China is slowing fast. Since hitting a post-financial crisis high of 11.9% in the first quarter of 2010, Chinese quarterly GDP growth has risen in just two of the subsequent thirteen quarters. The latest figure of 7.5%, for the second quarter of this year, is down from 7.7% in the first quarter and 7.9% in the last quarter of 2012.
This downtrend is set to continue into the second half of the year. Beijing has just launched a new campaign to rid the Party of “formalism, bureaucratism, hedonism and extravagance.” This will stifle both consumption and investment for at least the next two quarters.
Beijing’s economic planners are in a bind. High levels of excess capacity have reduced the return on investment to the point where China’s traditional investment-led growth model is no longer viable. Yet this is the only model that the country’s economic institutions can support.
The obvious way forward would be to dismantle these institutions by privatizing state-owned assets and radically reducing the role of the state in the economy. But this is a solution that Secretary General Xi Jinping has explicitly ruled out. He is instead relying on stricter discipline of Party members to make the existing system more efficient. Genuine reform is not really on the table.
This approach will do little to incentivize better economic decision making. In the short term, officials will take cover as they wait for the storm to blow over. Few will dare to promote obvious “white elephants” or to indulge in public displays of conspicuous consumption. Sales of cement, steel, Rolex watches and shark’s-fin soup will be poor.
But there will be no long-term gain for this short-term pain. China’s economic problems are not primarily the result of immorality on the part of individual Party members or an imperfect understanding of national priorities at the local level. They are an unavoidable consequence of state ownership and bureaucratic management. The current “rectification” drive, with its focus on prosecuting corrupt officials and studying Marxist classics, might temporarily treat some of the symptoms but will not cure the disease.