DOES THE BUCK STOP WITH XI JIMPING? / THE WALL STREET JOURNAL

Does The Buck Still Stop With Xi Jinping?

By Nathaniel Taplin

Is Xi Jinpingstill the only man that matters in China?

Perhaps. But one of his top economic priorities, cutting China’s enormous debt burden, has become a victim of his power consolidation.  
July data released Tuesday painted a picture of a deepening downturn, particularly in investment, where growth hit another post-2000 low. As signs of economic distress have crystallized, hints of discontent among China’s political class have emerged. A spat between the Ministry of Finance and central bank over how best to manage growth and debt has spilled into the open—such disagreements are usually handled behind closed doors. China’s cabinet, which had all but conceded economic policy making to Mr. Xi, has been uncharacteristically assertive in calling for stronger growth. And China’s short-term borrowing rates have plunged back to mid-2016 levels: a clear sign of a shift toward monetary easing.


Mr. Xi’s relentless rise to power, culminating with the abolition of presidential terms limits in March, has enabled him to do what weaker predecessors could not: force insouciant local officials to toe Beijing’s line. Previously China’s most intractable problems, including its enormous debt buildup, were the result of Beijing’s inability to control local officials. These days, the opposite is true: the biggest problem is bureaucrats terrified to step out of line, even when dictates from “the core” don’t make sense.

The deleveraging campaign is a perfect example. 


   Chinese President Xi Jinping, center, in Beijing in June. Photo: andy wong/Agence France-Presse/Getty Images 







Everyone agrees that China needs to borrow less and invest more efficiently. Still, clamping down on the bond market and shadow banking at the same time was always going to be risky, given the effect on small private firms who have trouble getting bank loans.

Local officials watching this year’s damage unfold were presumably too terrified to speak up.

The result: a brutal lending crunch for private companies, which are now defaulting in unprecedented numbers. Outstanding nonbank credit—including corporate bonds and shadow banking—has fallen by more than 1.5 trillion yuan ($218 billion) since April alone, easily the sharpest decline of the past 10 years. Now, policy makers have little choice but to loosen monetary and fiscal policy, undoing much of the progress on debt reduction over the past two years.

It seems likely that misjudging the U.S.’s resolve on trade—while simultaneously overdoing the debt crackdown at home—has damaged Mr. Xi politically. What isn’t clear is how deep that damage cuts.

Regardless, a period of political horse trading now seems likely, as Mr. Xi’s emboldened opponents reassert themselves. That could hamper policy makers’ ability to respond effectively to a coming downturn. Some analysts are now making buy calls on Chinese stocks as the tilt back toward easing gets clearer. Given the current uncertainty at the top, that process could be bumpier than expected.