to ensure a “correct development direction” for the economy (South China Morning Post, December 22, 2017; Nikkei Asian Review, October 26, 2017).
This is the first time since the establishment of the CCP almost a hundred years ago that the party chief has been designated the highest-level designer and arbitrator of economic matters. Even the apparently omnipotent Chairman Mao Zedong mainly focused on political and military issues; finance and economics were left to experts such as economic planners Chen Yun and Li Xiannian, as well as Premier Zhou Enlai (CCP News Net, September 19, 2012; People’s Daily, March 21, 2011). Xi’s anointment of himself as virtual “economic tsar” follows the marginalization of Premier Li Keqiang as the top decision-maker in this field. In a departure from tradition established since the beginning of the Reform and Open Door Policy forty years ago, Li has failed to become head of the party’s Central Leading Group on Finance and Economics in the years since the 18th Party Congress in 2012. That position has been taken up by Xi, who also chairs another top policymaking body, the Central Leading Group on Comprehensively Deepening Reforms, which he set up in 2013 (Gov.cn, November 20, 2017; Xinhua, February 28, 2017).
Xiconomics Means “Mixing Politics With Economics”
While the CEWM noted that “Xi Jinping Thought on Socialist Economy with Chinese Characteristics for a New Era” would be elaborated during Xi’s second term as party chief (2017-2022), it seems clear that Xiconomics has resurrected the Maoist tradition of “mixing politics with economics.” This essentially means that while the leadership is, at least in theory, pursuing Deng Xiaoping’s path of market liberalization, a balance must be struck between reformist measures and political stability. In other words, financial and economic policy must correspond with the political goals of the top leadership.
Xi’s main political and economic concerns include stable, medium-level growth (at least 6 percent) and party-state control over key sectors of the economy. China’s GDP expanded 6.9 percent year on year in the first three quarters of 2017. The objective for economic expansion in 2018 will likely be set at around 6.5 percent (United Daily News [Taipei], January 1; Wall Street Journal Chinese Edition, November 28, 2017). However, growth has been achieved at the expense of heavy borrowing, underpinning government investments in real estate and infrastructure. Both Chinese and foreign economists have cited debt as the biggest problem facing the world’s second-largest economy. The Moody’s rating agency regarded debt as such a large problem it downgraded China’s credit rating in 2017 (Moodys.com, May 24, 2017; Reuters, May 23, 2017). For the sake of stability, however, the Xi team will not cut debt drastically. And despite a big bubble forming in the property market, Beijing will prevent a hard-landing in this sector because this could cause massive instability.
Promoting “High-Quality Growth”
A major thrust of Xiconomics for the “new era” is promoting high-quality growth. Specifically, this entails the expansion of high-tech and high-end manufacturing and services that have benefited from the country’s impressive achievements in information and communications technology (ICT), AI, cloud computing, big data and other cutting-edge sectors. High-quality growth is intimately tied to “supply-side reforms” (another hallmark of Xi’s “new normal” economics), which consists of curtailing zombie firms, reducing inventory, promoting the efficiency of state-owned enterprise (SOE) groupings, and creating symbiotic links between civilian and military enterprises. “Supply-side reforms” also include more spending on education and social welfare, the reduction of poverty, and protecting the environment (Caixinglobal.com [Beijing], December 21, 2017; Ming Pao [Hong Kong], December 21, 2017; See China Brief, December 8, 2017).
Elements of “high-quality growth” and related goals such as “Made in China 2025” and “mass entrepreneurship and innovation,” have actually been raised by the Xi administration for the past five years. The effectiveness of this new deal remains in doubt. It is true that China has made spectacular progress in sectors such as artificial intelligence, financial technology (fintech), robotics, bio-tech and green technology; but these advanced sectors do not yet make up a significantly large portion of either the country’s GDP or its exports (China Economics Weekly [Beijing], October 9, 2017; MIIT.gov.cn, August 21, 2017). Moreover, high-tech industries and services usually employ less people than traditional manufacturing. Given Xi’s commitment to low unemployment and poverty reduction, “high-quality growth” is a tall order. Moreover, SOE conglomerates are poor innovators partly because of Xi’s insistence that their top management must be under tight party-state control.
Meanwhile, China’s corporate debt is about 175 percent of GDP, one of the highest in emerging market economies, according to the Organization for Economic Cooperation and Development (OECD), and SOE conglomerates account for roughly 75 percent of this debt pile (China Daily, December 11, 2017; CNBC, July 26, 2017; People’s Daily, October 12, 2016).
