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Xi Faces Tough Tasks

Since last year, the Xi government has maintained aggressive fiscal policies to support the economy, such as implementing the infrastructure component of the 13th five-year plan (2016-20) ahead of schedule
The Chinese government has predicted that this year’s growth target of around 6.5% can be achieved. For the Xi regime, achieving this year’s goal is critically important. The picture shows the National People’s Congress.The Chinese government has predicted that this year’s growth target of around 6.5% can be achieved. For the Xi regime, achieving this year’s goal is critically important. The picture shows the National People’s Congress.

The Chinese Communist Party’s National Congress, which gathers once every five years, will meet this autumn. For the administration of President Xi Jinping, which is entering its second term, failure to manage the economy would cripple its standing. Even if it smoothly navigates the 19th National Congress, there could very well be lingering anxieties.

The operation of a new model of high-speed train between Beijing and Shanghai began in late June. The model running the line was named “Fuxing” (Rejuvenation) after Xi’s slogan of the “great rejuvenation of the Chinese nation”, news outlets reported.

Xi enhances his image through any means possible. There is no doubt that economic policy requires scrupulous management, especially this year against the backdrop of a national congress. Under the Communist Party’s single-party rule, China’s politics and economics have become closely intertwined.

  Financial Risk

The Xi administration’s top priority is minimizing financial risk. In June 2015, stock prices tanked, which precipitated a plunge in the yuan.

When the People’s Bank of China decided to cut rates in November 2014 for the first time in two years and four months, investment funds flowed from the sluggish real estate market to equities. Government and official media recommended investing in stocks, triggering a sharp rise in the number of individual investors. The equities bubble, which expanded at a faster pace than the real economy, ended in the 2015 collapse.

If there is turmoil in the financial markets this year, Xi will lose face as supreme leader, which would severely undermine his authority and ability to drive an agenda.

Since last year, Xi’s government has focused on tightening measures against real estate investment. It continues to take steps such as raising mortgage interest rates and strengthening restrictions on the resale of houses.

Behind the tightening measures, there is believed to be increased concern about asset bubbles, such as a spike in real estate prices, and hikes in US interest rates.

“Although there are certainly risks at present, they can be controlled on the whole.” In late June, Premier Li spoke at the World Economic Forum held in Dalian, Liaoning Province, where he announced a continuation of his tightening policy.

He also stated that “the main goal for the year as a whole can be fully realized,” predicting that this year’s growth target of “around 6.5%” can be achieved. For the Xi regime, achieving this year’s goal is critically important.

  Overproduction

However, there are concerns about the future. Since last year, the Xi government has maintained aggressive fiscal policies to support the economy, such as implementing the infrastructure component of the 13th five-year plan (2016-20) ahead of schedule.

Nonetheless, statistics for the April-June 2017 quarter released on July 17 suggest that changes can be felt. Anxiety that the economy will start to slow down again could cast a shadow over the economy after the party congress.

Preliminary data showed a gross domestic product increase of 6.9% compared to the same period last year, and about the same rate as for the January-March quarter. Data from the first half of the year (January to June) likewise shows that investment in fixed assets, like urban public works and private capital investment, increased by 8.6% compared to the same period the previous year, a slowdown from the 9.2% increase seen when considering only the period from January to March.

Condominium construction and other real estate development investment increased by 8.5%, a drop from the 9.1% increase in the January-March quarter. There are signs that real estate market conditions will cool down and be subject to downward pressure in the second half.

If the deceleration trend of the economy becomes too strong, there is a risk that the elimination of excess steel production and other facilities will not proceed as originally planned. There is concern that the weeding out of “zombie companies”, a pillar of supply-side structural reform, will be derailed.

Zombie companies that are effectively bankrupt due to excess production facilities and liabilities are said to make up half of all listed domestic steel corporations. If their elimination leads to a surge in unemployment, the economic slowdown will accelerate.

According to government figures, the government must prepare for the unemployment of about 1.8 million workers in the steel and coal industries alone due to adjustments in excess production capacity.

An increase in unemployment would likely lead to dissatisfaction with the regime, which could trigger riots and other forms of chaos. It is the last thing that the Xi administration, which prioritizes political and social stability, wants to see.

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