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Brief #112: China’s Economic Headwinds

The Chinese economy faces strong economic headwinds. Questions over the public debt, ageing demographics, and economic growth model linger over China’s long term growth prospects. In the near term, the chief challenge is the disruptive impacts on both consumption and supply chains caused by the country’s pandemic policy. Amidst draconian, extensive lockdowns, China’s export and retail sales figures have plummeted (as shown by the April data).

Moreover, the hard-lined COVID measures adopted by central and local governments in China have triggered an exodus of expatriates from the country. Supply chains have also been significantly affected, with hold-ups and delays at major port cities, causing ripple effects across China and beyond.

The second challenge is the bruised investor confidence in the Chinese economy. The tech sector has suffered from a catatonic rout of regulation and re-regulation in recent years. Beijing is also trying to deleverage the real estate sector in an attempt to deal with a long-standing asset bubble. Such cross-sectoral volatility and uncertainty, together with the country’s zero-COVID policy, is undermining investors’ willingness to enter the market.

The third challenge conjoins finance and politics – the extensive sanctions led by the US and EU states against Russia highlight that investors can no longer afford to treat geopolitics as firewalled off from economics. The freezing of Russian foreign assets foreshadows a grave threat to China’s economic elite should Sino-American relations continue to deteriorate.

Beijing’s responses

In the face of these challenges, Beijing has not been idle. Over the past few months, authorities in Beijing and local governments alike have gradually yet noticeably pivoted towards providing relief to the suffering economy – through a combination of policy recalibration and damage mitigation.

On COVID, the Chinese leadership appears to be aware of the extent to which supply chains and consumption have been hamstrung over the past months. The Politburo meeting on April 29 called for “stabilisation of the economy, in order to realise the socioeconomic developmental objectives of the year.” Additionally, it noted the importance of government support for small and medium enterprises and sectors severely affected by the pandemic.

However, the lifting of restrictive Zero-COVID policies on travel and logistics remains unlikely in the foreseeable future due to political factors. Indeed, the Politburo Standing Committee meeting on May 5 doubled down on China’s Dynamic Zero COVID policy.

On investor confidence, Beijing has signalled its willingness to halt its regulatory crackdown on tech firms. Vice Premier Liu He, for example, recently called upon regulators to “complete as soon as possible” the crackdown on internet platforms. Indeed, there appears to be increasing recognition by Chinese officials that continuing to pile regulations on the tech sector is not in the interest of the Chinese economy (at least not right now).

That said, it remains unlikely that regulatory agencies would ‘loosen’ some of the more normatively informed restrictions imposed upon the usage and nature of goods and services provided by tech companies – e.g. video games and streaming services – which affect wider social and political values in China.

In addition, Chinese regulators are trying to broker a deal with their American counterparts that would prevent select Chinese firms from being delisted from New York Stock Exchange. The addition of prominent firms such as JD.com and Pinduoduo to a list that would potentially lead to their financial removal signals that US regulators and Congress are unlikely to settle for less-than-substantial concessions from Beijing. Whether a compromise could be brokered amidst caustic geopolitical relations remains to be seen.

Finally, the liability posed by China’s $3.2 trillion worth of foreign reserves, as well as the expansive private and individual wealth that remains overseas, is a worry that the People’s Bank of China and Ministry of Finance have sought to tackle. The April 22 conference between China’s bank and finance ministries and executives from prominent local and international lenders saw regulators consult on the prospects of China’s weathering a sanctions campaign comparable to the one confronting Russia now.

Questions were raised by senior officials over how the nation could protect its overseas assets – with limited options on offer as to how China could adapt to the potentially catastrophic consequences of a freeze of dollar assets or exclusion from the SWIFT payment system. For the foreseeable future, Beijing will tread carefully so as to avoid the financial and economic devastation that would be wrought by a perceived substantive alignment with Russia over its invasion of Ukraine.

The prognosis for the Chinese economy is gloomy, and the effectiveness of Beijing’s efforts to tackle China’s economic challenges remains to be seen.

By Brian Wong

Edited by Adam Ni