China President Xi Jinping courts private sector

China’s rising debt and Trump’s trade war is forcing Beijing to reach out to the private sector.

Has China’s President Xi Jinping seen the entrepreneurial light?

If so, is it because he now needs to enlist maximum support in addressing an existential challenge posed by two economic dilemmas: a debt swamp and Donald Trump’s trade war?

Five years ago, early in his first term, he pledged to “let the market play a decisive role in allocating resources”. Many commentators thought he would then complete the market-directed reform program set in motion by the bold premier Zhu Rongji.

But the Shanghai stockmarket defied his forecast of untrammelled growth, and its 2015 slump drove away many retail investors for good. In response he refocused towards the state sector, funnelling massive credit its way and pushing for mergers to create “national champions”.

Xi also insisted all private companies, whether locally or foreign owned, facilitate a major role for the Communist Party branches they are expected to foster.

The South China Morning Post commented recently that “the private sector is bearing the brunt of the country’s economic slowdown, and many entrepreneurs are feeling increasingly insecure in the face of a powerful state”.

Then a week ago Xi hosted a rare meeting with businesspeople, telling them: “In recent days, some people have made remarks negating and doubting the private economy. For example, some argued that the private economy has completed its mission and will fade out; some wrongly argued that setting up party cells and labour unions in private businesses is intended to control private enterprises.”

Xi assured the entrepreneurs this perception of the party’s goals was wrong, and that they would become eligible, like state businesses, to bank bailouts, and would receive unspecified tax cuts.

The private sector has to date suffered disproportionately from the government turning off the credit taps in the face of a looming debt danger. The overall setting is one of rapid cut in investment growth in China, slowing from 10 per cent in 2015 to 7.2 per cent in 2017 and 5.3 per cent up to September 2018.

The meeting with the entrepreneurs was followed by Xi’s second step in a similar direction.

Opening the Shanghai import expo, Xi promised to lower import tariffs and broaden market access by opening up key sectors and concluding new trade deals with Japan and South Korea, while clamping down on intellectual property theft and establishing a board on the Shanghai market to list hi-tech firms.

The speech was strong on liberalising principles, but contained little that was new.

Louis Kuijs, head of Asia economics at Oxford Economics, commented to Reuters: “I don’t think that there were necessarily path-breaking new reforms announced by him, but I would take this as a confirmation that China is very keen to be seen as continuing to open up further.”

So what’s driving this earnest new approach from Xi? Partly it’s Trump, although European companies too have been raising concerns about market access, increasingly forcefully.

China has been feeling the chill from Trump’s trade war. Hong Kong’s Hang Seng index is down 13 per cent this year, Shanghai’s composite index down 19 per cent and the Shenzhen component index down 29 per cent. The US tariffs are clearly biting.

When Trump flew out of Beijing a year ago after a strange state visit, it appeared to most onlookers that he was in the pocket of Xi.

That perception has turned around, as Trump’s measures hurt China’s manufacturing sector. Industry remains a crucial employer, despite moves to shift the economy from exports and inputs to services and consumption.

One of the prospects now under discussion, which would challenge Xi’s popularity given the job losses involved, is for some of the great Asian value chains — most of which involve assembly in China — to relocate to Southeast Asia, thus avoiding US sanctions.

The picture is complicated by China itself becoming a key final market — and by the intense government and corporate efforts to push Chinese firms up the value chain so they rather than foreign imports fill local demand. Xi’s “Made in China 2025” program spearheads this program.

Also a week ago, Xi and Trump agreed to hold a summit at the G20 meeting in Buenos Aires at the end of the month. Can this hammer out the details of liberalisations broadly conceded by Xi?

Optimism does not abound. Alibaba-owned South China Morning Post editorialised this week: “Regardless of Xi’s support and the outcome of the summit, it is unrealistic to think the private sector will no longer face systemic political and ideological resistance.”

Further perils may also be lurking for the economy. It appears Xi has been briefed that the economy is in a worse state than thought. It may be tough to maintain growth above the 6.5 per cent target, and jobs and housing may slide.

The US challenge to China’s manufacturing industry has come in the middle of Beijing’s deleveraging program, which must be maintained lest debt causes some financial lever or other to seize up, potentially contagiously.

China and its economy will remain important, but the direction is under question: how will the economy behave in the coming months and years?

A China-based business figure told me this week that a growing number of private companies are failing to meet debt payments, and credit default swaps are going through the roof. The price of flats is starting to soften or fall.

Beijing has been reducing banks’ capital adequacy ratios not so much to boost liquidity as to help them absorb bad debts.

The fall in the renminbi to 7:1 to the dollar has also lowered consumer confidence.

Australians will be hoping Xi’s backing of private business proves enduring, and that he can succeed in stemming China’s challenges on all these fronts, because the alternative would be deeply troubling for us too.