A growing army of prognosticators forecasting a Chinese hard landing and the collapse of Communist rule has an unlikely, but distinguished, new recruit: David Shambaugh.
His Thesis may well prove inaccurate but at least some of the symptoms he identifies as contributing to the regime’s ultimate collapse are real and they are eroding faith in the new leadership’s appetite and ability to make the difficult changes need to ensure sustainable development in the years ahead.
David Shambaugh is among the most sober-minded of experts on modern China and respected in both the U.S., where he teaches at George Washington University, and in Beijing, where he has been feted by the government.
Shambaugh’s reputation as one of the more insightful China analysts is why his gloom-laced op-ed in the Wall Street Journal, which predicts a crisis and the end of Communist Party rule in China, has created such a splash.
Critics have been quick to pounce, arguing that the symptoms of China’s collapse identified by Shambaugh have waxed and waned for years and arguing that he underestimates the Governments ability to survive. But Shambaugh’s analysis demands attention in this climate of growing concern about the health and stability of the Chinese economy, as well as the direction of the country under the rule of President Xi Jinping.
His is a risky prognostication – if nothing else, it’s hard to see how this won’t upset influential people in Beijing – but one that can’t be dismissed out of hand.
One of the five fault-lines that Shambaugh says will bring about the end of party rule is the economy, and specifically the leadership’s failure to institute the ambitious package of reforms adopted during the Third Plenum in November 2013.
Premier Li Keqiang said in his 2015 work report last week his government is targeting economic growth of around 7% this year, confirming a widely-anticipated embrace of a slower pace of activity as part of the economy’s “new normal”.
That was the key takeaway from a report which otherwise resorted to the usual list of reform pledges. These reforms, which include capital account opening, interest rate liberalization, a clean up of local government finances and an opening up of industry to private funding, lie at the heart of the Chinese government’s commitment to secure the economy, and the country’s, future.
The Government has opened a free trade zone in Shanghai intended as a laboratory for capital account opening. It has also allowed limited direct trade in equities between the Shanghai and Hong Kong stock markets. The Ministry of Finance has begun sifting through submissions of debt holdings reported by local governments to decide just how much it intends to take onto the central government balance sheet while more provinces are expected to be allowed to sell bonds directly to the market this year. The managers of big state firms have seen their pay slashed while at least token efforts have been made to open state industry to outside investors.
The problem is that this progress has been stuttered so far – Shambaugh says vested interests are successfully blocking implementation -- and the leadership has done a poor job in articulating just how it intends to put its lofty reform goals into practice.
Some officials and advisors believe the government’s targets for this year are too ambitious, while progress on reform has been too limited. The Government was able to muddle through the post-global financial crisis years but the new leadership came to office determined not to repeat the sins of the past, but to remake China and secure its economic future.
The lowering of the economic growth target signals Beijing’s commitment to that process, as well as its acknowledgement that the days of freewheeling growth are behind. Premier Li says China doesn’t need to grow as quickly as it did in the past, and that a burgeoning services sector can provide the jobs needed to allow for a slower pace of expansion.
But his work report was a disappointment to those expecting a more aggressive pace of change. The target for the fiscal deficit this year was increased, but only to 2.3% from last year’s 2.1%. Even with funding carried over from 2014, this points to ongoing fiscal conservatism, with banks continuing to play an outsized role in funding the investment needed to deliver headline growth rates.
In the meantime, Chinese debt levels are continuing to rise and a slowing economy is putting ever greater pressure on the financial system. China's debt load has quadrupled since 2007 and now stands at 282% of GDP. It is on track to hit Spain's 400% in three years, according to the latest unofficial estimates.
Betting against the Communist Party has been a losing game so far. This year marks the 14th anniversary of the publication of ‘The Coming Collapse of China’, a study which has been mocked for the surety of its prediction of the end of the regime. Its author, the lawyer Gordon Chang, continues to insist that China’s hollow, debt-ridden banking system will eventually drag the regime down.
Shambaugh’s previous study was about the Communist Party’s ability to adapt and survive – research which highlights the risk of making bold predictions about the end of days. That said, the new Chinese leadership has successfully outlined China’s problems and the need to fix them. But a leap of faith is still required to see just how the party intends to break with the past and successfully rebalance the economy.