In an emergency meeting last Wednesday, China’s economic czar, Liu He, calmed the markets with promises of support and caution for the implementation of policies that had spooked investors. But doubts remain over whether China can meet its lofty target, in a reversal of optimism about the pandemic performance of Chinese equities that until recently had attracted foreign capital.
The buildup of pressure on the Chinese economy also appears to have stalled Chinese President Xi Jinping’s ambitious reform agenda – himself a source of concern for some investors – who had promised to no longer prioritize growth for include environmental sustainability, the fight against inequalities and the development of indigenous innovation.
The causes of uncertainty over the economy include both domestic factors — the unclear intensity of Xi’s regulatory crackdown and the worst coronavirus outbreak since 2020 — as well as external shocks such as the possibility of a break with the West. There has been the threat of sanctions against China if it provides economic or military aid to Russia amid the already severe turmoil in global markets following President Vladimir Putin’s invasion of Ukraine.
“Fundamental economics is at a very important crossroads,” said Zhiguo He, professor of finance at the University of Chicago, of the recent market turmoil. “A lot of bad economic news has piled up over the last half year.”
In China, much of the unpredictability comes from investors trying to determine how far Xi is willing to go to promote sweeping reforms in the education, real estate, energy and health sectors. technology, as he prepares to break with precedent and embark on a widely anticipated third term. this autumn.
For Xi, China’s most powerful leader in decades, the upcoming party congress is a critical time to put in place senior officials and lock in a political agenda to realize his vision of “national rejuvenation”.
Last year, as part of its reforms, the Chinese Communist Party signaled a sharp turn towards “common prosperity” with crackdowns across society to focus on redistributing wealth, fighting competition disloyalty and control of excess debt in bubble-prone sectors such as real estate development. .
But this ideologically laden slogan was mentioned less frequently towards the end of the year, as economic planners emphasized stability rather than reform. The phrase was absent from the government work report on agenda setting presented by Premier Li Keqiang earlier this month, suggesting that – for this year, at least – maintaining economic activity is top priority.
In the struggling real estate sector, Chinese regulators promised to stabilize prices and announced the postponement of a property tax trial that was yet to shake things up. Xi also called for caution over the proposed switch from renewables to coal, saying “we can’t throw away the tools that can feed us before we have new tools.”
Martin Chorzempa, senior fellow at the Peterson Institute for International Economics, said recent signals from Beijing suggest officials still have some flexibility in promoting the new program that some investors feared would be implemented too far. rigid.
“We are seeing a recognition that the approach has to adapt to the circumstances,” he said. Previously, there had been a “stacking effect” where each regulator wanted to demonstrate its effectiveness, but ended up creating an impossible – and sometimes seemingly arbitrary – compliance burden. “Without predictability, there is no investment.”
Adding to the uncertainty over the direction and speed of Xi’s reforms, there are fears that China’s attempts to stay out of Putin’s war on Ukraine may eventually crumble. Beijing claims to be neutral, but economists warn that its failure to criticize the invasion and commit to maintaining normal economic relations with Russia, an important strategic partner, could undermine its relationship with larger trading partners, including the United States. European Union, United States, Australia and Japan.
Such concerns come on top of long-running issues in the US-China trade and tech disputes, including the possibility that Chinese stocks in the US could be delisted following review. scrutiny from U.S. regulators — a threat that accelerated the U.S. selloff last week. -listed Chinese stocks.
The impact of the war in Ukraine on China’s relations with its trading partners is one of the biggest sources of unpredictability, as it is unclear what the global economy will look like after the war, said Nancy Qian , professor of economics at the Kellogg School of Management at Northwestern University.
“The question is, what does neutrality mean? We are really in uncharted territory, in terms of economic sanctions,” Qian said. “Is it enough if China does not join the sanctions? If China does not join sanctions and continues to trade with Russia, is this neutrality or undermining sanctions? »
On Sunday, Chinese Ambassador to Russia Zhang Hanhui encouraged Chinese companies in Russia to seize opportunities presented by the current crisis and adjust their business models to fill “gaps” in the Russian market, another tipping point in the balance. delicate that China tries to maintain. Many Chinese companies are either unwilling or unable to increase business with Russia, in part for fear of secondary sanctions.
Soaring global energy and food prices caused by the war will add to economic headwinds for China, a major importer of commodities such as oil, gas and wheat, unless Beijing is able to buy these products at pre-war prices from Russia, according to Shang-Jin Wei, a researcher at Columbia Business School.
Combined with expected U.S. interest rate increases this year, war shocks could create weaker growth and higher uncertainty in other parts of the world that “would translate into lower demand for Chinese exports.” , which is a net negative for Chinese growth”. Wei said.
At the same time, Chinese officials have signaled that they are ready to do whatever is necessary to ensure the growth target is met. Yang Guomin, a senior economic official, told state media that achieving the target will not be as easy as before.
“It’s a goal that can only be achieved with hard work and then harder work. If you want to hit that fishery, you’ll have to jump,” he said.
That leap, however, may require going back to what has worked for China in the past, according to Wei, the Columbia economist. China will have to “return to the key ingredient of its past economic successes over the next four decades, which is to give markets a more decisive role… to reinvigorate the dynamism of entrepreneurs.
The question remains whether such a return to the old playbook can work alongside Xi’s efforts to curb the excesses of Chinese capitalism and increase centralization.
Shepherd reported from Taipei, Taiwan. Lyric Li in Seoul and Vic Chiang in Taipei contributed reporting.