Xi unlikely to correct course on economy after party congress -- China Boss update 10.14.22
Update
What happened.
“Much speculation has focused on the possibility of an economic course correction after this month’s congress,” Matthew Brooker wrote in a Bloomberg Opinion. But the chances of such appear increasingly slim, he said.
Brooker, Bloomberg:
Having consolidated power, the theory goes, Xi will be more inclined to soften some of his signature campaigns and return to the pragmatism that has served China so well. Such hopes may prove forlorn. Even if an economically liberal candidate such as Vice Premier Hu Chunhua becomes premier, there is no reason to believe that Xi will be more restrained. As Fraser Howie, author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise, points out, figures such as Premier Li Keqiang and top Xi adviser Liu He are economically liberal yet have had no real influence. “I see no silver lining,” Howie says.
In the China Project, Dexter Tiff Roberts, senior fellow at the Atlantic Council’s Asia Security Initiative, agreed: “You’d think people would have learned their lesson after watching Xi Jinping emerge as one of the most conservative, ideological leaders of China in decades.” “I certainly learned mine,” he said.
Why it matters.
Nearly a third of China’s economy is in meltdown
Investors are particularly worried about China's real estate sector which analysts have described as a “slow-motion financial crisis” that is “spreading into the deep tissue of China’s political economy.” But Chinese policymakers must also find ways to lessen the the damage of Xi’s zero-Covid campaign while housing prices continue to tumble, the Financial Times says.
The "shock" of Evergrande's failure last year "wiped out billions of dollars lent to the company and its peers, crippling construction and leaving swaths of unfinished housing across the country, and prompting mortgage boycotts from angry homebuyers," FT said. Little wonder folks are on edge as they wait for salvation.
But if Beijing can do anything to help - and that’s a pretty, darn big “if” - according to Nicholhas Borst who says “China’s economic recovery is balance sheet constrained,” there has been little sign of it.
FT:
In August, house prices fell 1.3 per cent year on year — their fastest pace of decline in seven years.
“So far, the policy easing has been playing catch-up,” said Larry Hu, chief China economist at Macquarie. “It’s still behind the curve in the sense that the property sector is still in deep trouble”.
Beijing’s “cautious approach,” was “unlikely to ‘significantly improve the liquidity crunch faced by privately owned property developers,’” analysts told the Financial Times. “We do not expect a visible recovery of the housing sector in the medium-term,” they said.
The new CCP brood is “bad for business”
“The outlook for the team of senior officials tasked with running the economy and finance isn’t good,” Roberts says.
Roberts, China Project:
Economic czar Liú Hè 刘鹤, known for his strong reformist tendencies, will retire and may be replaced by an official who ran China’s stodgy state planning agency. PBOC governor Yì Gāng 易纲, finance minister Liú Kūn 刘昆, and top banking regulator Guō Shùqīng 郭树清, all known as market-oriented policymakers (Yi and Guo also studied in the U.S. and Great Britain, respectively), are also likely retiring. Other well-known reformers like former central bank head Zhōu Xiǎochuān 周小川 and finance minister Lóu Jìwěi 楼继伟 already retired earlier.
“The overall reality is that the economics professionals who will be stepping down will be replaced by others with much less diverse experience, with much less international renown, and with much less collective voice in the making of economic policy,” writes University of California, San Diego China economy scholar Barry Naughton. If “Xi is favoring loyalty over technocratic competence, this would be one of the strongest policy signals out of the congress — and one that would be interpreted negatively for China’s economic outlook over the next five years,” notes Logan Wright of Rhodium Group, a research firm.
That’s because, as Brooker noted in Bloomberg, although “[o]ne-party rule served China well in the past four decades, at least from the point of view of economic development,” there is much to indicate that Xi has the wrong idea how.
Brooker, Bloomberg:
Xi appears to have drawn exactly the wrong conclusions from China’s rise, attributing it to the supremacy and historical rightness of the party rather than to the increased role of markets, which enabled the entrepreneurial energy of the Chinese people to be released. He has reaffirmed the primacy of the unproductive state sector and interfered in the private economy with ad hoc and ill-explained regulations that have wiped hundreds of billions of dollars off the value of technology companies alone. These interventions, along with Xi’s rigid insistence on a zero-Covid policy, have done demonstrable harm to China’s growth prospects and soured its image in the eyes of international investors. Even longtime China believers such as former Morgan Stanley Chief Economist Stephen Roach have been losing faith.
Ultimately, the worry is that “[a] single individual who has amassed such power in a closed Leninist system” - especially one who has established ideological legitimacy on “common prosperity” and “national rejuvenation” - could end up “impervious to contradictory evidence, storing up problems that eventually become too profound to fix,” Brooker said.
Brooker, Bloomberg
The last time it happened, Communist Party elders had to wait for Mao to die before reversing the political purges and economic disasters that had left Chinese society scarred and impoverished.
It’s much more of an all-or-nothing bet than a multiparty democracy. As long as Xi is on the right path, there’s nothing to worry about. What, though, if he isn’t?
Watch on YouTube.
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Have a great weekend.