Nomura describes the Volcker parallel as “positive praise for Beijing”, and in one sense it is. The Communist Party at last seems determined to lance the boil. But Xi’s petulant shake-up of the economy is also an ideological repudiation of the Deng Xiaoping formula credited with lifting the country out of poverty. His “common prosperity” campaign looks all too like a neo-Maoist purge.
It amounts to a declaration of war on “disorderly capital” and swaths of the private sector - the only dynamic part of China’s economy. The regulatory mugging of internet platforms, fintech, video games, ride-hailing, after-school tutoring, food delivery, and e-cigarettes - with “rectifications” to match - has echoes of the Cultural Revolution.
Those who know how the world economy really works are trying to head off a debacle. “We must be vigilant against “common prosperity” becoming a Great Leap Forward or something that blights development,” said Li Daokui, a former rate-setter at the central bank and a Davos fixture.
“Everyone can feel that a profound change is taking place,” he stated, proclaiming an end to China’s love affair with Western culture and “return to the essence of socialism”. It was framed as a fight to the death with the West, the unvarnished Xi doctrine.
The showdown has exposed China’s Achilles’ heel: its reliance on imported hi-tech components and chips, the fuel of the digital economy.
Hedge fund veteran George Soros this week floated the possibility of a systemic financial crash and an educational reckoning for tourist investors from the West. But I find it hard to imagine a Lehmanesque “Minsky” meltdown in a system where the state retains iron control over banks.
“The Party craves two things above all: control, and stability. If the property market falters, the consequences for the Chinese economy will be savage. They will not want to take that risk before next year’s Party Congress,” he said. The forum is supposed to be the ultimate coronation of “helmsman” Xi.
