China’s Confidence Delusion

Sep 14, 2023

There is considerable handwringing over the current malaise of business confidence in China. While there are no hard data that track a precisely calibrated barometer of Chinese business sector sentiment, there is plenty of circumstantial evidence that supports this assertion. For example, a quarterly survey of the People’s Bank of China shows a plunge in the investment preferences of urban depositors to record lows in 2022-23. And Chinese equities (based on the CSI 300 index) have been the world’s worst performing major stock market over that same period. These are telltale symptoms of China’s confidence quagmire.

Nor have these developments come out of thin air. The turning point, in my opinion, was the summer of 2021, when Beijing announced a major regulatory crackdown on Internet platform companies—long the leading edge of China’s dynamic “new economy.” That followed Xi Jinping’s so-called Common Prosperity redistribution campaign which he signaled in a major speech earlier that year. This combination prompted me to warn of China’s mounting “animal spirits” deficit. Borrowing from Keynes and drawing on more recent work of Akerlof and Shiller, I was referring to China’s diminished incentives for new start-ups as well as reduced rewards going to hard working, risk taking entrepreneurs. The subsequent tightening of oversight on a wide range of other Chinese businesses including consulting, banking, and technology has further compounded the confidence problem.

Chinese Party leaders have attempted to address this increasingly serious issue. This July, the Politburo rolled out a 31-point plan aimed at improving the private sector business environment. This has been followed by the establishment of a new private sector bureau aimed at removing the regulatory restraints bearing down on non-public businesses. Ironically, this new bureau is being set up under the auspices of China’s National Development and Reform Commission (NDRC), the modern-day incarnation of the original Soviet-style State Planning Commission first established in the early 1950s.

While Beijing recognizes the confidence problem, its actions are only making it worse. The newly launched 31-point plan is laced more with generalities than actionable proposals aimed at supporting the private sector. And by turning to NDRC central planners for implementation, there is little doubt who is ultimately in control.

Context is key here: During the nearly 11 years of leadership under Xi Jinping, the pendulum of economic power has swung away from the private sector back to state-owned enterprises. The 2021 pressures on animal spirits noted above have exacerbated the problems for the private sector. Then came a disappointing cyclical rebound from the ending of Zero Covid, now followed by disappointing actions to support the private sector. The confidence trap that has ensnared Chinese businesses is an outgrowth of this ominous continuum.

All this raises an even deeper question for the China model: What does confidence really mean for a business sector that finds itself increasingly under Beijing’s thumb? In the West, we tend to think of business confidence as a real time gauge of the economic opportunities and challenges of animal spirits. Yet in China, as the State now asserts more and more control over economic dynamism, business sentiment comes not as a self-assessment from within but as an byproduct of constraints dictated from above. The very notion of Chinese business sector confidence is at risk of becoming a delusion.

You can follow me on Twitter @SRoach_econ

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