Financial markets have shown disapproval of Xi Jinping’s success in securing a third term as China’s leader. Stocks, bonds, and China’s currency, the yuan, all fell with the close of the Party Congress and have more or less stayed down. The reaction is certainly understandable. For some time now, Xi has shown a penchant for policies that can only be described as anti-growth. His continuation in power can only mean more of the same.
There was, however, one surprise in the market response. It announced that investors strangely had not yet fully adjusted to a Xi-dominated future. They should have. Xi has long telegraphed his policies and intention to get a third term. Perhaps there was a lingering hope that reformers would retain power, and when at the end of the Party Congress it was clear that only Xi’s allies would have positions of power, that hope was shattered. But then, given Xi’s behavior for some time, even that result was entirely predictable.
Nor did the market have any news to mitigate despair over Xi. True, some good news on Chinese economics did appear as the Party Congress adjourned. The nation’s real gross domestic product (GDP) for the third quarter showed 3.9 percent growth over the same quarter a year ago. But that news was hardly distracting. The reported figure was only slightly better than the 3.5 percent growth widely expected and, in any case, was still slow compared to the kind of growth China exhibited in the not-too-distant past. Besides, September gave more news of economic trouble. Retail sales in September were up a mere 2.5 percent, quite a difference from August’s 5.4 percent advance.
Xi has demonstrated—almost from his first days in power—that he has completely misunderstood the root of China’s stupendous economic rise of the past few decades. That growth and China’s position now among the first rank of economic powers stemmed from Deng Xiaoping’s decision in the 1970s to dispense with the tight centralization and economic planning practiced under Mao Zedong. While keeping the Communist Party’s grip on political power, Deng opened China to trade and allowed more independent decision-making in private firms and state-owned enterprises. The openness and flexibility brought by that decision were critical to the great growth and prosperity that ensued and has put China—and the seemingly clueless Xi—in such a position of power and influence today.
But bad policy could stymie and even reverse such past success. If anything can do that, it is Xi increasing efforts to dilute Deng’s reforms in favor of more Mao-like central planning and market suppression. Xi has made his intentions explicit, saying that Deng’s reforms were always just a temporary measure to bring China up to this point when he can now return the country to its communist roots. Of course, there is no telling what Xi really thinks, but regardless of motivations, his policies will kill the goose that laid the golden egg.
In the same way, the huge debt overhang China faces today—even apart from the property developers—can be traced to mistakes in central planning. Xi’s reliance on centralized control and the overriding of market forces, which he clearly intends to exaggerate in his new term, will only cause more such problems even as they make China less responsive to global market forces and so less able to take advantage of growth opportunities than it once was.
Market responses have made this point clear. Those who pinned their hopes on continued Chinese gains—if there are any left outside the Chinese Communist Party—are bound to face disappointment. That certainly is what investors are saying. Those in the West and elsewhere in Asia who fear Chinese economics will also have to adjust, and if for some reason they enjoy being afraid, as some people seem to, they will have to find some other demons.
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