The Debt Conundrum
Other goals that are a part of “high-quality growth,” such as boosting spending on social amenities, augmenting SOE efficiency and cutting down on inventory cannot be achieved quickly. The party-state apparatus, therefore, has little choice but to continue relying on debt to maintain a minimum 6 percent growth in the near to medium term. The CEWM’s recommendations for cutting debt are relatively moderate. The communiqué merely noted that Beijing would “fight the critical battle of addressing major risks with the priority on managing and preventing financial risk” over the next three years. Moreover, there will not be thoroughgoing changes in monetary policy, which is closely related to the level of leveraging. The CEWM document noted that the authorities would “adopt a proactive fiscal policy and a prudent and neutral monetary policy.” However, no aggressive measures have been adopted to curb borrowing. In fact, “deleveraging” is not mentioned in the CEWM communiqué (Finance.sina.com.cn, December 21, 2017). The clause “credit and social financing should see reasonable growth” also seems to indicate that there would be no drastic steps to curtail “credit and social financing,” which is essential to maintaining a relatively high-level development of the infrastructure and housing sectors.
Analysts have compared the CEWM communiqué with the wording used in a Politburo meeting held in early December. The Politburo statement said that Beijing must “prevent and resolve major risks through effectively controlling the macro-level leveraging rate.” The CEWM document, however, used much more general and less hard-hitting terms regarding the debt crisis. It said the Xi leadership would “perform well in the hard battle to prevent and resolve major [financial] risks, put emphasis on preventing and controlling financial risk… and determinedly combat financial activities that are illegal and against regulation” (Eastmoney.com [Beijing], December 12, 2017; Xinhua, December 8, 2017). According to Li Qilin and Zhang Deli, both experts at the Guangdong-based Lianxun Securities, “the future pace of economic deleveraging may be loosened up” (Finance.sina.com.cn, December 21, 2017). Lu Zhengwei, chief economist with Industrial Bank Co. Ltd., also said the CEWM’s message of spreading the measures to tackle financial difficulties over three years was a reflection of Xi’s preference for “making progress while ensuring stability” (South China Morning Post, December 21, 2017). 
While no official explanation has been given for a more relaxed pace of deleveraging, a number of factors are clearly at play. Most importantly, Chinese authorities have underreported the extent of total debt. Usually cited as 256 percent of GDP, credible estimates by credit rating agencies and foreign financial institutions have put the debt-to-GDP ratio at around 300 percent (Cj.sina.com.cn, June 29, 2017; Wall Street Journal Chinese Edition, January 24, 2017). Given the size of the debt pile, deleveraging cannot be accomplished quickly. A related problem is shadow banking, which has received little coverage from official media. In late 2017, Moody’s credit agency recently estimated that assets lodged with China’s informal and underground banks had soared to 82.6 percent of GDP. While in theory illegal, the practice is often tolerated because many companies, including major employers, could go under in the event of a major crackdown on non-registered loan providers (Asia Times, November 7, 2017).
While over the past decade the growth of debt has been driven mainly by enterprises and local governments, individual consumers have begun to borrow heavily. Debt owed by ordinary citizens, particularly related to mortgages, has risen dramatically. Western economists note that outstanding household debt has reached 44.4 percent of GDP—triple the level in 2008 (South China Morning Post, August 6, 2017). The governments’ hands are therefore tied, since rapid de-leveraging could cause a crisis in the housing sector, leading to social instability.
Xiconomics will receive a boost at the National People’s Congress in March, when top officials in the State Council will be confirmed. A triumvirate of Xi protégés are expected to entrusted with handling financial and economic issues. They include long-time economics adviser Liu He, who was inducted into the Politburo at the 19th Party Congress. Liu, who went to the same high school as Xi, is expected to become a vice-premier in charge of finance. He Lifeng, one of Xi’s underlings when the latter served in Fujian Province from 1985 to 2002, is set to remain Minister at the powerful National Development and Reform Commission. Zhong Shan, who worked with Xi in Zhejiang Province, will remain Commerce Minister (United Daily News, December 12, 2017; Hong Kong Economic Times, October 25, 2017). Given the likelihood that Premier Li will be further marginalized from top-level policy-making in finance and economics, Xi will have a near-absolute say on the delicate balancing act of promoting stability while pushing forward market-oriented reforms that will not impinge upon orthodox socialism.
- In an effort to defend the government against accusations that deleveraging is no longer a top priority, People’s Bank of China Vice-Governor Yi Gang noted in a conference on December 24 that curtailing debt was still a major task. “We must unswervingly do well in the tough battle of preventing and controlling [financial] risk,” he said. Yi added that “we must control well the overall rate of leveraging, and we must insist upon enthusiastic and stable deleveraging and stabilizing the leveraging rate.” In particular, the Vice-Governor highlighted the urgency of reducing debt incurred by state-owned enterprises and local-level administrations (Tech.sina.com.cn, December 24, 2017). The apparent spin doctoring by Yi, however, does not alter the fact that out of political considerations, the Xi administration favors gradualist measures to curb debt so as to preserve a moderately high growth rate of at least 6 percent for 2018.