Chinese President Xi Jinping’s bid to reform economy, consolidate power just got tougher

NEW DELHI: The Chinese leadership has the levers to ride out, even if it takes time and effort, the volatility roiling China's stocks and the global markets, but the crisis poses a deeper challenge to President Xi Jinping's ambitious bid to reform state behemoths, snuff political challenges and consolidate power.

China's immense $3.5 trillion-plus reserves provide several options ranging from currency controls, reserve ratios and bailouts to keep the financial system liquid even though the markets seem to have surprised the government.

Even if emergency measures have not yielded desired results, the politburo can fall back on deep pockets. The bigger challenge is to face up to making banks and government finances more transparent.

Xi's political and economic reforms are intended to undercut power bases built on state monopolies, attack corruption and to cushion the impact of slower growth by making the economy more efficient and diversified.

Delivering high growth is central to the communist party's legitimacy as better living standards compensate for lack of political freedom and the current crisis can galvanize Xi's opponents discomfited by his reforms.

Topping the "to do" list are local government financing vehicles, used by local governments to finance projects, that account for 51 per cent of government debt. Growing leverage and slowing GDP is a poisonous combination, an International Centre for Banking and Monetary Studies pointed out.

Other signs of stress in the banking system are corporate bond defaults, failure of wealth products, bank runs (jiangsu), under-utilized infrastructure and rising non-performing loans.

Though increasingly market-oriented, China's banks are protected from market forces, often thriving in a preferential environment where the government is the biggest borrower, lender and sets all relevant rates.

China's bank assets are more than 35 per cent of global GDP, more than 300 per cent of China's GDP and growth of loans has for long outpaced GDP growth, fuelling construction of airports, roads, railways and housing.

Supported by the unique Chinese political and economic eco-system, China's giant banks and mega-SOEs powered a frenetic pace of urbanization, but also spawned an opaque web of loans and defaults covered up by a conniving bureaucracy.

Mega policy banks like China Development Bank exploit the government's ownership of all the land, which is used to provide massive upfront loans based on the estimate that land values can only increase. Land expropriation and transfer of land rights represent an unbeatable advantage over the private sector.

It's been more than two years since the communist party formally accepted the need for state-owned enterprises to be run on market principles. But resistance is fierce and official exasperation often seeps into state publications.

Not only do most of the 150,000-odd SOEs underperform as compared to private investment, their graft and inefficiency has propped up influential party officials who Xi recognizes as a major threat to his power.

The year 2015 began with Xi consolidating unprecedented power, compared to past 'supreme' leaders whose dominance led to a preference for low profile leaders and diversified power bases.