The 17th annual Boao Forum for Asia just concluded on China’s southeastern resort island of Hainan, and opened a window onto Xi Jinping’s economic plans for the next five years. Normally the big reform announcements come earlier in the year at the Communist Party’s big 3rd Plenum policy meeting, but this year’s Plenum was dominated by the controversy over China’s constitutional reforms, which removed term limits on the Chinese Presidency. So the economic announcements had to wait.
Now they’re in, and the big message is: if at first you don’t succeed, try, try again. Xi announced at the Boao Forum that he would promote import growth and open up China’s service sector to greater foreign investment. Xi specifically pledged to “increase imports and achieve greater balance of international payments under the current account.” China’s central bank chief Yi Gang followed up with further details on financial market opening and reform.
If that sounds familiar, it’s because Xi pushed the same agenda at Boao 2013, just a few months after taking office. But at the time Xi was apparently not strong enough to push through his reform agenda amid slowing GDP growth and internal Party resistance. Instead he doubled down on debt-fueled infrastructure development to keep the economy moving, people employed, and government budgets growing.
That may not have been such a bad thing. Five years of binging on infrastructure has given China a first-class high speed rail network of more than 25,000 km (15,500 miles) covering most of the country, a huge national highway network, and literally dozens of new metro lines in nearly every big city. I had warned in 2013 that it was too early for China to shift from public investment to private consumption. Luckily for China, events intervened to force Xi to postpone difficult economic reforms until his second term.
Now that Xi has fully consolidated his hold on power, will he get serious about pursuing demand-led growth through financial liberalization and service sector reform? Of course, no one really knows for sure. Donald Trump is certainly pushing him in that direction, so much so that China had to issue an official denial that Xi’s Boao speech represented a concession to Trump’s demands. Perhaps inevitably, China called accounts that Xi “blinked” in his trade war with Trump fake news.
Unfortunately for Xi, the problem with demand-led growth is that it can’t easily be imposed from above. China’s Communist Party leadership can always force governments, state-owned banks, and state-owned enterprises to open the taps on public investment. Truth be told, it doesn’t take much arm-twisting to convince government bureaucrats to spend more money. But increasing consumer demand is a tougher challenge.
China’s per capita disposable income is growing at 7.3% per year, according to official statistics, but per capita consumer spending is growing at only 5.4%. Take off consumer price index (CPI) inflation of 1.9%, and that leaves just 3.5% real growth. With producer prices rising at 4.9%, it’s possible that the true growth rate in real consumer expenditures is even lower. If real GDP growth really is running at 6.9%, as official figures indicate, then consumption is falling behind, not surging ahead.
Xi Jinping can cut tariffs, open up the service sector, and liberalize financial markets, but that won’t necessarily make people spend. The surest way to spur consumer spending is to put money in the hands of the people who need it most: working families, the poor, and the elderly. But the Chinese government is moving in the opposite direction, slowing down benefits growth to keep budget deficits under control. That may make good fiscal sense, but it won’t drive demand-led growth.
Xi now has more power than any Chinese leader in decades, but he still can’t change the laws of economics. If he wants demand-led growth, he’s going to have to put more money into ordinary people’s hands. That sounds an awful lot like socialism. But apparently it’s not what you call “socialism with Chinese characteristics.”