Is China’s Xi on the Correct Economic Path?

President Xi Jinping’s economic thinking – “Xiconomics” – reflects the kind of adjustment that is required by Chinese rebalancing in a challenging international environment.

Three years ago, sinologists in the West – led by Barclays Capital – introduced the term “Likonomics” to describe the central tenets of Premier Li Keqiang: no stimulus, deleveraging, and structural reforms. By now, those policies were expected to push China toward a “temporary hard-landing” with quarterly growth plunging to 3%.

President Xi Jinping’s economic thinking – “Xiconomics” – reflects the kind of adjustment that is required by Chinese rebalancing in a challenging international environment.

Three years ago, sinologists in the West – led by Barclays Capital – introduced the term “Likonomics” to describe the central tenets of Premier Li Keqiang: no stimulus, deleveraging, and structural reforms. By now, those policies were expected to push China toward a “temporary hard-landing” with quarterly growth plunging to 3%.

While the description illustrated some of Premier Li’s efforts, growth predictions proved wildly off.

A few weeks ago, the People’s Daily introduced a series of articles about President Xi Jinping’s economic thought. “Xiconomics” is shorthand to describe the “new normal” and “supply-side reform” as the two distinctive characteristics of President Xi’s first term. It is not a growth prediction but a policy mix to support sustained growth in challenging international environment.

In a challenging international environment, Chinese President Xi Jinping’s economic thinking – ‘Xiconomics’ – reflects the kind of adjustment policies that are necessary for the rebalancing of the economy toward consumption and innovation. Its two distinctive characteristics are the “new normal” and “supply-side reform.” The former refers to environmental constraints; the latter to vital policies required to overcoming these constraints.

Since spring 2014, president Xi has stressed that China must adapt to an economic new normal. In the short-term, that means slower growth, painful restructuring and conflicting responses following fiscal accommodation.

The Two Sides of “Xiconomics”

Since spring 2014, Chinese President Xi Jinping has stressed that China must adapt to an economic new normal. In the short-term, that means slower growth, painful restructuring and conflicting responses following fiscal accommodation.

At the 2015 Central Economic Work Conference, the policy authorities pledged to focus increasingly on supply-side reforms, which prioritized the reduction of excess capacity while maintaining stability. That is likely to mean expanded fiscal spending and further monetary easing. As an effort to stimulate economic growth, the supply-side reforms represent the other side of the new normal.

In the near future, China will emulate neither the laissez-faire doctrines of the United States, which led to the global crisis, nor Europe’s social accommodation, which is no longer supported by the region’s growth.

In contrast, supply-side reforms seek to facilitate China’s transition to a post-industrial society.

Secular transformation, not hard landing 

A hard landing describes a business cycle in which an economy slows down sharply or tips into recession after a rapid growth performance due to government efforts to rein in inflation. A hard landing can also be the unintended result of a central bank’s efforts to tighten monetary policy to slow down growth and contain inflation.

Since the global financial crisis, many observers have argued that China is in the midst of such a hard landing. I have argued that they are wrong.

First, a hard landing is predicated on a central bank being willing to hike up rates to slow growth. In reality, the People’s Bank of China has been cutting interest rates since early 2012.

Second, a hard landing indicates rising inflation. Yet, since late 2011 when inflation peaked at more than 6 percent, inflation in China has gradually decreased to less than 2 percent.

Third, a hard landing indicates a sharp slowdown in economic growth, if not outright recession. Yet, China’s growth remains between 6.5 and 7 percent, more than four times as high as the Eurozone’s and almost three times higher than the US.

Finally, a hard landing is predicated on a business cycle. However, China’s growth deceleration is fueled by the government’s rebalancing efforts. The shift from unsustainable growth based on investment and net exports to consumption and innovation is about structural transformation, not just business cycles.

Long-term policy reflects responsible leadership

After the global financial crisis, China, thanks to its huge stimulus package, accounted for more than 50 percent of the global GDP growth from 2009 to 2010. An extraordinary contribution spared the international economy from a 21st century replica of the 20th century’s Global Depression. However, in the future, the mainland will not be able to “bail out” global growth in a similar way.

At that time, China’s GDP was less than 10 percent and its population about 20 percent of the total world population. Today, China accounts for about 25 percent of world GDP growth, which is closer to its share in the world economy. In the coming decade, China has the potential to grow two to three times faster than major advanced economies, as long as market-oriented structural reforms prevail.

Today, the US, Europe and Japan continue to take debt, have zero-bound interests or persist in new rounds of quantitative easing. In contrast, China’s government is engaged in a structural transformation, even as it is deleveraging. After two to three years, that could result in a reform dividend.

That’s a purposeful long-term policy, which reflects responsible economic leadership that should inspire the advanced West.

‘Xiconomics’ for Challenging Times is republished with permission from The Difference Group