Demand-side reform; S. China faces power shortage; Demolition of "small property rights" housing
And don't kowtow to the United States, says Xinhua
*New word on the block: demand-side reform. What does it mean and what will it mean? Your Pekingnologists talk to Peking University's Michael Pettis.
*Several provinces in S. China are reporting power shortages. Worst case scenario: climbing 30 storeys everyday to work for the next two months.
*Hu Xijin shoots off cryptic Weibo message. What’s it about? Some background of the demolition in far corners of Beijing.
Economics is all about supply and demand. And the supply-side reform, to be exact 供给侧结构性改革 supply-side structural reform first unveiled by Xi Jinping in November 2015 (CHN) and emphasized in that year’s December Central Economic Work Conference (CHN), has been guiding China’s economic policies for the past 5 years.
By tradition, China holds its Central Economic Work Conference in December to chart the economic course for the next year. On Dec. 11, a Politburo meeting 分析和研究2021年经济工作 analyzed and studied economic work for 2021, where the meeting readout includes a new phrase 需求侧改革 demand-side reform.
It is the first time that such a phrase appears on such a high-level platform. In late November, Politburo member and Vice Premier Liu He wrote in an article on the People’s Daily saying
In the process of adhering to the main line of supply-side structural reform, we should attach great importance to demand-side management
So within a month, the phrasing took a leap from management to reform. In a news report after the Politburo meeting, 张燕生 Zhang Yansheng, an economist with an official think tank told Xinhua (CHN)
The supply-side structural reforms in the past few years, including restructuring the economy and eliminating excess capacity, have improved the overall effectiveness of the national economic system. The future reforms will work on both the supply and demand sides, which will expand new space for economic development.
新京报 The Beijing News, a newspaper associated with the city of Beijing, ran an editorial entitled Emphasize on demand-side reforms, Provide continued impetus to development.
沈明高Shen Minggao, former Head of China Research at Citi and now with domestic 广发证券 GF Securities, reportedly commented on Wednesday
The current potential of our consumption has not been brought into play, the efficiency of resource allocation is not enough, (we need) to promote the reform of income redistribution, so that the distribution between the state, enterprises and the people is more rationalized
Your Pekingnologists took the initiative to speak to Michael Pettis, a Finance Professor with Peking University and Senior Fellow with Carnegie-Tsinghua Center, on what he thinks demand-side reform would entail. Below is an edited transcript (to accommodate the length of the newsletter):
Q: When you saw the readout, the term caught your attention, why?
A: Beijing has really only talked about supply-side reforms. They've talked about rebalancing demand but in very vague terms. Much of what they discuss is enhancing consumption, but they want to enhance consumption in ways that are very indirect.
At the end of the day, there's only two ways you can raise the consumption share of GDP: one way is by increasing household debt, the other way is by increasing the household share of GDP.
It's much too early to say, but it seems like as part of demand-side reform they are actually talking about income transfers. So they mentioned raising wages and strengthening the social safety net. I think this is a recognition that China has no choice but to rebalance income, but even when recognized that doesn't mean it's going to be easy, because it's above all a political issue.
So I would argue that if demand-side reform really does mean a shift in the distribution of income within China, that's a very good first step to recognize the problem.
Q: What policy implications do you think demand side reform would bring about?
A: At some point probably in the last decade, or maybe even in the late 1990s, China closed the gap between the investment that it needed and the investment that it actually had. It kept investment rates extremely high.
There's really only three ways you can solve this. One way is to find a whole new engine of growth that you could switch all of these trillions of Renminbi into this new area of growth.
The second way out is to do a rebalancing of income, so that consumption surges. So now you have consumption rather than all of this bad investment driving growth.
The third thing you can do is do nothing and continue to allow rapid increase in debt, but it's hard to imagine that you can let debt rise forever.
Q: You said it would be a political issue and requires difficult political decisions. Can you elaborate?
A: If you look back at the track record of other countries that have done it, all of them lead to political difficulties.
How would you distribute income? You could do it by strengthening the social safety net, paying more interest on bank deposits, raising the value of the Renminbi, or increasing wages.
One of the best things they could do is have local governments build very cheap housing and give it away for free to the workers. That would be a huge and very positive transfer.
The problem is always the same thing, when you transfer wealth, if I get richer, then you must be poorer. Who is rich in the Chinese context? It can only really be the rich or businesses or local governments. It shouldn't be businesses because the healthiest part of the Chinese economy, so you don't want to destroy them. That really only leaves the rich and local governments, both of whom are politically very powerful. That's why it's so difficult to transfer.
I can't tell you how it'll happen in China, but what I can tell you is that it’s shift in relative income and therefore in relative political power.
If you want to keep Chinese growth at around five percent a year without an explosion in debt, you need to transfer probably one and a half to two percent of GDP every year to the household sector.
South China’s Hunan, Zhejiang and Jiangxi provinces are reporting widespread power rationing, catching businesses and residents off guard.
Hunan authorities are ordering (XINHUA, CHN) what’s called 有序用电 orderly use of electricity, in essence pulling the plug on non-essential users and prioritizing distribution to residents, schools and hospitals, and crucial businesses. Expect the order “to last until around spring festival (Feb.12) next year”, according to local government.
