CAN CHINA SAVE ITSELF IF THE REST OF THE WORLD WON`T? / THE WALL STREET JOURTNAL OP EDITORIAL

Can China Save Itself if the Rest of the World Won’t?

Beijing finds it harder to export the consequences of bad economic decisions, as Xi resists reforms.

By Joseph C. Sternberg

Chinese President Xi Jinping in Beijing, Sept. 30. Photo: Yan Yan/Zuma Press

By the way, China’s economic crisis is getting worse and worse. 

It’s easy to lose sight of this, given all the economic and political chaos in other corners of the world. 

So consider this your periodic reminder.

The September purchasing managers index survey, released by the Chinese government this week, exposed industries in contraction mode, although a bit less pessimistic than before. 

That survey captures sentiment in the large state-owned companies that dominate the economy.

A separate PMI survey measuring a larger number of small and private-sector businesses found a bit more optimism. 

But these companies are hostage to the vicissitudes of trade negotiations between China and its partners, especially Donald Trump’s America. 

Don’t assume the optimism will last.

Fixed-asset investment, long a mainstay of Chinese economic growth, declined for three straight months over the summer—as in, “fell,” not merely “grew more slowly.” 

Real-estate investment has sagged for years as Beijing tries to deflate a property market that before 2020 ranked as one of history’s great bubbles. 

The new and worrying development is that fixed investment in manufacturing and infrastructure also is declining.

So far, so good—as counterintuitive as that sounds. 

The old investment-driven economic model, fueled by astounding quantities of debt, created China’s phenomenal economic growth in the first part of this century. 

It also was fundamentally unstable. 

That property bubble was one warning sign. 

Another was chronic dependence on a growing volume of exports that was certain to vex China’s trading partners sooner or later.

Reducing Beijing’s reliance on unproductive investment is the first step toward a more stable economic model. 

The next step should be a shift toward domestic consumption and entrepreneurial, high-productivity private investment rather than the big white-elephant public-works projects and state-owned-enterprise boondoggles of yore.

That this isn’t taking shape is the true source of China’s economic woes. 

Consumers appear to be weighed down by pessimism. 

And who can blame them, given the unprecedented destruction of middle-class wealth from the housing correction? 

The consumption fillips that do appear in the official economic statistics generally are artifacts of government subsidies for household purchases of items from white goods to mobile phones. 

This is no way to fix an economy.

It’s at about this point in the story that Beijing descends into total incoherence.

Policy makers, from Xi Jinping on down, have spent the past year on a tear against what they call “involution.” 

This refers to the tendency of local governments to spur overproduction of everything to juke their economic data, and then dump excess production somewhere else. 

With the rest of the world balking at China’s export dominance, that “somewhere else” is at home. 

Rampant price competition in the domestic market to unload the excess is sparking fears of deflation.

In another world, fierce competition and price declines would be the only things going right for Chinese households, who could expect deflation to boost their real purchasing power. 

But in overleveraged China, the prospect of deflation wrecking the profitability of heavily indebted firms (and the balance sheets of heavily indebted local governments) may be the most serious threat confronting the economy.

Hence Mr. Xi’s instructions to companies to avoid cutting prices in a competitive frenzy. 

This is coupled with somewhat hazier directives to local and regional government officials and Communist Party cadres to pare back subsidies and incentives so as to arrest the overinvestment that causes deflationary gluts. 

The most visible manifestations of the anti-involution drive are efforts to consolidate various industries by merging many small producers into fewer bigger ones with more pricing power.

To the extent fixed-asset investment is declining, it’s a sign the anti-involution drive is working. 

But Beijing already is losing its nerve. 

This week brings news of yet another credit stimulus. 

This time it’s 500 billion yuan ($70 billion) in direct lending from state-owned banks, which might lever up to around 2 trillion yuan of investment in public works and other projects, mostly administered by local governments. 

Beijing is again subsidizing precisely the activity it needs to stop to have any hope of rebalancing the economy.

That assumes rebalancing is the goal. 

Mr. Xi’s purpose instead appears to be the consolidation of economic control in the hands of the state, and the more centralized that control is in Beijing, the better. 

This was easier when he could count on the rest of the world to absorb, via imports of Chinese overproduction, the most glaring effects of the state’s economic mismanagement. 

With the export option off the table for now, and no better prospects for reform in sight, expect the bad news to keep rolling in for the foreseeable future.