The administration of Xi Jinping took over leadership of the Chinese Communist Party in late 2012 determined, I think, to deal with a number related issues:
–economically, China has reached the point where can no longer grow by exporting simple products made with labor-intensive methods. It also has much too much simple, inefficient basic industry. It has to shift to more sophisticated, higher value-added production.
The country, particularly in the more industrialized east, has finally run out of unskilled workers to staff labor-intensive operations at low cost. Air, ground and water pollution from primitive basic industry is becoming a very serious national problem (by the way, I’ve traveled to a lot of developing countries in my career, but Beijing is the only place where I’ve been physically ill from the poor air quality the moment I got off the plane).
The textbook way of dealing with development transition is to allow the local currency to rise to the point where simple manufactured goods are priced out of the world market. But that invariably causes large scale unemployment, which is the last thing China wants. Beijing has been taking another approach over the past few years–keeping the currency stable but mandating large wage increases for employees. As far as I can see, this approach seems to be working.
–forces of the status quo, epitomized by province and local governments, have continued to resist making the transition. They continue to strongarm local banks into making loans for old-style (and now uneconomic) construction, manufacturing and basic industry projects. Why? …some combination of: it’s easy, it’s all they know, they’re under pressure to create GDP growth and they get kickbacks from all parties concerned.
Beijing has ordered the banks to stop this sort of unsound lending. Unfortunately, the banks in China have done what banks everywhere else in the world do in the same situation. They set up non-bank subsidiaries that continue to make the dud loans. (Ever wonder why most of the horrible US sub-prime mortgage derivatives originated out of London? –to evade the regulators, of course.)
Xi Jinping has decided to crack down on the non-banks, too, even allowing s0me of their projects to fail. I don’t mean to suggest that a banking crisis is imminent in China. Far from it. As I see it, Beijing is just establishing that it will hold banks, and bankers, to account for violating the spirit of its regulations, not only the letter.
–clinging to a growth model that’s no longer viable has three “externalities,” namely, that it’s destroying the environment, it weakens the banking system and it’s seen by ordinary citizens as simply a vehicle for official corruption–which threatens the legitimacy of the Communist Party.
Ever the optimist, I think that Beijing is well-intentioned, its policies are sound and that they have a good chance of being successful. So, all in all, what’s happening is a good thing …and necessary for China’s future economic development. Maintaining the status quo would be a recipe for disaster.
Nevertheless, transitions take time, and:
–GDP growth in China will be lower as export-oriented manufacturing disappears faster than domestic-demand, consumer-oriented businesses can be built up to replace them
–there’ll be less basic industry in China, and less demand for metals
–there’ll be more focus on technology and, as time goes on, on export of consumer goods
–there already is a shift in the luxury goods market away from foreign brands toward local. This will likely continue and eventually spread to other areas.