Weibo users in Changsha, capital city of Hunan, are complaining (CHN) about climbing 30 storeys for work, after the elevator shutdowns.
Zhejiang, an economic powerhouse, is also suffering from a power crunch, with some small businesses saying that they are halting production.
Zhejiang gov’t issued a guidance on Friday directing all provincial level agencies to turn off heating AC unless temperature drops below 3ºC, or 37ºF before Dec.31.
On Wednesday, the public library of Yiwu, a business hub in Zhejiang, said they are adjusting opening hours and turning off the AC. The temperature today in Yiwu is 7ºC, or 44ºF.
On Thursday night, Xinhua published an interview (CHN) with an official at the National Development and Reform Commission who acknowledged the 电力供应偏紧 shortage of electricity and pledged remedies.
The official cited such reasons as: high consumption of electricity from robust industrial production; surge in electricity-powered heating in ultra-cold winter weather; and power generators going off-grid.
Another unidentified official with the NDRC Wednesday acknowledged (ENG) the shortage of coal but insisted that demand and supply are “balanced” and that there’s sufficient supply for this winter and next spring.
An official with the National Energy Administration told Xinhua on Thursday night the government is working on ensuring coal supply for power plants.
There has recently been speculations of rule changes to imported coal, but Hu Xijin, the Editor in Chief of the Global Times, said (CHN) in his latest Weibo, “Even if there’s an adjustment of import (of coal) in the direction of Australia, the change would be too insignificant to affect nation-wide power supply.”
Hu, perhaps now China’s most famous media person, fired away three paragraphs on Weibo seemingly out of nowhere:
The recent demolition of small property rights (SPR) villas should sound a strong alarm to the whole society that SPR apartments/houses are not legal. It has become a real turning point for people to form sufficient awareness of the risks associated with SPR house ownership, and for the decline of SPR housing construction and trading. At the same time, it is painful for those owners who bought SPR houses cheaply and now face the change of "demolition", and it is not difficult to share their feelings.
It is a reality that there is a lack of continuity in policies in some areas of China's economy, especially on property rights. This has to do with the fact that China has developed so fast over the years that the process of rules being precipitated and thoroughly legalized has not kept pace. In this process, the local grassroots government has a lot of power and the ability to push things through in the murky area between legal and illegal. Plus, there is the long-held Chinese notion that 法不责众 the law will not be enforced when too many are offenders and the fact of high housing prices in the cities. All of them exacerbated the expansion of the SPR housing phenomenon in many places in the past few years.
It is sincerely hoped that the process of solving the problem of SPR houses is a process of strengthening the rule of law in the property market and that the practical effect it brings is people's confidence in the country's comprehensive rule of law constantly being implemented, not the other way around. It is undoubtedly not easy to do this. It is only because it is difficult that it is worth striving for.
These cryptic sentences is a classic subtweet, or maybe subweibo. What Hu was referring to, your Pekingnologist believes, is the recent demolition of 小产权 SPR rights apartments in Xiangtang Village, Changping District of Beijing, which the Voice of America covered on Wednesday.
In August, The New York Times ran a report on another Changping demolition, observing:
"The destruction of the village, one of several unfolding on the suburban edges of Beijing this summer, reflects the corruption at the murky intersection of politics and the economy in China. What is perfectly acceptable one year can suddenly be deemed illegal the next, leaving communities and families vulnerable to the vagaries of policy."
The big picture is much more complicated and not restricted to just the city of Beijing. (For example, University of Hong Kong’s Shitong Qiao took a deep dive into similar housing in Shenzhen in the book China’s Small Property published at Cambridge.)
At the risk of oversimplification: all the legal residential housings in China have to - by law - be built on specifically-allocated land, the sale of which is an important source of revenue of local governments; on the other hand, rural land, which by law is owned by collectives of rural residents, are largely forbidden to be transferred - without proper procedures - for building legal residential housings.
Beijing has been largely reluctant to allow rural land to change hands, in fear of diminishing farmland and land concentration, which could impede food supply and social stability.
The restricted rural land is seen as, in effect, an insurance policy - even if the rural residents can’t find jobs in the cities, at least they can return to their old homes to grow food and won’t starve.
In reality, some village committees or townships - often the lowest level of government power - are willing provide land for SPR housing for revenue.
People buy them for all kinds of reasons. These are definitely and significantly less costly. It’s also possible the people who bought them believe their respective localities’ will have their back. Or the people just aren’t convinced bulldozers would come towards these distant corners.
While it would be hard to believe that SPR owners are unaware of the legal troubles associated with or after their purchase, it's certainly unfortunate for them to be hit head on by a demolition, especially in the middle of a harsh winter.
Xinhua on Wednesday published a commentary (CHN) targeting those who allegedly worships or kowtows to the United States.
For some time, some people have been disseminating varying messages that worship or kowtow to the United States. They express jealousy of U.S. style democracy and freedom, or praise the U.S. human rights record, or exaggerate the self-correction ability of the U.S. political system. The most imaginative among them marvel at U.S. capabilities to combat COVID.
The bottom line is that some people have not stood up mentally. Those who worship or kowtow to the United States deem U.S. values as the golden standard, they bow down to the world’s hegemony, contracted “rickets” in their minds, allow themselves to be surrenderers in struggles, lost basic self-confidence and judgement.