Confident: Chinese Premier Li Keqiang at the World Economic Forum in January. Photo: RUBEN SPRICH”When the wind of change blows, some build walls while others build windmills.”
In late January, Chinese Premier Li Keqiang shared that proverb with global leaders in a keynote speech at the World Economic Forum in Davos. China was in windmill mode, committed to structural reform “no matter how difficult.” The “new normal” called for more moderate, consumer-led growth. The financial system would be modernised and the country aimed to shift away from its excessive reliance on debt-fueled, infrastructure-powered growth that had led to industrial overcapacity and an epic credit bubble. Better still, the makeover would be pulled off smoothly: “What I want to emphasise is that regional or systemic financial crisis will not happen in China, and the Chinese economy will not head for a hard landing,” Li said. Roughly seven months later, China finds itself at the epicentre of a global stock market rout that has vaporised $US8 trillion ($11.2 trillion) in wealth. Nobody is quite sure whether the world’s No. 2 economy is really growing at 7 per cent, as official figures suggest, or 6 per cent — or actually careening toward a hard landing.
Authorities are now quietly rolling out China’s biggest stimulus effort since the 2008 global financial crisis in an effort to put a floor under a weakening economy. Interest rates have been cut to record lows, banks are being encouraged to lend and new infrastructure spending is being rolled out. The confidence Li exuded in January has given way to policy zig-zags and mixed messages about the commitment of President Xi Jinping’s government to reform. The tale of how Chinese leaders have dealt with decelerating growth, debt pressures, a stock market crash and its sudden currency shift is instructive for investors, executives and policy makers puzzled by the trajectory of this all-important, $US10 trillion economy. It didn’t take long for economic trouble to surface. In April, Li met a group of local government officials in Changchun, the capital city of Jilin province that shares a border with North Korea. Li, 60, wanted to take the pulse of the region’s economy — and the news wasn’t encouraging. Known as China’s rust belt due to its state-dominated heavy industry and manufacturing sector, Jilin was among the worst performing economies in the country. It grew at 5.8 per cent during the year’s first three months compared with 7 per cent for the national economy. Neighbouring Heilongjiang province grew by 4.8 per cent and Liaoning by 1.9 per cent. Li’s response
But if the regional governments had hoped for a fiscal rescue mission from Beijing, they were set for disappointment. When one official said the wider region needed help from the central government, Li’s response flashed anger. “If you rely on the central government for everything, why on earth do we need local officials like you,” Li said, according to one of those present at the meeting who asked not to be identified. In a personal aside to what had become a tense meeting, Li noted that he once worked in Liaoning and considered himself a half “north east native,” and that he was “heartbroken” by the region’s economic performance. The pain being felt in places like Jilin was all part of a plan to rebalance China’s economy away from debt-fueled investment and exports to one spurred by consumers, services and innovation. Officials knew the economy would need some help and hoped interest-rate cuts and targeted public spending would do the trick rather than a massive stimulus program like the one rolled out in response to the 2008 crisis.