September 30, 2019 / 3:47 AM / 14 days ago

Breakingviews - China turns 70, to forced applause

A heart-shaped Chinese flag installation ahead of the 70th founding anniversary of People's Republic of China is seen on a street in Shanghai, China September 26, 2019. REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - The People’s Republic of China turns 70 on Tuesday. President Xi Jinping has bought compliance and crushed resistance. His cowing of internal critics, however, is becoming a risk to economic resilience.

China in 2019, with a $14 trillion economy, is vastly different from the impoverished wreck that emerged from civil war in 1949. The Chinese Communist Party has changed too. It has warmed to foreign trade and private property, allowed more freedoms and raised a generation of pro-growth technocrats to build infrastructure, schools and financial markets. These pragmatists convinced foreigners to plough an accumulated $1.6 trillion into a still-communist country, helping propel domestic companies up the value chain.

Some officials proved a little too pragmatic, exploiting positions for personal profit. When Xi Jinping took power in 2012, he cleaned house, consolidating his personal power along the way. Economist Andy Xie estimated corruption was costing around 10% of annual GDP. Yet the purge of hundreds of thousands of officials scarred the state.

Many local bureaucrats are now so risk-averse that they are hobbling stimulus efforts as growth slows. Worse, in part because salaries were not adjusted after illicit perks stopped padding pay, government jobs appeal more to ideologues than specialists. The exodus of financial regulators to the private sector, for example, was a factor in the botched response to the stock market crash of 2015. When the United States followed through on tariff threats, the Ministry of Commerce admitted it had run low on experienced negotiators.

Xi has prioritised loyalty, but he has plugged the government’s ears too. Straight-talking reformists like erstwhile Finance Minister Lou Jiwei have been sidelined; the pro-market Unirule Institute of Economics was shut down this year.

This tighter control expands a worrying information vacuum in Beijing and beyond. Many mainland investors had no idea why their stock indexes swooned in reaction to President Donald Trump’s trade war tweets. The leadership itself often appears ill-informed, caught off-guard by backlash against campaigns like the Belt and Road Initiative, and by massive protests in Hong Kong that are destabilising the country’s only hard-currency financial centre.

As a result investors, who once believed that Beijing bureaucrats made rational business partners, are losing confidence. The regime may pay a high price.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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