Changes in the president’s term limit could lead to capital misallocation and risks in the financial system.

President Xi Jinping’s supporters have succeeded in their attempt to lift the constitutional provision on the length of time a president can serve. The change was ratified by the National People’s Congress this month. The two-term limit was in place for about 20 years. For that reason, you may be tempted to argue that it’s no big deal, but it was part of the move China made to change direction after the end of Maoism.

The question is whether it really makes sense to run the world’s second-largest economy, with a population of 1.4 billion, from a handful of offices in Beijing staffed by Maoists.

Xi is a Maoist. In addition to removing term limits, his backers are pushing for a package of measures that will unify a large number of government structures under Communist Party control. Deng Xiaoping, who was a great reformer, had placed a lot of emphasis on separating the Party from the everyday machinery of the government. Xi and his supporters claim they want to “strengthen the Communist Party’s leadership in every sector.” The question is whether it really makes sense to run the world’s second-largest economy, with a population of 1.4 billion, from a handful of offices in Beijing staffed by Maoists.

Economic risks

These political issues create risks for the economy over the long term because this system of government leads capital to be misallocated, creating bad assets on the books of the financial system. This is what’s in China’s future, although not this year.

These issues create risks for the economy over the long term because this system of government leads capital to be misallocated.

In addition, Chinese macroeconomic data seem to have deteriorated a little. However, it’s hard to interpret the data flow in January and February because of the changes in the timing of the Lunar New Year. The government has set a GDP growth target of around 6.5%, the same as in 2017. China also trimmed its fiscal deficit target for this year. The economy expanded 6.9% last year. It’s not clear that both of these targets are achievable, but there’s no money to be made shorting Chinese government targets. Keeping the growth target the same as last year is a clear signal that the government is not interested in risking slower growth by advancing reforms more rapidly.


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