The problem with Xi Jinping’s Davos pitch
“Pursuing protectionism is just like locking one’s self in a dark room. Wind and rain may be kept outside, but so are light and air.” Chinese President Xi Jinping’s eloquence at the World Economic Forum in Davos last week duly earned encomiums from free-trade advocates. The consensus was that under Donald Trump, the US may well turn inward and abandon its global economic leadership role, leaving a vacuum that Xi’s China is looking to fill. It makes for an optimistic narrative. But if China is to become a free trade champion—and that is indeed to be wished for—it must deal with several challenges.
The first is the trifecta of state subsidies, zombie companies and oversupply. The problem dates back—as so many do—to 2008 and the financial crisis when Beijing excessively used state-owned enterprises (SOEs) as agents of state policy. Chinese banks threw loans at them that were used for irrational capital expenditure, creating housing and infrastructure bubbles, as well as seeding the steel oversupply problem that has become a trade flashpoint over the past few years.
The comedown since has been hard. The exact magnitude of China’s bad loans problem isn’t known yet, but it could be debilitating. And Beijing’s blueprint for supply-side reforms doesn’t seem to be doing the trick. The solution is the same tough-minded reforms initiated in the late 1990s when Beijing had reformed SOEs aggressively for almost a decade. But that would mean layoffs numbering in the millions. An authoritarian regime delivering double-digits economic growth during the previous round of reforms could absorb that. One that must deal with China’s current growth rate has a very different calculus to consider. Thus, instead of shutting down SOEs or privatizing them, Beijing is taking the merger route instead. This does little to address oversupply and trade-distorting subsidies.
Then there is the renminbi and capital controls. The halcyon days of 2015 when the International Monetary Fund’s executive board approved including the Chinese currency in the Special Drawing Right basket seem long in the past now. It was supposed to be the renminbi’s coming out party; instead, it has stagnated since. Capital outflows due to concerns about China’s economic performance have led to significant depreciation. Beijing has responded in a heavy-handed fashion. The People’s Bank of China’s reserves have fallen nearly a trillion dollars since 2014 in an attempt to prop up the renminbi. And adding to restrictive inbound capital controls, Beijing is imposing increasingly tougher outbound capital controls as well as exchange controls to prevent further depreciation. This has already affected European companies unable to remit dividends abroad—and will in turn affect inbound capital that will be justifiably wary of being unable to exit easily. Managing a currency’s exchange rate while allowing free flow of capital is unsustainable, as economist Eswar Prasad has pointed out. The obvious answer would be a free float. But that, Beijing fears, could lead to sharp depreciation, and economic—and consequently, political—instability.
The third problem is plain old-fashioned protectionism. Take China’s surging technology sector, one of the areas of focus for Beijing as it attempts to shift the economy from smokestack industries and export-led growth. It is protected by what foreign investors have dubbed the Great Firewall of China. Domestic companies like Baidu and Weibo are protected by a thicket of regulations that make it impossible for global giants such as Google, Facebook and their ilk to compete effectively. Part of this stems from the desire to promote indigenous companies—but part of it can also be traced to Beijing’s desire to control the online space in order to keep a lid on freedom of speech and public dissent.
There is a common theme of attempting to extend political control, and it’s no coincidence. Reaching back to Deng Xiaoping, successive administrations have prioritised pragmatism over ideology, moving away from Mao’s cult of personality brand of politics. Xi has broken with this trend emphatically. He is now held to be China’s most powerful—and authoritarian—leader in the post-Mao era.
That comes with a host of problems. Document 9, a Communist Party internal document issued a month after he came to power in 2013, railed against the concept of civil society, terming it a threat to the party. This year, Zhou Qiang, president of the People’s Supreme Court—the country’s top judge—termed judicial independence a “false Western ideal”. And Xi is blurring the traditional line between policy-making bodies and party power centres with his advisers ranged against the state council, responsible for managing the economy, and various ministries. None of this—from stifling civil society to undercutting faith in legal arbitration mechanisms and creating policy uncertainty—is helpful to integration with the global economy.
There, then, is that pesky question again that China was supposed to have put to rest with its rise as a global economic power: can globalization and free trade go hand in hand with authoritarianism and rigid political control? The answer these days is perhaps not quite as clear as Beijing had declared it in better times. Xi’s Davos pitch may have worked a treat. But now comes the hard part.
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