◼ ECONOMICS Bloomberg Businessweek September 30, 201928
expansioninalmostthreedecades—andwith
morespacetocutinterestratesthanitsglobal
counterpartshave—PresidentXiJinpingis doubling
downonhisstability-firststrategy.There’sstimu-
lus,butit’smoderate,evenminimal,andthathas
bigrepercussionsfortheworldeconomy.
“Inthepast,justatthefirsthintofuncertainty
theywouldthrowopenthecredit taps,”says
AndrewPolk,co-founderofresearchcompany
TriviumChinainBeijing.“Nowtheyrealizethat
anextrapercentagepointofgrowthis notworth
thedamagethatthey’ddototheireconomy.”
In2008,whentheglobalfinancialcrisishit,
Chinaunleashedthemotherofallstimuli.Five
cutstothebenchmarkone-yearlendingratewere
accompaniedbya 4trillionyuan($563billion)
stimuluspackagethattriggeredanavalancheof
banklending,mostofit tolocalgovernmentsfor
infrastructureinvestment.
Thatsetinmotiononeofthefastestaccumula-
tionsofdebtinhumanhistory,andthatdebtis still
a weightonthenation’seconomy.
AnalystsdatethepolicyshifttoMay2016,when
anarticlewrittenby“anauthoritativeperson”in
thePeople’sDaily, theCommunistParty’smouth-
piece,calledlevelsofdebtthe“originalsin.”The
“fantasy”ofstimulatingtheeconomythrough
easy monetarypolicyhad createdproblems
includinganemergingpropertybubble,excess
industrialcapacity,andrisingnonperforming
loans,accordingtothearticle,widelysaidtohave
beenwrittenbyVicePremierLiuHe,President
Xi’stopeconomicadviser.It signaleda newpath
thatleadershavelargelystucktoevenamidthe
uncertaintyofanescalatingtradeandtechnology
warwiththeU.S.
Insteadofmakingmorecreditavailable,policy-
makersarestrivingtoredirectlendingawayfrom
deadbeatstate-ownedenterprisestosmaller,more
efficientprivatecompanies.They’vealsosought
toreducesystemicriskbystrengtheningthereg-
ulatorysystem.People’sBankofChinaGovernor
YiGangreiteratedthepolicyata pressbriefingin
BeijingonSept.24: “We are not in a rush to roll
out massive rate cuts or QE, like some other cen-
tral banks.”
The result is an inevitable drag on growth.
Industrial production in August grew at the slow-
est pace for a single month since 2002, while a
price index of industrial products fell deeper into
deflation. All of this means China’s slowdown
is likely to be a headwind for global economic
growth this year and next, Polk says. “The rest of
the world will need to get accustomed to the idea
that China will not offer a quick fix to its currentgrowth malaise,” says Frederic Neumann, co-head
of Asian economics research at HSBC Holdings Plc
in Hong Kong.
China is taking some steps to keep growth
humming. The amount of cash banks must hold
as reserves was cut this month to the lowest level
since 2007, market interest rates have been guided
lower, and bond issuance for infrastructure spend-
inghasincreased.Thegovernmemsgmsgntalso
haspledgedtocuttaxesforbusinessesandhouse-
holdsbyabout 2 trillionyuan($281billion) this
year in what it described as the largest ever fiscal
stimulus plan for the country. “Though it seems as
though China is a laggard in policy stimulus, and
the narrative proclaims it, the reality is a bit less
convincing,” says George Magnus, an economist at
University of Oxford China Centre and author of
Red Flags: Why Xi’s China Is in Jeopardy.THEBOTTOMLINE WhiletheU.S.andEuropearejuicingtheir
economy, China is taking a slower approach. This will be another
obstacle to global growth. ILLUSTRATION BY WOSHIBAICompared with past spending binges, this stim-
ulus is more targeted and calibrated. But it’s not
without risk: The biggest danger is that the econ-
omy slows more than policymakers expect, result-
ing in widespread unemployment and a downturn
that becomes hard to reverse. Leaders may then
crank up stimulus, bringing about the very finan-
cial instability they aimed to avoid.
The leadership’s resolve may be tested sooner
rather than later. With more stubborn trade and
financial challenges, growth could tumble to 5.5%
without stronger stimulus, says Louis Kuijs, chief
Asia economist at Oxford Economics in Hong Kong.
“The coming six months are going to be a litmus
test,” he says. “I personally don’tthinkthat China’s
policymakers are willing totoleratesucha rate of
growth, but let’s see.” �KevinHamlin“In the past,
just at the
first hint of
uncertainty
they would
throw open the
credit taps”