Beijing Can’t Get Out Of Its Own Way

If it were not part of a somber government announcement, it would make a good joke. Beijing, after its planning and heavy-handed direction have destroyed confidence among private businesses and sapped the growth momentum of the economy, has decided to fix the problem with a new government bureaucracy. According to Beijing’s National Development and Reform Commission (NDRC), the government’s planning agency, the new bureau will coordinate across government agencies and set priorities for businesses as well as monitor how business is complying. The Chinese government would do better with a convincing promise to not interfere with the pursuit of profits, but clearly Beijing is incapable of seeing such a need, much less acting on it.

China’s economic situation is dire. Exports – still the primary engine of growth – are in decline, falling almost seven percent between last March and August, the most recent month for which data are available. Europe, China’s biggest customer, is in recession or near it and making fewer purchases than previously. The U.S. economy has so far avoided recession, but its pace of growth has fallen off markedly from what it was late last year and earlier this year. This economic reality plus ongoing tensions between Beijing and Washington have kept down American purchases of Chinese product as well as investment flows into China. The rise in trade with Russia cannot even begin to offset this kind of weakness. At the same time, residential real estate is in free fall. Having once dominated some 30% of China’s economy, most developers have fallen into bankruptcy and housing prices are in decline.

On top of this is the legacy of lockdowns and quarantines imposed for years by Beijing’s zero-Covid policies. Beijing lifted these misguided policies earlier this year and enjoyed a brief surge in consumer spending. But the growth was short-lived, largely restricted to only the wealthiest citizens. The average Chinese person came out of those severe restrictions unsure whether he or she can even count on a regular paycheck. Especially because residential real estate values constitute the major portion of household wealth, most Chinese are reluctant to consume and instead are socking away what income they have into savings, actions that are exaggerating the ill effects of falling exports on the economy.

Private businesses in China have suffered in much the same way as households have from zero-Covid policies. That alone would be enough to kill confidence, restrain investing, and stifle any impulse to expand, but there is more. For some time leading up to the pandemic and during it, President Xi Jinping and his colleagues in Beijing showed hostility to private businesses, criticizing them for following profits instead of the agenda set by the Chinese Communist Party (CCP). Xi even threatened businesses, saying that China had finally reached a level of development when it could return to its Marxist roots. As part of this stance, Beijing denied financing to Jack Ma’s retail empire and effectively destroyed what had been a fast-growing private tutoring sector.

Not surprisingly, private businesses have held back. Even as Beijing has pushed forward with its classic use of infrastructure spending to support economic growth and the nation’s large state-owned enterprises have increased their investment spending, private firms, large and small, have actually pulled back, cutting their capital investment outlays 0.2% over the first half of the year and making even bigger cuts in July so that the figure for the first eight months of the year came in at a 0.7% decline.

Desperate for the participation of private businesses, Beijing has changed its tune. Whereas not too long ago Xi denigrated private business leaders, he has more recently referred to them as “our own people.” But as the accelerating decline in private investment spending shows, the rhetorical change is not working. So Beijing has decided on more substantive efforts to get private businesses to extend themselves. Beijing’s answer is notably inept. Instead of encouraging private business to pursue profits and reassuring it that Beijing will not interfere as in the past, China’s government has established a new government bureau. The tracking, direction, and compliance testing of the NDRC is the sort of interference that undermined confidence in the first place. Beijing seems unable to get out of its own way.

Nor is it apparent that the new bureau, even in the unlikely event that it has great insight, will have much power to help private businesses, either within the larger planning bureau or the vast Beijing bureaucracy generally. According to Zharg Shixin, senior planner at the NDRC, this new bureau will not even have vice-ministerial rank.

Beijing clearly is too involved in its Marxist ideology to see that adding another bureau and another layer of government direction is not likely to inspire an enthusiastic response from private business. After all, it is after all the planning and heavy-handed government direction that destroyed confidence in the first place. This effort is likely to fail. It is in a way reminiscent of another joke about misplaced top-down efforts. It goes something like this: The beatings will continue until morale improves.