(MENAFN-Asia Times)
Chinese President Xi Jinping’s “zero-Covid” strategy turns out to be generating a zero-growth situation that few saw coming for the world’s second-largest economy.
Asia’s largest economy saw an expansion of just 0. 4% in the current quarter year-on-year, up from 4. 8% in the first quarter, according to newly released data. This figure is well below the 1% expansion forecast for beyond 3 months and is dangerously close to the negative territory that few serious economists imagine in the Xi era.
This already casts a shadow over that of 2022.
“Even with a little manipulation of the numbers, it’s hard to see how the government’s growth purpose” of around 5. 5% can be achieved this year, says Julian Evans-Pritchard of Capital Economics. improbable.
This could have an effect on Xi himself. Later this year, Xi plans to win a revolutionary third term as national leader. While the economic expansion that has stalled over the past three months may not necessarily run counter to that ambition, it could erode aid for an indefinite period from Xi.
This slowdown in expansion is the result of self-inflicted wounds from Xi’s widespread pandemic blockades. The closure of Shanghai and other major cities has proven to be a triple whammy for factory production, affecting customer activity and scaring global investors.
This last point was clear last week: The Institute of International Finance warned that China is experiencing the biggest wave of capital outflows it has noticed in seven years.
While foreign investors withdrew $2. 5 billion net from the continent’s bonds in June, they accumulated $9. 1 billion net in other emerging market debt. Clearly, bettors are fleeing emerging markets; rather, they are involved in the direction China is taking.
As troubling as this trajectory is, there is a U-turn.
Xi’s Covid 0 dilemma is perfectly avoidable. And this bad news is, in a way, smart news.
If Xi takes the lever and reverses politics, moving away from the giant Covid lockdowns, pressing the stimulus accelerator creatively and productively while unleashing his attack on tech corporations, he can replace the narrative in no time.
For now, however, they are happening as Eurasia Group CEO Ian Bremmer warned in January.
He then said that “China finds itself in the most complicated scenario due to a zero covid policy that seemed incredibly a success in 2020, but now has a fight against a much more transmissible variant with broader lockdowns and vaccines with limited efficacy. “
There is more to come. As the super-transmissible Omicron BA. 5 becomes the dominant strain, Beijing’s damn adherence to zero-Covid is deeply worrying investors globally.
The same goes for the persistent lack of clarity about the prestige of Xi’s crackdown on big tech companies. The fallout from Jack Ma’s Ant Group’s planned initial public offering for November 2020, and a slew of shares since then, remain a cloud over China Inc. The perspectives of .
Could this cloud burn soon? In recent months, senior officials led by Vice Premier Liu He have been confident in markets that there will be less regulatory uncertainty in the future.
Liu vowed that regulators will prioritize “standardized, transparent and predictable” policies for China’s web giants, which come with negotiations aimed at reducing the threat of exclusion of mainland Chinese companies listed on U. S. stock exchanges. USA He also promised status to sectors affected by regulatory turbulence.
Still, Caixin published this week that regulators have fined Alibaba and Tencent for failing to comply with previous merger and acquisition agreements, which is not a sign that the technological crackdown is waning, as Liu admitted.
As investors weigh in on the combined messages, Beijing is dramatically stepping up fiscal stimulus, adding $1. 1 trillion for urgent infrastructure spending. According to Bloomberg, this includes $222 billion in unprecedented “special” bonds to allow local governments to build up stimulus.
According to analysts at Citigroup Inc, infrastructure investment will increase by about 8% compared to last year, a first boost in an economy that was also affected by the deterioration of the real estate market. This, according to economist Nathan Chow of DBS Bank, means that “the worst of the recession is over,” even though “the recovery in the current part of the year is unlikely to be too strong. “
However, others worry that the stimulus will ultimately produce such a surprise for GDP.
“This year, funds are a minor constraint on infrastructure investments, while bottlenecks are basically in allocation channels and government incentives,” says economist Xinquan Chen of Goldman Sachs Group. Machinery such as excavators has weakened in China since April 2021.
Economist Charlene Chu, known for warning of a Chinese debt bubble when she worked at Fitch Ratings, believes Xi’s team is sowing the seeds for further debt calculation. Now, at Autonomous Research, Chu is not only worried about a new wave of China Evergrande Group: type of defaults, but also about debt acting as an increasingly intense headwind in the economy.
In recent interviews, with One Decision Podcast, Chu estimates that, so far, around 30 corporations on the continent that have defaulted on bonds have done so with general liabilities of around $1 trillion. What’s next?
“We are still in a climate where the Chinese government is expanding lending at very, very fast rates,” Chu said. “And in the long run, it comes at a cost. “
Analyst Karl Shen of Fitch Ratings said: “Weak sentiment among homebuyers may simply undermine the recovery of China’s real estate market, adding to the difficult situations facing suffering developers and pressuring lawmakers to provide additional stimulus and liquidity support. “
OANDA analyst Jeffrey Halley said a recent loan bill strike among Chinese homebuyers “seems to be making more headlines, highlighting a cogwheel around China’s neck that had recently been forgotten: the slow collapse of the personal developer sector, where debt disruptions seem to be spreading in the domestic market to be a foreign problem.
None of this is a “high probability” of a full-blown currency crisis, admits Chu.
However, he adds: “This is starting to weigh on the overall economic expansion. The more families and businesses borrow, the more every dollar or RMB of income they earn from wages will pay off the debt. And it’s not going to consume goods, it’s not going to lead to new capital expenditures to encourage expansion and business. »
She sees no gloomy advances on the family front.
The positive expansion of retail sales “seems unsustainable, as it largely reflects government subsidies to car purchases,” said Xu Tianchen, a China researcher at The Economist’s Intelligence Unit.
“Demand in other customer sectors remains weak and we expect household spending to remain fragile this year, given China’s commitment to its zero covid policy. “
China, Chu points out, “is lately in a scenario in which the debt bubble continues to grow and this is, I think, one of the structural disorders that weigh on the Chinese expansion and one of the reasons . . . where we’re going to look down to an average single-digit expansion in China, at best, because the country is starting to slow down because of that.
It’s true that investors who bet against China over the past 10 years haven’t fared well. But now, the multiple open-air headwinds of an increasingly stormy 2022 are colliding with the winds inside at the worst time imaginable for Beijing.
“The slowdown in global economic and industrial expansion during the remainder of 2022 also suggests that Chinese exports would possibly struggle to achieve long-term economic performance,” EIU’s Xu said.
This is worrying, Xu says, because “the contribution of the industry’s balance sheet to nominal GDP has reached its highest point since 2016, but this is partly due to weak import growth, which highlights domestic problems. “
After all, China is unlikely to reach Xi’s 5. 5% expansion target this year. It is important for Xi to avoid expanding the possibilities of a longer-term debt calculation.
Follow him on Twitter @WilliamPesek
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