China’s President Xi Jinping may be trying to manipulate the hearts and minds of the ruling Communist Party, or he may just be telling the darn truth about economic growth and human welfare.
Xi delivered a speech to Party leaders over this weekend in which he stressed that “we should no longer evaluate the performance of leaders simply by GDP growth. Instead, we should look at welfare improvement, social development and environmental indicators to evaluate leaders”.
Over the last decade of China’s boom times, average Chinese ditched their bicycles for Buicks. The upper classes liked yachts so much, some bought the Sunseeker Yacht company. But others have fallen behind. Not blessed with living in a high growth city like Shanghai, their incomes have not kept up with the cost of living. Housing prices skyrocketed. A gap between rich and poor widened. The sky’s turned more polluted. Growth has come with a price.
This weekend’s message by the new President is an important one, meant for the ears of big spending local government leaders who have strong incentives to push up investment under the existing “GDP growth oriented” performance evaluation framework; a framework that the Central Bank and financial regulators no longer have any tolerance for.
The shadow banking system municipal level has run amok. Investors fear the possibility of a Lehman style banking crisis at the local level in dozens of munis across China. To grow from now on, China will have to build things that make sense and money, not just build things that create jobs. If China’s old Happy Meal economy has given way to the new Bridge to Nowhere economy, what comes next is anybody’s guess. But the real money for the moment — the believers — are betting on more sustainable growth, high end manufacturing in industries like lithium batteries and solar power, and faith that the Chinese consumer, strapped with cash, will save less and spend more.
Since the days of Wen Jiabao, who left office last year and said China’s real GDP growth rate should be around 7%, Beijing’s top leaders are all willing to tolerate slower growth to reduce risks and improve the welfare of an aging population living, largely, without a safety net.
China’s “new attitude” — says Zhiwei Zhang, a senior economist at Nomura Securities in Hong Kong — reinforces the view that there is a 30% chance China’s growth will drop below 7% in either the third or fourth quarters.
China investors should take note, because when that happens the hard landing guys will be on CNBC, Fox Business, Fox News, CNN, Bloomberg and all over the internet smiling and reminding us that they told us so (and how we all should have bought their newsletters or read their latest yarn on Amazon).