Xi Jinping Behind China's Economic Woes, Experts Say: 'Don't Think We Can Yet Sort Of Wipe China Off The Blackboard'

Recent economic data from China this week revealed more cracks in its economy, and former Treasury Secretary Larry Summers and Willett Advisors’ Steve Rattner both recently shared their views on the latest developments.

What Happened: In an interview with Bloomberg's Wall Street Week on Friday, Summers said he thought for a number of years that the Chinese juggernaut was going to slow. “Juggernauts usually do,” the economist said, referring to Russia in 1960 and Japan in 1990.

Then China began facing a variety of near-term challenges, such as financial strains coming from the excessive reliance on real estate and the drying up of the export market, the economist said. He also pointed to “profound adverse” fundamental challenges such as the population collapse. “There are large amounts of people with money in China who are very, very eager to get it out, which is always a sign of impending difficulty in emerging markets,” he added.

“So, I would not be confident at all that China will be a faster-than-average growing major economy over the next decade,” Summers said.

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Is China Down And Out? Rattner said that, while he was more optimistic about China in the past, he has since changed his view. He, however, said China can't be written off completely.

While China's GDP may not grow by 5% this year, its growth is still about twice as much as the GDP growth of the U.S.,  Rattner said. “So, I don’t think we can yet sort of wipe China off the blackboard,” he said.

Delving on the factors weighing on China, Rattner said that U.S. sanctions, globalization and the realization by companies that they have to diversify their supply chains have taken a toll on the Chinese economy.

The second problem the Chinese economy is facing is President Xi Jinping, who has reasserted control over the economy despite not understanding economics, Rattner said.

“But I would say I’m not completely going to write China off because I think you have to recognize that you do have a lot of tools,” the investor said. Rattner referred to an IMF paper on China's balance sheet, which showed that, though the net assets are declining, they are still substantially positive. This is in contrast to what we see in the U.S., he said.

Way Out: While Summers wasn't very confident of the veracity of the economic numbers China has released, he said he sees several measures the country can deploy to substantially stimulate demand.

That said, there is this core problem of the basic tension between politics and economics in the Chinese political economy, he said.

“Is control going to rest with 100 million people who are members of the party or the 1.2 billion Chinese citizens who are not members of the party?” he asked.

The consumption-led growth agenda, according to Summers, is basically an agenda of spreading money all over the place and shifting it from the control of the Communist Party to the control of people who aren’t members of the party.

Rattner said that, fundamentally, the deal between the Chinese government and the people has always been “We’re going to make you rich and let us control. And, you know, you’re not going to have free speech, you’re not going to have this. You’re not going to have that.”

Xi faces the tension of not ceding control of things, he said. This explains why China started pulling the reins in when tech companies and tech billionaires such as Jack Ma started asserting themselves, he added.

Rattner said he sees plenty of room for Chinese consumers, with their enormous savings, to increase their consumption. “Is he [Xi Jinping]  going to try to use the tools he has, which, as I said, I think are substantial to get the ship righted, or is he going to just stay hunkered down the way he’s been?” he asked.

The iShares MSCI China ETF MCHI, an exchange-traded fund tracking performances of Chinese stocks available to overseas investors, ended Friday’s session down 2.39% to $43.32, according to Benzinga Pro data.

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