Xi Jinping’s Quantitative Easing Unlikely to Save Economy

Executive Summary:

• In an apparent U-turn, the People’s Republic of China (PRC) has initiated stimulus policies that have boosted the stock market and are attempting to jump-start key sectors and meet the annual GDP growth target of 5 percent.
• In the last week of September, the central bank announced a package worth at least 2 trillion Renminbi (RMB; $280 billion), cut the banks’ reserve requirement ratio by 50 basis points, and hinted at further measures.
• The domestic and international response has been underwhelming, in part because the package leaves the economy even more overleveraged than before.
• President Xi Jinping’s attempts to enhance the PRC’s global stature, including through a recent ICBM test and by deepening support for Russia’s war in Ukraine and for other countries willing to denounce the United States and the West, will not help the domestic economic woes as they discourage foreign investment.

Supreme leader Xi Jinping has sprung a surprise on his critics by initiating radical financial policies geared toward lifting the economy of the People’s Republic of China (PRC) out of the doldrums of the last two years. At the end of September, the Chinese Communist Party (CCP) General Secretary, who has total charge of national policies, took an apparent U-turn by authorizing an omnibus spate of monetary and fiscal policies aimed at jump-starting key sectors and pushing the GDP growth rate for the year up to the prescribed goal of 5 percent (Xinhua, September 26; People’s Bank of China [PBOC], September 27). The Shanghai and Shenzhen stock market index initially rose 27 percent following the announcement of stimulus measures on September 24, before slumping more than 7 percent on October 9 and eliminating some of the earlier gains (Reuters, October 9; The Guardian, October 9). This fall has cast doubt on not only the long-term efficacy of the financial easing measures but also their underlying rationale.

Stimulus Measures Cause Momentary Relief

The liberalization toolkit includes issuing at least 2 trillion renminbi (RMB; $280 billion) of special sovereign bonds and cutting the banks’ reserve requirement ratio by 50 basis points. Interest rates have been lowered by up to 1 percent for most businesses, and in particular for consumption-related activities. Fiscal measures are being rolled out to facilitate the purchase of unfinished apartments, to boost social security benefits, and to reduce local government debts. Additional measures are expected to be announced through October (CNBC, October 8; Reuters, September 27).

While the stock market and speculation-prone sectors of the economy saw a rapid rise in the first fortnight of the new financial regime, it is unclear whether the so-called “irrigation by flooding (大水漫灌)” can help crucial areas of the economy such as industry and agriculture, high-technology, and consumer spending (Atlantic Council, October 7; Bloomberg, October 8, Nikkei Asia, October 8). [1] Signs of fundamental weaknesses since the end of the COVID-19 pandemic have included lower-than-expected exports, tepid consumer spending, and a youth unemployment rate of over 20 percent (before the government revised its methodology for calculating the statistic in late 2023). In part because of these weaknesses, multinationals from Western countries, Japan, and South Korea, have all pulled out of the PRC as FDI has slumped to record lows (Marketplace.org, August 23, 2023; Radio Free Asia [RFA], January 4; Bloomberg, June 21). The immediate result of this “social engineering”-style monetary easing will be to further burden the already severely overleveraged economy. [2] As early as 2022, the country’s total social debt exceeded three times its GDP, while that of local governments has now reached an astronomical $16 trillion (Reuters, June 14; Nikkei Asia, December 7, 2022).

Structural Problems Persist

The new measures deliver a concerning message about the Party’s ability to manage the economy. The measures largely contradict the more liberal and market-oriented aspects of the policy direction outlined during the Third Plenum of the 20th CCP Central Committee held only two months previously in mid-July. In its plans for the economy up to 2029, the plenum “Decision” made solid pledges to “establish a unified national market (构建全国统一大市场)” and to “expand international markets (拓展国际市场)” (People’s Daily, July 29; QStheory, September 16). The current round of monetary liberalization, however, is a typical top-down endeavor imposed by the Party leadership and does not give the market any meaningful role. The supreme leader’s dictum that “the public sector advances while the private sector retreats (国进民退)” continues to underpin the overall trajectory of the economy [3] The PRC’s much-weakened private enterprises have received few benefits and are expected to continue lying low. Foreign capital will also be unlikely to be persuaded to return, as very little of the quantitative easing is geared toward attracting continued outside investment in the PRC. This is due in part to the so-called Washington-led containment policy, wherein efforts are being made by US allies in Europe and Asia to decouple from the PRC’s international supply chains (Wall Street Journal, September 11; Forbes, August 30).

