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Abenomics proves contagious

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BARRON'S ASIA

When Prime Minister Shinzo Abe declared “Japan is back” and urged the world to “buy my Abenomics,” foreigners tripped over themselves to bet on his bold revival plan. None more so than China’s President Xi Jinping.

No, Xi’s government didn’t indulge in the great capital race back to Japan, as did a who’s-who of hedge fund managers. But he’s enthusiastically embraced a key element of Abe’s program: its underlying strategy. Like Abe, Xi promised nothing short of shock therapy, and is delivering hollow rhetoric instead. Just as Abe’s talk of epochal structural change now inspires eye-rolling, Xi faces a crisis of confidence as markets get wise to his all-stimulus-no-change government.

Xi’s not alone. The all-talk ethos sinking Abenomics can be found in Narendra Modi’s much-hyped resurgence plan. The latest budget from India’s “reformer-in-chief,” his third, makes for dismal reading. Once again, Modi served up cautious tinkering, not the big bang voters wanted. Ditto for South Korea’s President Park Geun-hye, another self-described Asian disrupter. Parkonomics, too, has been big on rhetoric, small on tangible change.

Why is Abenomics proving to be so catching in Asia? I don’t mean to suggest some kind of complacency contagion, but there are two common threads worth considering. One, timid leaders facing vested interests getting the better of them. Two, each is governing in an era when monetary policy, for better or worse, rules the world.

Timid? Seriously? Well, yes. Abe, for example, plays the strongman brilliantly, displaying what opposition bigwig Banri Kaieda calls “authoritarian tendencies.” In reality, Abe pulls punches at every turn when it comes to taking on agriculture, construction, education, health care and aging voters in rural areas. Even with high approval ratings and majorities in both house of the Diet, Abe has relied almost completely on central bank rate cuts. His modest reform wins — tighter corporate governance and championing women — are too little, too late. The Trans-Pacific Partnership, which Japan joined, is more a corporatist land grab than blueprint for higher living standards.

Xi looks equally feckless in the face of the Billionaire Club into which his party is morphing. Shaking up state-owned enterprises (SOEs) means irking those 3,000 anxious Communist Party bigwigs in Beijing for the National People’s Congress. Xi’s challenge is to keep money flowing to power brokers looking over his shoulder, while looking out for the small-time stock punters losing big and hundreds of millions facing job insecurity. And then there are the foreign hedge funds warning of a hard landing and governments demanding Beijing boost the yuan. China’s latest bubble is in policy paradoxes.

Instead of enraging the 88 million party members looking to join the Billionaire Club, Xi is turning to the People’s Bank of China to increase liquidity. The 25.4 percent tumble in exports in February (after an 11.2 percent drop in January) would seem less troublesome if Xi’s team were making more progress swapping China’s economic engines. The shift away from excessive investment and smokestack industries to services is occurring much slower than hoped. So are the upgrades needed to change the casino dynamic in Shanghai. If Xi’s reformist team can’t even get the mechanics of stock trading right, its odds of modernizing the SOE sector or internationalizing banks are low, at best.

Even the big news out of Beijing this week has Tokyo-style muddle-through written all over it. The central government says it will assume some of the debt burdens crushing local-government finances, merely formalizing what the world long assumed anyway. Absent is a change in incentives or regulations to halt local leaders from continuing to borrow with abandon to gin up growth.

“Beijing is cribbing the strategy in ways that should worry investors and world leaders alike.”

The stop-start nature of yuan reform is plenty Abenomics-like, too. The formula, of course, is announce an ambitious and splashy plan, preferably with three parts (Abe’s “three arrows” were a huge sell). In China’s case, it was arguing it could simultaneously control exchange rates, monetary policy and capital flows. When markets catch on to the con, intervene aggressively to offer the illusion of success. Next, use that breathing room to delay the painful reforms you know deep down you’ll never get to. And if things go bad, blame the foreign media for covering you unfairly.

That’s been Tokyo’s playbook since the early 1990s, and it’s still in effect. Beijing is cribbing the strategy in ways that should worry investors and world leaders alike. At the moment, Xi’s government is devising a plan for the next five years. Really, the NPC should be aiming on the next five months, a monumentally consequential window to right its listing financial system. It’s not short-termism that I’m advocating, but a focused, methodical and carefully executed plan to tackle asset bubbles, level playing fields and head off the debt crash that a five-year muddle-through strategy would ensure.

No one should take notice of Tokyo’s latest batch of bad data more than Xi. Amid the cacophony of challenges, Xi could be excused for missing news Japan contracted 1.1 percent in the fourth quarter, wages fell in 2015 for a fourth straight year, private consumption is down two years running and deflation persists. But Japan’s cautionary tale has everything to do with the decisions Xi’s government makes today.

Take, for example, signs of diminishing returns. Last summer’s epic battle with stock bears ended badly. So are hopes a real estate rebound would materialize to lift spirits (it didn’t). Or that a fresh wave of urbanization would propel growth back toward 7 percent. As Louis Kuijs, head of Asia at Oxford Economics points out, that “can only work if reforms take place to enable local governments to provide services to the newly urbanized migrants. While some tentative steps are planned for this year, substantially more is needed on this front.”

There’s a similar disconnect between big talk of cutting overcapacity and letting zombie enterprises die. Look no further than the Sharp Corp. drama playing out in Osaka for a preview of what may wait China Inc. Xiconomics promises “comprehensive reforms,” but lacks the stomach and is maddeningly vague about how officials plan to proceed.

That’s where the hollow slogans (“buy my Abenomics!”) take over. Xi and his premier, Li Keqiang, often seem to be playing the economic version of buzzword Bingo. They’re liberal with phrases like “market forces” and “supply-side structural reform” and “social productivity” and using an “iron hand” to curb pollution, but woefully conservative about the legwork needed to implement such ideas.

It’s an Asia-wise phenomenon, of course. Look no further than Modi’s “Make in India” ruse and Park’s hollow “creative economy” talking points. But the real master at convincing the masses a revival program that doesn’t exist is working is Tokyo. Abenomics has done so with a brilliance that could teach religious leaders a thing or two. If only China weren’t learning the worst lessons from Japan at the very worst moment.

William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com