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What are the policy implications for China's economy from the 19th Party Congress?'

December 18, 2017
Pieter Bottelier
Pieter Bottelier—top China economist, former World Bank head in China, and stalwart CHINADebate expert—set the theme today: the crucial albeit unsung importance of elite technocrats in guiding China's Economic Miracle. Here is summary of today's three parts.

1. Pieter, in our interview, warned that China's shift from pragmatism to ideology could weaken the quality of the technocrats' economic policy making and regulation, and thereby hurt economic stability and growth. 

2. Pieter believes China has avoided a hard landing, thanks especially to technocrats who manage the property sector. 

3. I employ one of my favorite real estate graphics to demonstrate - using data - just how well, in fact, the technocrats manage the property sector. And, the impact less competent technocrats could have.

1. Shift from pragmatism to ideology could make China's managed economy harder to manage

'Black cat, white cat. If it catches mice, it's a good cat.' 

The big idea. The shift from Deng Xiaoping pragmatism to Xi Jinping ideology and Party control could weaken the effectiveness of China's economic policy and decision making. This would undermine the foundations of China's Economic Miracle, and, in turn, the stability and growth of China's economy.

Pieter Bottelier - top China economist, former head of the World Bank in China, and stalwart CHINADebate expert - surprised me when he gave this issue as his sole concern when I asked him, 'What are the policy implications for China's economy from the 19th Party Congress?'

China is still, to a great extent, a managed economy, and the managers are the elite technocrats; they pull levers that in the West we leave to the market.

Elite technocrats are the unsung heroes who guided China's Economic Miracle and navigated the crises that could have derailed it at any point.

  • 'One of the pillars of China's Economic Miracle has been the quality of the technocratic elite in the civil service since the start of the economic reforms under Deng Xiaoping in the late 70's.'

Beginning in the Deng era of economic reforms, technocratsoperated in an environment of, '... free debate and free research, as well as unrestricted exchanges between Chinese technocrats and overseas technocrats and intellectuals.' Black cat, white cat.—Pragmatism trumped Party power and ideology.

Now, Party power and ideology trump pragmatism.

  • 'The policy environment and intellectual climate within which economic policy is made have definitely changed.'
  • 'The recent 19th Party decisions confirmed the political changes that had been underway for some time.'
  • 'Politics has moved to center stage.'
  • 'Party priorities have changed from economic growth, economic development to party power, party prestige, party control over everything - the economy and, of course, the political system.'
  • 'That has potentially very significant implications for the economic policy making environment.'

Beyond the technocrats.  The enshrinement of 'Xi Jinping Thought' in China's constitution further solidifies 'the shift in priorities from pragmatism to party power that translates into an ideologically underpinned party power.'

  • For example, 'Chinese universities have all hurried to create institutes for the study of 'Xi Jinping Thought.' 
  • Because of this, 'I worry that the very positive and open intellectual climate in China's universities and think tanks in China will become a thing of the past.'
  • Chinese academics and think tank experts, unlike those in the West, wield greater influence and have an outsized role in policy making.

What this means. 'Because ideology and party power have drifted back to center stage, the environment within which intellectuals and policy makers have to debate policy options and consider alternatives has changed fundamentally.'

  • 'This may lead to the very strict narrowing of the intellectual climate within which the technocrats can operate in the years ahead.'
  • 'And that could undermine a significant part of the foundations of China's economic miracle of that last few decades -the freedom of debate, the freedom of research, and the open exchange between Chinese technocrats and foreign intellectuals.'
  • 'If that climate, which has been so positive and so open in the last several decades, is jeopardized, we have to worry about the quality of the economic decision making in the years ahead.'
  • And, the stability and growth of the economy.

New problems in analysis. 

China's technocrats have proven capable of managing most every problem the economy has thrown at them. They have done such a good job that we don't even notice them or factor their abilities into our analyses. They are just so much background; we take them for granted. 

  • That's changed. From now on, figuring out what's happening and what might happen in the economy just got more complicated.
  • We have to understand better how the bureaucracies that manage and regulate the economy work, and then dig down a layer or two in.
  • We have to assess the technocrats and pay attention to who is appointed - competent economist or ideologue?
  • Be ready for some bungling, weak policies, and inept regulation that could put the stability and growth of China's economy at risk.And, catch these before they ripple through the economy. 

2. No hard landing for China's economy...for now

giphy-61.gif

'Two years ago we were all speaking about, all worried about the possibility of a hard landing,' Pieter Bottelier also told me in our interview.

  • 'Very few people are talking about that today.'
  • 'Even though the risk has not disappeared completely from the horizon, it's no longer on the top of the agenda of most pundits.'

What's changed? 

'The major factor that has worked out differently from what had been expected is the property sector.'

  • 'Real estate markets have recovered instead of deteriorated.'
  • 'They have pulled demand for raw materials much more strongly than expected, and exports have been stronger than expected.'
  • 'All together manufacturing, gross exports, and the real estate sector, particular the urban property sector, are the main factors explaining why the objective economic situation has improved rather than deteriorated as many people had expected.'

How about the real estate bubble? 'That risk is certainly there. There is in a way a bubble, but the bubble is not about to burst.'

  • 'We have seen is a more positive regular evolution of development in the real estate markets. Partly as a result of strong demand and partly as a result of very capable administrative regulation.
  • 'Very astute management of the administrative environment at the local level is the main explanatory factors, plus the underlying demand remains very, very, very strong.'
  • 'The stock of unsold properties as a percentage of the total supply side has declined a lot in recent, in the last eighteen months. So we have a much more healthy supply-demand balance situation than we had two to three years ago.'
  • 'And the prospects, of course, remain uncertain but the likelihood is that markets will weaken in the next several quarters in 2018.'
  • 'Total turnover and prices will probably slacken.'
  • 'But, I don't expect a collapse as we did a few years ago.'

3. Technocrats manage China's property sector pretty well

NBS_Price_Movements_Jan2012-May2017.gif
‍Source: Analysis by Real Estate Foresight based on data from NBS, Datastream

Pieter Bottelier credits 'very astute management of the administrative environment at the local level' for managing China's real estate bubble.

Have a look at one of my favorite charts, above, courtesy of Robert Ciemniak of Real Estate Foresight.

  • We can see that the real estate market is not a 'market' as we understand it.
  • Rather than the invisible hand at work, local technocrats pull their many levers, tightening and loosening at will.
  • Loosen , markets go up. Tighten, markets go down.
  • Never out of their control.

Riffing on Pieter's worry that the shift from pragmatism to ideology could weaken economic decision making...

  • Imagine that competent technocrats might substitute their best judgement to toe the Party line and keep their jobs.
  • Or that they are replaced with cadres who are more ideological than competent.
  • Then, the real estate and China's economy really might... 
Pieter Bottelier

Pieter Bottelier

Visiting Scholar, SAIS (School of Advanced International Studies, Johns Hopkins University)
  • Visiting Scholar, School of Advanced International Studies, Johns Hopkins University
  • Former Chief, World Bank’s Resident Mission in Beijing

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book

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Pieter Bottelier

Pieter Bottelier

Visiting Scholar, SAIS (School of Advanced International Studies, Johns Hopkins University)
  • Visiting Scholar, School of Advanced International Studies, Johns Hopkins University
  • Former Chief, World Bank’s Resident Mission in Beijing

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book
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