The Saturday essay in the WSJ this week is an excellent piece by Andy Browne (full disclosure: my former bureau chief) on China’s two-speed economy, a phenomenon that I’ve been exploring both in our Dragonomics research and on this blog. The reporting nicely illustrates both the extremely troubled and the extremely prosperous parts of China’s economy, and also makes a strong argument that how Xi Jinping handles the lagging regions will be crucial for the country’s prospects. Here’s an excerpt:
For international investors, China’s two-speed economy—one dying, the other accelerating—is utterly confusing, and it has produced wildly contrasting strategies. If China keeps subsidizing wasteful investment to keep industrial cities alive, its financial system will eventually blow up: At 260% of gross domestic product, the country’s overall debt is approaching danger levels. Some Wall Street hedge funds are taking huge speculative bets against the Chinese currency. Global markets are bracing for a “hard landing” by the Chinese economy and years of subpar growth. The financier George Soros says China is already crashing.
At the same time, however, some of the world’s smartest investors are making the opposite wager: They are piling in. Last year, China attracted up to $37 billion in venture capital, much of it for technology hubs along the coast. That is more than the U.S. typically draws in a year and multiples of what Europe usually pulls in. …
Who’s right? Politics will largely determine the outcome. … Two years ago, Mr. Xi announced an ambitious 60-point economic reform program to give markets a “decisive role” in allocating resources. Many expected that he would shutter state loss-makers and open protected state industries like telecommunications and banking to entrepreneurs, even as he attacked the patronage networks that weave through local industry and governments.
But Mr. Xi seems to have gotten cold feet. Instead of closing down state enterprises, he is bulking them up. He seems afraid that allowing market forces to prevail will entrench geographically based wealth disparities and that an aggrieved underclass could erode the Communist Party’s legitimacy. As Mr. Xi has made clear during his three years in office, his first priority is to save the party. The economy can wait. Against this political backdrop, Beijing’s usually decisive economic decision-making process has started to look rudderless.