From: lessgovt@gmail.com   
      
   The Problems With China’s Economy Start at the Top   
   Aug. 26, 2023, By Eswar Prasad, NY Times   
   [Mr. Prasad is a professor in the Dyson School at Cornell University.]   
      
   This is a perilous moment for China. The numbers portray a stalling economy,   
   but there is a far more profound concern. Chinese consumers and businesses are   
   losing confidence that their government has the ability to recognize and fix   
   the economy’s deep-   
   seated problems. If President Xi Jinping’s government doesn’t tackle this   
   fundamental issue, any other measures will have little impact in arresting the   
   downward spiral.   
      
   Mr. Xi’s government has prioritized state enterprises, which hew closely to   
   the Chinese Communist Party line and are under direct government control, over   
   the private sector. Technology companies, including highflying fintech   
   businesses like Ant Group,    
   that were seen as having grown too big and powerful have been forced to break   
   up into smaller units and are now subject to more state control. The   
   crackdown, which intensified after Mr. Xi tightened his grip on power late   
   last year when the legislature    
   amended the Constitution, allowing him to extend his reign, has also enveloped   
   private companies in education and other sectors. In addition, the   
   government’s apparent hostility toward foreign businesses amid rising   
   geopolitical and economic tensions    
   with the United States and other Western countries — which could affect   
   China’s ability to maintain access to global markets and technology — are   
   worsening the loss of confidence.   
      
   The government’s unwillingness to modify its increasingly untenable “zero   
   Covid” policy, followed by the abrupt reversal of that policy last December,   
   further undercut confidence in the policymaking process. This confidence   
   problem is apparent in    
   the tepid private investment and weak household consumption over the past   
   year. Reflecting their concerns about economic prospects, households are   
   saving more and spending less on big-ticket items like cars. China’s   
   currency, the renminbi, is    
   depreciating in value as capital flows out of the country and foreigners   
   become less willing to invest in China.   
      
   The worrying cognitive dissonance between the government and entrepreneurs   
   became apparent during a recent trip I took to China. It was striking how   
   officials in Beijing seemed relatively sanguine about the economy and argued   
   that, in recent months,    
   enough had been done to reassure entrepreneurs that they were seen as making   
   important contributions to the economy. Entrepreneurs, on the other hand,   
   thought that the government’s actions spoke louder than its words and that   
   actions taken to cut    
   successful businesses down to size were clear indications of its hostility   
   toward private enterprise.   
      
   The reality, which Beijing seems to acknowledge only grudgingly, is that the   
   private sector is crucial to keep the economy chugging. The labor force is   
   shrinking, which leaves productivity as the key driver of growth. Private   
   enterprises, which made the    
   country a global leader in digital payments for instance, have tended to be   
   far more innovative and productive than doddering state enterprises. The   
   government’s desire to encourage domestic innovation and shift the economy   
   toward higher-tech and green    
   technologies cannot rely just on large state enterprises.   
      
   Small- and medium-size companies, particularly in the more labor-intensive   
   services sector, are important for employment as well. Despite rapid growth in   
   gross domestic product in recent decades, the Chinese economy has not been   
   able to generate many new    
   jobs, because much of that growth has come from manufacturing investment, and   
   the government has been trying to cut jobs from bloated state enterprises. At   
   a time of slowing growth this becomes a particular concern, as evidenced by   
   the surging youth    
   unemployment rate, which poses risks to social stability.   
      
   The increasingly centralized and often wayward nature of policymaking under   
   Mr. Xi has also hurt confidence. One example comes from the property sector,   
   which Beijing has long relied on as a pivotal source of growth — and which   
   had become marked by    
   speculative activity, in part because of government policies that increased   
   the availability of mortgage financing. The Chinese government has rightly let   
   some air out of this bubble, including by limiting financing for multiple home   
   purchases and by    
   tightening eligibility restrictions.   
      
   Some property developers told me that they understood the rationale behind the   
   government’s actions but not the abrupt way in which some policy changes   
   were introduced, leaving them little time to adjust. This has reportedly led   
   to a sharp fall in    
   housing prices and construction activity, which the government has now tried   
   to compensate for by reversing some of the restrictions. Such abrupt policy   
   shifts hardly inspire confidence. One view is that officials in Beijing   
   “live above the clouds,”    
   lacking a full understanding of how their attitudes and policies affect   
   businesses.   
      
   Private enterprises see worrying signs of rhetoric that could have practical   
   consequences. Mr. Xi’s “common prosperity” initiative, introduced in   
   2021 and officially described as an effort to quell public disquiet about   
   rising income and wealth    
   inequality, has been interpreted by successful entrepreneurs as being directed   
   squarely at them. The initiative, which has spurred regulatory and   
   anti-corruption crackdowns, has served as a cudgel against private businesses   
   as well as banks and even    
   government officials straying from the party line.   
      
   The government’s response to the drumbeat of concerns about rising youth   
   unemployment was to scrub the release of those data. In doing so, it seems to   
   believe that the spread of bad news is behind the loss of confidence.   
   Similarly, even as it becomes    
   apparent that prices for goods and services are falling because of weak demand   
   and excess capacity in some industries, the government has pushed back against   
   talk of deflation. Investors and analysts outside China have said that they   
   have recently been    
   denied access to some of the services provided by Wind Information, a private   
   database with corporate and financial data that had been used to flag concerns   
   about China’s financial markets.   
      
      
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