- REUTERS/Denis Balibouse
Xi Jinping just spelled out a looming transformation in the Chinese economy.
More specifically, he gave a speech about the death of highly indebted industrial state-owned enterprises to make room for new more privately owned service industry companies, a painful process to be sure.
Which is why it isn’t surprising that since this talk began in earnest, at the end of 2015, Chinese officials spoke in little detail, especially regarding the stark reality that this transformation would result in millions of people losing their jobs.
However, Xi’s recent speech to China’s Central Leading Group on Finance and Economic Affairs included some of that missing detail.
“Authorities must deal with zombie companies in a ‘resolute manner,’ offer laid-off workers new posts or vocational training opportunities, and ensure those who are unable to find a job are covered by the social safety net or other aids, Xi said at the meeting of the Central Leading Group on Finance and Economic Affairs, according to the official Xinhua News Agency.”
The most anyone in government would say about the matter up to now was simply: “There should be proper arrangements for (laid-off) workers.”
That’s not really a plan. This new speech sounds more like a plan. In his speech, Xi also warned that the property market, a main driver of economic growth, would cool – another sign that things are getting serious for the government.
It’s not hard to understand why China is afraid of mass layoffs. The country’s government is constantly talking about “social harmony,” and layoffs tend to lead to unrest, especially during an economic downturn.
But with companies getting less and less productive, while needing more and more borrowed money to survive, and the country’s debt-to-GDP ratio climbing toward 300%, the government likely feels it doesn’t have a choice.
This year, last year, and forever
Plus, economic conditions are much better than they were this time last year. You’ll recall that in winter 2016, the Chinese stock market had just finished taking the entire world on a wild ride, and the talk at the World Economic Forum in Davos was that China might not last the year without a credit event.
Across Wall Street, yuan short sellers sharpened their knives.
The government survived by easing monetary policy and using its $3 trillion in foreign currency reserves to stabilize the Chinese yuan, despite the fact that the dollar’s surge toward the end of 2016 pushed its value down.
Now things are looking more stable. A few February data points to illustrate:
- China’s official manufacturing purchasing managers’ index (PMI) came in at 51.6 last month, up from 51.3 in January and beating expectations of a 51.2 reading. (A number above 50 shows economic expansion, while below 50 shows contraction).The new factory orders index rose to 53.0 from 52.8, and export orders improved to 50.8 from 50.3.Manufacturing output rose to 53.7 from 53.1China’s official non-manufacturing PMI came in at 54.2, down slightly from 54.6 in January, but still a healthy number.
“Expectations are remarkably positive… Focused on the current strength in orders, managers appear little concerned with risks US President Donald Trump might impose tariffs, or the domestic property slowdown crimp demand,” wrote Bloomberg economist Tom Orlik in a recent note.
Meanwhile, China still has a little under $3 trillion in reserves to keep the yuan stable in the event of a dollar surge.
Even with all that underlying good news, it’s been hard to take talk of economic transformation seriously, as debt continues to build. Total social financing, a measure that the Chinese government invented in 2011 to figure out how much debt non-state entities (like individuals and private companies) have taken on, has kept growing.
TSF came in at 3.74 trillion yuan in January, busting through expectations of a 3 trillion yuan print.
In January outstanding credit grew 11.6% from the same time last year, following a year-over-year growth rate in December of 11.7%.
So, credit is still expanding – at a slower pace than last year when the government was combating a downturn, but still fast. Banking regulators have reiterated that they’re going to crack down on financial risks in recent weeks, but that’s all talk we’ve heard before.
However, Xi’s speech, spelling out more details on plans for layoffs from the sprawling state-owned industries, is different and new.
But it’s also incredibly difficult and dangerous to China’s social contract. China’s totalitarian government has promised its people economic prosperity in exchange for their political and social freedom. It has to deliver before its people lose faith.