Xi’s penchant for arrogating to himself all initiatives and policymaking runs counter to Deng Xiaoping’s idea of building institutions instead of relying on so-called “outstanding” cadres (Reform Data, October 1, 2008; China Brief, June 4, 2014; Journal of Democracy, April 2018). While Xi afforded Deng sufficient “face” by eulogizing his achievements on the occasion of the 120th anniversary of his birth in August, Xi’s pivot away from Deng’s principles in the “new era (新时代)” belies his true feelings about Deng’s relevance today (Voice of America, August 22; Gov.cn, August 22). Compounding factors of the Xi leadership’s failing economic policies are the negative impacts on many PRC citizens. Persistent institutional bottlenecks perpetuate the privileges enjoyed by well-connected individuals and businesspeople at the expense of policies that could improve people’s standard of living, such as medical and social security payouts. To achieve its stated goals, the focus of the Party’s policies should be to resolve the pressing needs of the people, including by reducing structural inequalities.

Economic issues at home have not deterred Xi from his obsession with boosting the PRC’s global stature via a series of aggressive moves aimed at hard-power projection in the Indo-Pacific. Most recently, the PLA fired an intercontinental ballistic missile (ICBM) into the Pacific in late September. With a range of some 7,400 miles—and therefore the potential to reach most of the United States—the nuclear projectile seemed to be a warning for the US administration against its deepening security partnerships in the region and any eastward expansion of NATO (Defense News, September 25; BBC Chinese, September 26; Voice of America, September 26). The ongoing standoff in the South China Sea between PRC naval and fishing vessels and those of the Philippines and, more recently, Vietnam, has escalated. The PRC continues to act with impunity in its provision of aid to Russia’s military efforts against Ukraine, even as its material support has also become more apparent. Hong Kong exporters are sending microchips and other high-tech components imported from Western countries to Russia. Moscow also stands accused of establishing a factory on PRC soil for the production of advanced G-3 attack drones used in the Ukrainian theater (China Brief, October 20, 2023; Foreign Policy, September 25, New York Times Chinese Edition, July 26).

Beyond just Russia, Beijing is in the midst of buttressing both the coordination between and the firepower of what critics call an “axis of non-democratic nations.” It is working with Iran, North Korea, and selected members of the BRICS and Shanghai Cooperation Organization to build an anti-NATO, anti-US coalition (RFA, June 21; Australian Broadcasting Corp, June 24). The longer the conflicts in Ukraine and the Middle East have worn on, however, the weaker both Russia and Iran and its proxies appear. These trends suggest that Xi is unwise in continuing to subscribe to the Maoist dictum that “the East is rising while the West is declining (东升西降).”

Conclusion

Recent history contains potential lessons for Xi and his advisers. In the wake of the global financial crisis, then-premier Wen Jiabao (温家宝) ordered a stimulus measure of RMB 4 trillion ($590 billion in 2008) (China Brief, November 24, 2008). While successfully boosting the economy, this monetary injection benefited mostly SOEs and led to distortions in the market, including overemphasis on infrastructure and the real estate sector (Gov.cn, September 17, 2009; China News Service, March 13, 2009). With GDP in 2009 totaling $5.12 trillion—compared to $18.5 trillion today—Wen’s stimulus was proportionally far larger than Xi’s offering. This suggests that the debt levels weighing down the economy are a significant constraint on the government’s ability to embark on a rescue operation of a comparable size. Wen is said to have substantial influence on the supreme leader, though it is impossible to know what advice he would have for Xi today. (RFA, October 8, World Journal, October 1).

Notes

[1] The term “irrigation by flooding (大水漫灌)” refers to quantitative easing measures.

[2] The term “social engineering” is used here in the Hayekian sense, referring to the use of state power or centralized planning to reshape society according to a specific set of goals. It implies a deliberate effort to control or design social structures, relationships, and institutions, often through policies that regulate behavior, distribute resources, or reorganize economic and social life. Hayek believed that this approach to governance was fundamentally flawed, as it is predicated on those in government possessing much more knowledge than is possible in order to craft policies and plans.