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Beijing's new economic model
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Hello. Today we look at China’s regulatory crackdown, growing inequality in the world’s second-biggest economy and the best way to cut government debt.
Beijing Bombshells
Shock moves by Chinese regulators towards swathes of the nation’s private sector have been roiling the nation’s stocks for weeks now, and spurred some hard thinking about whether there’s a whole new framework for economic policy.
Beijing over the weekend banned tutoring companies from making profits, part of a sweeping overhaul of a $100 billion education technology industry
Monday, regulators unveiled fresh moves affecting Meituan, the nation’s largest food-delivery firm — setting pay guidelines for local workers after launching an anti-monopoly investigation in April
Earlier this month, the China’s dominant ride-hailing service, Didi Global Inc., was hit with a cybersecurity review
The latest moves follow imposition of a record fine for e-commerce colossus Alibaba, and the halting of financial giant Ant’s stock-market debut
On the face of them, the moves appear to clash with rhetoric from President Xi Jinping on down about the Communist Party’s “unwavering” support for private businesses.
But in a deeper sense, they reflect concerns shared by politicians the world over about social ills and deepening inequality being a by-product of the pursuit of profit. Consider:
Florida’s embrace of a $15 minimum wage isn’t unlike Beijing’s demands toward Meituan’s delivery staff.
President Joe Biden’s recent executive order to promote competition shares some of the same goals as China’s actions.
The steps essentially gutting the for-profit tutoring sector come against a backdrop of rapidly rising education expenses. Democratic lawmakers in Washington are trying to address the same issue via free community college tuition.
What’s different is the speed with which Beijing is acting. Democracies have built-in brakes on major policy changes, requiring public deliberation and sometimes painful political negotiation. Xi has a much freer hand.
While it makes for effective and swift implementation, China’s system also can undermine confidence in the rules of the road. And too heavy a hand could prove counterproductive to what China aims to achieve, Bloomberg Economics says.
“Mishandling of the implementation and transition to the tighter regulations could deter development of the private sector — crimping private investment,’’ write Bloomberg economists Chang Shu and Eric Zhu.
The latest moves do represent a change, JPMorgan’s China economy team, led by Zhu Haibin, wrote Monday. Out: the old policy of late reformer Deng Xiaoping, “Let some people become rich first.” In: “Common prosperity.” That means:
“More focus on social welfare for average households and social equality, and social responsibility for public and private enterprises.”
This leaves some major questions, Zhu says. Like, “the role of capital, and more broadly the borderline to draw a balance between profit-making and social responsibility.”
Heady times, for economists and investors alike.
For more on the topic, check out the cover story of Bloomberg Businessweek.
—Chris Anstey
Got tips or feedback? Email us at ecodaily@bloomberg.net
The Economic Scene
Staying in China, there’s inequality in regional growth rates too. Four out of the five best-performing provinces in the first six months of the year were from southeast China, including major manufacturing and export hubs Jiangsu and Guangdong, according to official regional data collated by Bloomberg News.
The central province of Hubei, which was the epicenter of the pandemic, saw the size of its economy expanding 28.5% in the first half of the year from the same period a year ago, the fastest among all localities, largely due to an extremely low base of comparison in 2020. Provinces in less-developed western regions and the rust-belt northeastern parts of the country have lagged behind.
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Today’s Must Reads
Long haul | The highly-contagious delta variant is dulling optimism the global economy has put Covid-19 behind it as the realization dawns that we’re entering a long, endemic tail that’ll delay the recovery.
Embattled HK | Hong Kong’s financial sector shows no damage from the political crackdown by Beijing the past year, but the risks are rising.
Fed lessons | European Central Bank policy makers acknowledge that their new push to boost inflation expectations could take quite a while to kick in given the experience of the Federal Reserve.
Port problems | The state-owned ports company declared force majeure at key container terminals after disruptions caused by a cyber attack. That releases a company from fulfilling contractual obligations. Meanwhile, Brazil’s ports and their regulator are intensifying efforts to quantify the risks of climate change at its maritime hubs.
Powell support | Fed Chairman Jerome Powell has won over a number of influential Senate Democrats who are prepared to back him for another term, though a key pair remain holdouts.
Sandwich signals | Sales at Pret A Manger rose faster last week in New York and Paris than in London’s West End and financial districts even after England ended the vast majority of pandemic restrictions.
Need-to-Know Research
The best way for governments to cut debt is to secure the economic recovery, Morgan Stanley analysts reported in a recent study. They found 76 instances in the past century when economies experienced a build-up of debt similar to that seen in the past year
Those that eventually pared back “somewhat counterintuitively … kept expansionary monetary and fiscal policies in place for slightly longer periods than the debt expanders,” the analysts found. “They only changed course after the economy had reached a self-sustaining path. A stronger foundation for growth and moderate inflation then set the stage for a virtuous cycle, which eventually produced lower debt ratios.”
The study also said that governments kept inflation-adjusted interest rates below inflation-adjusted economic growth by 2 percentage points were more successful in managing what they owed. A lesson is that fiscal consolidation alone is not enough to stabilize debt burdens.
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