Beijing is still trying to revive China’s economy. Its effort started in earnest a few months ago when the authorities finally lifted the stifling strictures of zero-Covid. Reversing this misguided policy was, however, insufficient. Now the authorities are changing other policies in an effort to restore confidence among private business and so lift their investment spending and their expansion plans. This, Beijing hopes, will enhance growth prospects and relieve youth unemployment, which presently is running above a 20% rate.
This effort will likely fail. What Beijing has devised to bring back private investment is in many ways antithetical to the need. It reeks of Marxist centralized planning, command, and control. In other words, it repeats the mistakes of the past by continuing to ignore market signals, which are, of course, the ultimate guide for any successful economic effort. If this new effort has any positive effect, it will not last long and will instead sow the seeds of future economic troubles.
The loss of confidence among private business stems largely from two causes, both created in Beijing. One is the legacy of strict zero-Covid policies. For the last three years, zero Covid has imposed a series of lockdowns and quarantines. These have undermined any sense among individuals and businesses that they can earn reliably or plan in any way, much less invest. Little wonder then that the business managers and owners hold back on putting any money at risk in new ventures or expansions. If this were not burden enough, President Xi Jinping has until very recently talked up the need for China to move away from private enterprise and cultivate more Marxist principles. His rhetoric has included severe criticisms of private firms and non-government-related businesses, large and small. He and his colleagues in Beijing have characterized private businesses as somehow hostile to society because they pursue profit opportunities revealed through market signals instead of following the Communist Party’s agenda.
With no impetus from private business, China’s economy has suffered. In the first half of this year, even as state-owned enterprises (under orders from the party) have added 4.4% new value to the economy, private companies have held back, adding a mere 1.9%. Whereas state-owned enterprises (SOEs) have increased their investment spending 8.1%, private investment has declined 0.2%. This divergence is unsustainable. As Beijing has noted, small- and medium-sized private businesses contribute some 50% of all tax revenues and amount to 60% of the nation’s gross domestic product (GDP). They account for some 70% of commercial applications of technology and account for 80% of urban employment. Without the engagement of private business, China’s economy falters, and it has. The post-Covid recovery has simply failed to materialize.
Faced with this ugly reality, Xi & Co. have changed their tune. In an implicit admission of the failure of past policies, they lifted the zero-Covid strictures last January and subsequently downplayed the talk of Marxist principles while reversing anti-private-business rhetoric. Now Xi in speeches refers to private entrepreneurs as “our own people.” But as the figures quoted above show, private business has remained wary. To change this picture, Beijing has come out with a new plan that the planners say will rebuild confidence among private business owners and managers and so evoke needed investment and expansion. It has dubious promise at best.
The new 31-point plan contains 17 measures that are supposed to increase private investment spending. The idea is for the National Development and Reform Commission (NDRC), China’s planning agency, to identify “key industries” for increased investment. The NDRC has already compiled a list of 2,900 investment projects to absorb some RMB 3.2 trillion (about $448 billion) in new investments. The NDRC says that it has compiled its list from recommendations of local government authorities. Under the plan the NDRC will further develop a data base of these investment projects for relevant financial institutions – all SOEs — to provide financing. Private firms will apply to gain inclusion in the program.
This certainly sounds like a plan, but it is hard to see how it can restore business confidence. The entire program is – communist party fashion — directed from the top down, with central planners receiving recommendations from other government officials, arranging financing and deciding which private businesses can participate in its plans. Beijing does reference “listening” to the “concerns” of private business, but otherwise takes no account whatsoever to the desires of ultimate consumers with whom businesses presumably have daily contact. In other words, the direction of the effort ignores market signals entirely in favor of government-ordained and government-selected efforts.
Far from inspiring private investment efforts and rebuilding economic momentum, this new scheme carries all the classic risks of central planning. It will marshal tremendous resources and financing for efforts that planners and other government officials want but that have little or no relation to the desires of ultimate buyers. This is the same approach that led China to build tens of thousands of units in high rise apartment blocks that today remain empty because they were constructed in places where no one wants to live and leaving a legacy of waste and debts.
Pressure from the authorities and a plentitude of financing might elicit an immediate positive response to the 31-point program. Ultimately, however, private businesses are not likely to follow too far along projects that have little relation to the market signals of their customers and that at best offer a random chance of earning the enough to justify their financing costs. Beijing’s response and its flaws may offer a warning to Americans when considering President Biden’s top-down, centralized industrial policy. He calls it Bidenomics, but it is mostly a watered-down version of what China is doing.
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