asia timesby William Pesek Chinese President Xi Jinping’s “zero-Covid” strategy appears to be generating a zero-growth scenario that few saw coming for the world’s second-largest economy.
Asia’s top economic power managed to eke out just
0.4% growth in the second quarter year-on-year, down from 4.8% in the first quarter, according to just-released data. That figure falls well below forecasts of 1% growth for the last three months and comes dangerously close to the negative territory few serious economists thought was possible in the Xi era.
It’s already casting a shadow over the rest of 2022.
“Even with some massaging of the figures, it’s hard to see how the government’s target of ‘around 5.5%’ growth this year can be attained,” says Julian Evans-Pritchard at Capital Economics. “That would take a huge acceleration in the second half of this year, which is unlikely.”
That could impact Xi himself. Later this year, Xi plans to secure a norm-breaking third term as national leader. While economic growth grinding to a halt these last three months won’t necessarily upend that ambition, it could erode support for an indefinite Xi era.
This growth deceleration is the result of self-inflicted wounds from Xi’s widespread pandemic lockdowns. Shuttering Shanghai and other major cities proved to be a triple whammy hitting factory output, hammering consumer activity and spooking global investors.
That latter point became clear last week: The Institute of International Finance warned that China is experiencing the biggest wave of capital outflows it has experienced in seven years.
As overseas investors yanked a net US$2.5 billion from mainland bonds in June, they piled $9.1 billion net into other emerging market debt. Clearly, punters are not fleeing emerging markets; rather, they are worried about where China is headed.
Worrisome though that trajectory looks, there is potential for a U-turn.
Reversible policies, shifting fortunes
Xi’s
zero-Covid dilemma was eminently avoidable. And that bad news is – in a way – good news.
If Xi grasps the lever and reverses policy – pivoting away from giant Covid lockdowns, hitting the stimulus accelerator in creative and productive ways while easing up on his assault on technology companies – he could shift the narrative in short order.
For now, though, things are playing out just as Eurasia Group CEO Ian Bremmer had warned in January.
He said then that, “China is in the most difficult situation because of a zero-Covid policy that looked incredibly successful in 2020, but now has become a fight against a much more transmissible variant with broader lockdowns and vaccines with limited effectiveness.”
There is more to come. As the super transmissible Omicron BA.5 becomes the dominant strain, Beijing’s stubborn embrace of zero-Covid is deeply worrying global for investors.
So, too, is the ongoing lack of clarity about the status of Xi’s
clampdown on Big Tech companies. The fallout from the scrapping of a planned November 2020 initial public offering by Jack Ma’s Ant Group — and myriad actions since — remains a cloud over China Inc.’s prospects.
Could that cloud soon clear? In recent months, top officials led by Vice Premier Liu He assured markets of less regulatory uncertainty to come.
Liu pledged regulators will prioritize “standardized, transparent and predictable” policies for China’s internet giants, that include negotiations to reduce delisting risks for mainland companies trading on US exchanges. He also pledged
state support for sectors affected by regulatory turbulence.
Yet Caixin
reported this week that regulators have fined Alibaba and Tencent for not reporting earlier merger and acquisition deals – hardly a sign that the tech clampdown is easing as Liu avowed.
While investors weigh the contradictory messaging, Beijing is ramping up fiscal stimulus in a big way, including $1.1 trillion for urgent infrastructure spending. As per Bloomberg, this includes an unprecedented $222 billion of “special” bonds to empower local governments to increase stimulus.
Analysts at Citigroup Inc think infrastructure investment will rise nearly 8% from last year, a major boost in an economy also plagued by a deteriorating
property market. This, says economist Nathan Chow at DBS Bank, means “the worst of the downturn is over,” even if “recovery in the second half is unlikely to be too strong.”
Yet others worry that the stimulus won’t ultimately produce such a big GDP jolt.
Gloom, defaults and debt
“Funds are less of a constraint for infrastructure investment this year, while the bottlenecks lie mainly with project pipelines and government incentives,” says economist Xinquan Chen at Goldman Sachs Group. It might be an ominous sign, Chen says, that sales of construction machinery like excavators have weakened steadily in China since April 2021.
Economist Charlene Chu, known for warning about a Chinese debt bubble when at Fitch Ratings, believes Xi’s team is planting the seeds for a bigger debt reckoning. Now at Autonomous Research, Chu worries not just about a new wave of China Evergrande Group-like defaults but also about debt acting as an intensifying economic headwind.
In recent interviews, including with the
One Decision Podcast, Chu reckons that so far about 30 mainland companies that missed bond payments did so with total liabilities of around $1 trillion. What’s next?
“We continue to be in a climate where the Chinese government is growing credit at very, very rapid rates,” Chu argues. “And longer term, this does have a cost.”
Analyst Karl Shen at Fitch Ratings adds that “weak sentiment among homebuyers may put the brakes on China’s property market recovery, which will add to the challenges facing distressed developers and put pressure on policymakers to provide further stimulus and liquidity support.”
OANDA analyst Jeffrey Halley says a recent
mortgage payment strike by Chinese homebuyers “seems to be gathering more headlines, highlighting a millstone around China’s neck that had been forgotten recently – the slow-moving trainwreck of the private developer sector, where debt issues appear to be spreading to the domestic market from being an offshore problem.”
None of this means there is a “high probability” of a full-blown financial crisis, Chu admits.
But, she adds: “It does start to squeeze overall economic growth. The more you saddle households and businesses with debt, the more each dollar or RMB of revenue or income they get from wages is going to repay debt. And that’s not going to consume goods, it’s not going to new capital expenditure to drive growth and business.”
She is not the only one to see grim developments on the household front.
Positive growth in retail sales “looks unsustainable, because it largely reflects government subsidies to support car purchases,” Xu Tianchen, China researcher at the Economist Intelligence Unit reckons.
“Demand in other consumer-facing sectors remains weak, and we expect household spending to remain fragile throughout the remainder of this year, given China’s attachment to its zero-Covid policy.”
China, Chu notes, “is in a situation now where the debt bubble continues to grow and it is, I think, one of the
structural issues that is weighing on Chinese growth and one of the reasons…where we are going to be looking at low to mid-single-digit growth in China, at best, as the country really starts to slow down from this.”
Debt reckoning
To be sure, investors betting against China these past 10 years have not done well. But now the multiple external headwinds of an increasingly stormy 2022 are colliding with domestic ones at the worst possible moment for Beijing.
“Slowing global economic and trade growth over the rest of 2022 also suggests that China’s exports may struggle to prop up future economic performance,” says the EIU’s Xu.
That’s worrisome, Xu says, because “the contribution of the trade balance to nominal GDP reached its highest level since 2016, but this was partly owing to weak import growth, highlighting problems in the domestic demand landscape.”
All things considered, odds are low that China can hit Xi’s 5.5% growth target this year. This makes it vital that Xi avoid raising the odds of a debt reckoning in the longer run.
Mr.BadGuy
Publisher
These soldiers are from a country whose president is a Jew Zelensky. Orthodox churches are also being destroyed in this country. Synagogues are not touched. Surprisingly, it turns out that Jews get along well with the Bandera Nazis.