Liu He has a bulging portfolio these days. Since he was elected vice-premier with a seat on the powerful Politburo, President Xi Jinping’s economic consigliere has been a key figure in China’s trade war cabinet, as well as spearheading state-owned enterprise reform.
Part of his brief has also been to push ahead with refining fiscal policy in his role as chairman of the Financial Stability and Development Committee, and raise funding issues for small businesses squeezed by the credit crunch.
But it is Liu’s views about the health of the economy, which has been showing signs of cooling in the past few months, that have been heavily scrutinized.
“The prospects for China’s economy are extremely bright,” he told members of the China Investment Corporation, a major sovereign wealth fund with assets of about US$900 billion.
“No matter how the international environment changes, China will firmly promote reform and opening up, unwaveringly safeguard economic globalization and the multilateral trade system, and stand firm on the building of a community with a shared future for humanity,” the Harvard-educated economist added.
Last week’s ‘pep talk’ was a textbook exercise. The fundamentals are still strong as Xi’s administration realigns the economy from low-value manufacturing to technology-fueled growth through the “Made in China 2025” program, as well as expanding the service sector.
Still, there are major challenges on the horizon. Trade tensions with the United States continue to escalate, while concerns are growing about the speed of SOE reform, which at least appears to be gathering pace under Liu’s guidance.
There have also been mixed signals on Beijing’s war on corporate and state-owned debt, forcing up borrowing costs and triggering a rising number of defaults.
This, in turn, has dried up local government spending on infrastructure projects, a major driver of growth.
In the first seven months of the year, “intended infrastructure investment” dropped by a massive 35% compared to the same period in 2017, a report by the National Development and Reform Commission highlighted.
It also showed that overall investment, which is hovering around record lows, will weaken further.
“The decline reflects the many barriers that our country’s infrastructure construction faces, and the stiff competition in low-end manufacturing while middle- and high-end sectors have a relatively high bar for entry,” NDRC stated earlier this week in a monthly monitoring study.
Fleshing out the statistics, the government’s macroeconomic management agency pointed out that the slowdown was, in part, due to Beijing’s curb on debt in an effort to reduce financial risks.
Last month, the Politburo announced plans to relax the vise-like grip on borrowing to stimulate the economy with increased spending on infrastructure projects expected in the second half of the year.
But this could exacerbate already excessive debt levels, according to the International Monetary Fund after suggesting that the central government should resist another stimulus surge.
“Directors [have] stressed the importance of staying the course on reining in credit growth,” the IMF stated.
To muddy the waters even further, the National Bureau of Statistics is having to defend its methodology amid accusations of “anomalies,” especially when it comes GDP numbers.
“In an authoritarian system there is definitely an incentive for statistics officials to publish data that will please the government,” Carsten Holz, a professor of economics from the Hong Kong University of Science and Technology, who has closely studied Chinese statistics for years, told the South China Morning Post.
“[But] unreliable data can only be deficient and thus lead to outcomes that will not please the government,” he added.
Untangling the various economic strands will test Liu’s reformist approach. Moreover, he has always been a man of ideas but can he turn into a man of action?