Is China moving to High Quality Expansion?
Xi’s visit to Central Asia this week, his first foreign trip in two years, suggests he’s comfortable with his grip on power at home, yet questions will be asked about China’s faltering economy at the Communist Party Congress starting on Oct 16th.
The week-long gathering will bring together some 2,300 representatives to choose the party’s leadership team and set strategic goals for the next five years and beyond.
At the end of it all, seven politicians will walk across the stage, thereby unveiling the de facto top decision-making body and amidst the grandstanding, western investors and analysts will be seeking to decipher clues from the Congress transcripts to many urgent questions;
• What is the roadmap out of China’s growth-sucking zero-Covid policy?
• Will Beijing use more force to deal with debt problems in the property sector?
• How determined is the central bank to defend a falling yuan?
• How much will China double down on what Xi calls its “common prosperity” effort to redistribute wealth, or on its self-sufficiency push?
Some of China’s current economic malaise traces back to the vision Xi outlined at the previous meeting when he confirmed that the People’s Republic will transition from a phase of rapid growth to “high-quality” expansion.
He stressed the importance of party control over everything and advocated for a stronger public sector while repeating past platitudes made by the party in 2013 about letting market forces play a decisive role.
Investors heard what they wanted, ignored the red flags and felt the shock later as the dizzying ascent of China’s technology and property giants including Alibaba, Didi Global and China Evergrande was rudely halted last year.
The benchmark CSI300 index tracking the largest companies in Shanghai and Shenzhen has delivered annualised returns of less than 4% over the past five years, per Refinitiv data, including reinvested dividends.
That’s better than the MSCI Emerging Market Index but barely a third of the returns delivered from America’s S&P 500.
Xi’s effort to de-risk the economy, has led to more defaults, most recently officials even allowed lenders in the north-eastern province of Liaoning to enter bankruptcy proceedings.
The big surprise is the heavy-handedness of some officials. Since late 2020, efforts to curb what senior leaders have called the “reckless expansion of capital”, punishing private companies for monopolistic behaviour even as state companies continue consolidating.
Investors may hope that after Xi’s political dominance is reassured, as the twice-a-decade Congress is likely to hand an unprecedented third term to President Xi Jinping. The officials will then focus on boosting business confidence, but that could prove to be wishful thinking.
A similar assumption of the importance of economic stability ahead of the meeting has already been shattered. Xi is ring-fencing major cities every few months to stamp out Covid-19 outbreaks, despite the traumatising impact on services and consumption.
For the first time, annual growth may miss the official target of 5.5% by a wide margin. State media are trumpeting zero-Covid as a “big benevolent policy”. This implies that economic disruptions are irrelevant, and any easing of restrictions depends on medical breakthroughs or a drastic expansion of hospital capacity.
Barring a major social discord, it is hard to see Xi walking back from the current trajectory. Key figures in his economic team may step down from the party’s top echelon and then leave their government roles in March.
These could include the cautious, reform-minded Premier Li Keqiang, and Vice Premier Liu He, known for his warnings on financial risks, as well as banking regulator Guo Shuqing, who pushed outright debt caps on property developers.
The risk is that replacements might be promoted for their loyalty rather than competence, especially if Xi cares less for the economy than investors assume.
Whatever Xi emphasises at the meeting this time around, investors might seize on signs that China is sticking even more determinedly to its current unsettling course of high quality expansion, instead of the rapid economic growth, China has become renowned for.