President Xi Jinping is setting up a committee on financial stability and development under the aegis of the Chinese State Council. While this may alleviate some shortcomings in financial supervision in China, it does nothing to resolve the fundamental contradictions between finance and politics in Beijing.
Sixty years ago Chairman Mao Zedong put forward his ‘10 major relationships’ that underpinned the development of a socialist society in China. Among other things, he spoke about the dichotomy between heavy industry and agriculture, the differences between the coastal regions of China and the interior, and the relationship of the state to commerce. The issues Mao expounded have not been resolved. China’s leaders are contending with a new version of Mao’s 10 contradictions, rooted in the incongruity of the country’s economic success and its Marxist politics.
The first contradiction relates to the leadership of the Communist Party v. the private ownership of financial assets. China’s financial sector is developing rapidly, leaving the Party as an onlooker rather than in charge of finance. The ownership of myriad assets has led to a surge in income from capital, which is abhorred by Marxists. Second, the role of money more generally is a matter of ideological discord. Marxist theory says money should serve the flow of goods, whereas capitalism treats money as a means of generating profits.
Third, unchecked developments in the financial sector created and continue to contribute to abnormal risk taking. Such market excesses produced public failures, such as the stock market crisis of 2015. Similar risks seldom lie far beneath the surface, as international institutions like the International Monetary Fund are quick to point out.
Fourth, similarly, involves the dichotomy between financial stability and the volatility of liberalised markets. The government stresses the significance of stability to achieve economic harmony in China, and opposes excess market volatility.
Fifth, Marxists resist uncertainty and resort to central planning to stifle risks. Recent statements by the Party highlight the need to expunge the threat of rare and unexpected ‘Black Swan’ crises, as well as what Xi has called ‘Grey Rhinos’, namely risks to the economy which are visible but ignored until they are moving too quickly to control. Capitalist thinking, meanwhile, accepts the existence of risks and provides instruments to manage them.
The sixth contradiction concerns the Belt and Road infrastructure proposals and the economic viability of the cross-border initiative. Supporting the Belt and Road plan is a commendable political step to institutionalise China’s role in world trade. However, it is doubtful that receiving countries will be able to repay their debts as quickly as China can build the infrastructure. It remains unclear which party carries the risk of financing the Belt and Road.
The seventh relates to the increasingly popular renminbi. The government’s desire to maintain a fixed exchange rate is contrary to the ubiquity of floating rates in other major economies. A stable exchange rate is viewed as part of financial stability, and any deviation is viewed as a failure. Eighth, given Beijing’s wariness of foreign influence, China continues to separate its onshore and offshore renminbi markets. The former are reserved predominantly for Chinese citizens, with controlled access for foreigners. International financial actors only have uninhibited access to offshore renminbi, contrary to the vision of liberalised foreign exchange markets espoused by capitalism.
The ninth and 10th contradictions between China’s politics and finance can be seen to affect advanced economies which are experiencing increased inequality as well, with clear political repercussions. They relate to the relationship between the real economy and financial markets, and the debate between assuring social stability and accruing personal wealth.
In developed economies, the financial sector becomes increasingly sophisticated and can become detached from the real economy. China would rather maintain the primacy of the real economy, while allowing the financial sector to service the production of goods and services. However, the development of China’s economy and financial sector has led to heightened polarisation of income and wealth. This threatens both the harmony of Chinese society and, by association, the existence of the Communist Party.
The latest swing of the pendulum is towards political supremacy over finance in China. Tightening supervision and reducing risk, while continuing to deepen financial reform, should be welcomed by international investors.
Herbert Poenisch is a Member of the International Committee of the International Monetary Institute at Renmin University of China, and former Senior Economist at the Bank for International Settlements.