Xi chairs standing committee meeting; Is there a plan to deal with the growing debt mess?; Defending the RMB; Xizang
Xi Jinping has reappeared after the Beidaihe break. His first publicly reported activity since early August was chairing a Politburo Standing Committee meeting, the focus of which was “to study and arrange work on flood prevention and relief as well as post-disaster restoration and reconstruction”.
The financial events of the past few weeks demonstrate that the “tough battle” against financial risks, one of Xi’s three key “tough battles” along with poverty alleviation and pollution after the 19th Party Congress, has not yet achieved victory.
What if Xi has decided they just need to “chew on the hard bones 啃硬骨头” and do a much bigger restructuring and so therefore will tolerate the risks of a financial crisis? Perhaps he believes that the political environment is stable enough and the system has been hardened enough that they can handle the financial and economic damage and social stability problems that will come from a broad debt restructuring, and that they can not effectively transition to “high quality development” without resolving the debt mess? As I wrote yesterday “extreme case scenario thinking 极限思维” can certainly also apply to the risks of a PRC financial system crisis. Yes, that sounds grim (and I am probably crazy for even floating it as a possibility) but given the lack of strong policy response that just about every serious analyst, economist and policy advisor has recommended, can we rule that out? But what if they don’t fully understand both the real amount of debt as well as all the linkages and so don’t understand how defaults may ripple through the system, and what kind of systemic risks they will cause?
They seem stuck as the incremental efforts over the years to deal with the massive build up of debt have not solved the problem. There are plenty of people who have been saying for a long time that the Chinese economy would eventually crash due to the weight of massive debt, and certainly over the last few days and weeks those voices have become louder, and somewhat triumphant. In previous periods where a crisis looked like it was imminent we saw similar surges of “it’s finally happening“ only to see the leadership muddle through to avoid a crisis. Will this time be different?
It is harder to see anything but a very painful path forward and given Xi Jinping‘s history of decision making and especially the example of the exit from dynamic zero Covid I don’t think we can rule out the possibility that he could decide it is much better to just let things rip and do a reset, but neither can we rule out the possibility of a sudden pivot to once again step in forcefully, a pivot that would be painful for anyone too bearish.
Perhaps the leadership’s public confidence that things are not that bad is justified, but in June 2013 as the interbank market started blowing up they seemed surprised, and in 2015 they fumbled the RMB devaluation in a way that made them look incompetent. Has the economic policymaking process improved since 2015? Or might they quickly realize things may be worse than they thought and shift to a much more proactive response?
Apologies, the above is a bit of a ramble, I am just struggling to get my head around why they appear to be marching towards the brink of another financial crisis. Maybe they have a plan, but they have not yet articulated it well, and the events of the past few weeks strengthen the arguments of those who say the PRC is increasingly uninvestable.
When is the long overdue National Financial Work Conference? That may be the venue where we learn what the plan is.