“Authoritative Person” Escalates Uncertainty in China

A dispute at the top of China’s government may signal a policy shift ahead. But until that becomes clear, the main risks are policy paralysis in the world’s second-largest economy and heightened uncertainty about growth.

For the third time in the last year, the People’s Daily, China’s authoritative Communist newspaper, published an interview with an unnamed official who said policy change was necessary to avoid a financial crisis and recession.

This time, the official interviewed—identified only as “an authoritative person”—said China can’t rely on debt-driven stimulus to restore its economic health.

The article appeared on page 1, which has fed speculation that there is policy disagreement among Chinese top leaders. It especially questioned the use of credit growth and liquidity-supported stimulus to kick-start the slowing economy.

At this point, it’s hard to tell how significant the policy disagreement is. But similar People’s Daily interviews last year aimed at communicating the party’s thoughts on policy ended up escalating political uncertainty and policy confusion.

We’re worried about a similar outcome this time. For example, the article advocates a “supply-side” approach to economic policy, but the details aren’t clear.

What is clear is that this isn’t the Western-style, neoliberal supply-side policies championed by Reagan and Thatcher three decades ago, but rather the reversal of the state’s role in restructuring and rebalancing the economy.

Such a policy shift will bring sizable downside risk to Chinese growth. Consider: if growth slows even more over the coming quarters, should investors expect the government to step in with support again? Or will policy have changed?

And if supply-side policies were to override China’s traditional debt- and loan-driven stimulus, we’re not at all sure what would support growth. Public spending has been strong, but private demand is weak.

The most likely outcome of all this is policy paralysis: Nobody at the government or state enterprise level will want to risk starting a new project as long as these questions remain unanswered. That’s something we’ll be monitoring closely.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

Asian Sovereign Strategist

Anthony Chan is an Asian Sovereign Strategist with primary responsibility for macroeconomic forecasts and sovereign/interest-rate strategy for the Asian fixed-income markets. Before joining the firm in 1999, he was chief group economist (Asia) for HSBC Economics and Investment Strategy, chief regional economist of MeesPierson Securities (Asia) Ltd. and senior China/Hong Kong economist of the Economist Intelligence Unit Ltd. Chan holds a BSc (Hons) in applied economics from the University of East London and an MSc in economic forecasting from the University of Leeds. He was appointed by the Hong Kong Special Administrative Region government to serve as an advisor to the Central Policy Unit from 1998 to 2000. Location: Hong Kong

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