Tamping Down Expectations on China’s Growth

The prospects for China’s economy look so challenging for the remainder of 2013 that increasing numbers of usually cheerleading investment bank economists are cutting their rosy growth forecast for China. The release last Thursday of preliminary manufacturing data for May, which surprisingly indicated a contraction in manufacturing activity, was just one more in a series of weak data points.

The government is not denying the weakness, nor does it appear to be panicking. Officials continue to state that no further government stimulus measures are likely:

“Enterprises need to close down backward production and upgrade their industrial structure, and should not expect further economic stimulus measures by the government,” an official from the National Development and Reform Commission, who wished to remain anonymous, told the Beijing-based newspaper [The Economic Observer].

In a sign of how concerned the new administration is about China’s environmental crisis and the constraints it places on the country’s future development, President Xi Jinping told senior officials at a study session last Friday that the government should “set and strictly observe an ecological ‘red line’ amid the country’s rapid urbanization in order to protect the environment.”

Mr. Xi also said “China will not sacrifice the environment for temporary economic growth” and that officials will be held responsible for pollution “for life.”

Premier Li Keqiang is also talking down expectations for China’s growth. During a visit to Germany he said on Monday that China had “huge challenges as it seeks 7 percent annual growth this decade, down from more than 10 percent in the previous 10 years.”

Two weeks ago, this column noted that urbanization and comprehensive economic reform were among the main hopes for supporting and improving the quality of China’s growth. The signals for deepening economic change remain strong.

On Friday, the State Council released “Opinions on Economic Reforms in 2013,” a document that further detailed plans to reduce the state’s role in the economy. Jun Ma, greater China chief economist for Deutsche Bank, was impressed and said some of the reforms would have meaningful implications for the real economy.

Urbanization is still the subject of debate. Reuters reported last week that Premier Li had “rejected” a draft urbanization plan because it was heavy on infrastructure investment and relatively light on economic reform. An official at the National Development and Reform Commission dismissed the report of a rejection and said the draft was “still under discussion and there’s no clear timetable for implementation.”

Ting Lu, China economist for Bank of America Merrill Lynch, addressed the areas under debate in a research note published after the report of a rejection of the draft:

There are a number of controversial issues related to the urbanization plan: (1) First and foremost, how to deal with the rights of land for those farmers who are willing to move to cities? Should the government start rural land ownership reform first? (2) How to unwind the Hukou system orderly? (3) Shall the central government and local governments determine the locations for urban expansions? Or should the market play a bigger role? (4) What’s the right distribution of city sizes? Shall China encourage the growth of numerous small towns? Or should the government develop bigger cities which could be more efficient? (5) Can local governments force farmers to move to towns by consolidating (or even confiscating) their lands? If not, how to prohibit land grab? (6) Last but certainly not the least, how to finance spending on infrastructure and social housing which are related to urbanization?

Whatever is going on with the drafting of the incredibly complex and politically fraught urbanization plan, investors should not be holding their breath that it will be a panacea for the Chinese economy and commodity producers around the world.

TRYING TO UNDERSTAND CHINESE ECONOMICS without also paying attention to Chinese politics is usually a mistake. In the midst of the acceleration of economic change there appears to be quite a leftward ideological shift under way. The Chinese Communist Party has spent decades trying to understand and learn from the collapse of the Soviet Union. Among the key lessons are that a struggling economy, an unaccountable, incompetent government and a dissolute, flaccid party whose members have strayed from the true path and lost their faith doomed the Soviet Union.

President Xi inherited many challenges, including but not limited to: a troubled economy; a growing debt mess; widespread corruption in the party and society in general; and a huge environmental crisis. Combine those challenges with what looks to be a very significant economic reform agenda that will affect many powerful interests across society and it may be that the logical response from the party is to batten down the ideological hatches, rectify the party, strengthen control over the military, and increase oversight of the media (especially the Internet) and educational institutions before undertaking those jarring economic changes.

I do not think Mr. Xi wants to revert to Maoism. There are other signs that he is serious about making the Chinese Communist Party much more of a responsive, consultative, authoritarian ruling party. But there are so many serious problems right now that he may believe any sign of weakness will be the end of the party.

An “ideological crackdown” may have foreign implications, as the Jamestown Foundation argues in the recent essay “Exploring the International Aspects of China’s Ideological Crackdown.”

President Obama and the Chinese president will have their first summit meeting on June 7 and 8 at Sunnylands, the Walter and Leonore Annenberg estate in Southern California. Thomas E. Donilon, President Obama’s national security adviser, was just in Beijing to prepare for the meetings.

Given the difficult 2013 China appears to be having, it is hard to expect many positive breakthroughs in the United States-China relationship in the near term.