‘Tortuous’: Alarm bells are ringing as China faces reality

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It’s now apparent that the weak June quarter economic data released last week has set off the alarm bells in Beijing, forcing an about-face on some of Xi Jinping’s signature economic policies.

After the release of that data, which showed the economy growing at less than one per cent relative to the March quarter, China’s Politburo has scrambled to announce a series of measures, albeit without much detail, to try to inject some momentum into the faltering economy.

Authorities in China have suddenly realised that the big policy shifts directed by Xi Jinping may not have been such good things after all.Credit: AP

The most interesting of the statements that flowed after the Politburo’s meeting ended on Monday was the admission that the recovery from the two years of zero COVID lockdowns that ended late last year was making “tortuous” progress. Until now, the authorities have appeared quite complacent about the ability of the economy to hit is five per cent GDP growth target for this year.

Their somewhat belated conclusion, however, is one with which the International Monetary Fund concurs, with the IMF saying on Tuesday that China’s anaemic recovery could slow and be a drag on the global economic recovery and have negative implications for China’s trading partners in the region and beyond.

In response to the realisation that even the modest growth target of “about five per cent” for this year was under threat, the authorities in China have suddenly realised that the big policy shifts directed by Xi may not have been such good things after all.

Two years of crackdowns on the private sector, particularly on China’s big technology companies, were key elements of a major shift in economic strategy as Xi moved away from Deng Xiaoping’s “let some people get rich first” approach to harnessing the dynamism of the private sector.

Xi’s emphasis was on “common prosperity,” with a greater role for the state-owned enterprises, the redistribution of wealth and the “encouragement” made to China’s “high-income groups and enterprises to give back to society more.”

Billionaires, having seen some of the biggest and most successful tech platforms and their founders smashed by the crackdown of tech companies, read the threatening tea leaves and queued up to hand over tens of billions of dollars of their wealth two years ago then largely disappeared from public view.

Under Xi, the role of the state-owned enterprises has been elevated and that of the private sector diminished, China’s once-vibrant tech sector has shrunk and, with the introduction of the “three red lines” restrictions on leverage, the property sector has imploded.

Late last week, in advance of the Politburo meeting, the authorities released a list of 31 measures/guiding statements in which they vowed to make the private sector “bigger, better and stronger.”

China’s battered economy is struggling to sustain its recovery after emerging from zero-COVID lockdowns at the end of last year.Credit: Getty

They promised to level the playing field between private and state-owned companies, remove market barriers, increase access to funding, involve the private sector in future policy developments and ensure that funds owed the companies by local governments and other state-owned entities would be paid.

They would “concretely optimise private firms’ development environment,” they said.

There was a rush, which appeared choreographed, by China’s billionaire class (who have kept an increasingly low profile in the past two years amid the crackdowns on the private sector) to share their excitement and appreciation for the party’s plans.

The broad shift in stance towards the private sector wasn’t the only significant shift away from policies regarded as Xi-driven. For the first time since 2019 a phrase attributed to Xi – “property is for living in, not for speculation” – disappeared from the Politburo’s statements.

In the midst of a property crisis, with major developers defaulting almost on weekly basis, the Politburo now wants to “timely adjust and optimise real estate policies.” It says it will act to increase the construction and supply of low-income housing, renovate “urban villages” and revitalise “idling” properties. There are, because of the distressed developers, a lot of uncompleted property developments in China.

China’s private sector has contributed about 60 per cent of its GDP, with the tech sector generating the highest growth rate, and about 80 per cent of urban jobs. Its property sector, pre-crash, contributed about 30 per cent of GDP.

With the economy spluttering, urban unemployment at record levels of more than 20 per cent and the property sector depressed it seems to have finally dawned on the authorities that cracking down on the key drivers of growth and employment and elevating the less productive and innovative state-owned enterprises may not, coming out of the pandemic, have been the wisest of policy choices.

The Politburo also pledged to resolve the debt-laden plight of its local governments, which are struggling because of the loss of the property sales-related income they previously relied on, and to use monetary and fiscal policies to try to boost consumption.

Whether the switch from the vow of making state-owned enterprises “bigger, stronger and better” to the same pledge for the private sector will suddenly turn around the risk-averse sentiment within China’s private sector is doubtful.

Youth unemployment is soaring across the country.Credit: Reuters

It will take action, and time, for China’s entrepreneurial private firms to regain trust in Beijing after the traumas associated with the response to the pandemic and the volatility of policymaking of the past few years.

There is no instant or even near term fix for the property sector, which will drag on China’s growth rate for the forseeable future, and it may take large-scale fiscal largesse for China’s battered consumers to regain the confidence to spend.

Beijing, despite a concerted effort in recent weeks to woo foreign investors, including a meeting last Friday with some of the world’s biggest investment companies, is also unlikely to get much help from external sources.

For the first time since 2019 a phrase attributed to Xi – “property is for living in, not for speculation” – disappeared from the Politburo’s statements.

Foreign investment has been scared off by the crackdown on foreign consultancies and the removal of access to economic and business data, on national security grounds, that they rely on to undertake their due diligence and by the nature of the policymaking in recent years. The increased tensions between China and the West and the decoupling of their economies that’s occurring won’t help.

With the global economy slowing, the restructuring of global supply chains and the banning of access to key technologies by the US and some of its allies, China’s exports are unlikely to come to its rescue.

It has to generate domestic activity and demand growth, hence Xi’s willingness to countenance the about-face in policies that he developed, implemented and was committed to.

While there was a long list of measures outlined in the Politburo statement, the lack of detailed actions means it will take some time to see whether the authorities are doing what they have indicated they will do and even longer to assess the effectiveness of the policy changes.

The willingness to, at least rhetorically, walk back from an ideological prejudice against the private sector is, however, an important and necessary shift in the policy framework if China is to regain the kind of growth rates that would start to shrink its youth unemployment rate and, longer term, help offset the drag of a shrinking population.

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