Chinese President Xi Jinping is expected to tighten his grip on power when China’s National Party Congress convenes Sunday. A spectacle held once every five years, the 20th Party Congress marks the culmination of Xi’s ascent in many ways, with the leader poised to secure a third five-year term, making him arguably the most powerful ruler in China since Mao Zedong.
But China’s sputtering economy threatens to overshadow Xi’s coronation, with the country in the midst of its slowest growth in decades. On Wednesday, the International Monetary Fund (IMF) lowered its growth forecast for the world’s second-largest economy to 3.2% this year, while calling for a 4.4% growth in 2023, citing a volatile geopolitical situation and Beijing’s hardline policy on covid among the factors.
“China's patch reform has really stagnated,” said Nargiza Salidjanova, China Practice Director of the Rhodium Group, speaking to Yahoo Finance Live (video above). “It’s not enough to undo some good progress that they've done since the WTO accession, but in areas from openness to investment to market competitiveness, we see a pause or in some cases just all bad.”
ZERO-COVID POLICY
The future of China’s restrictive Zero-covid policy remains a central focus. Since the first known cases of the coronavirus were first reported in the city of Wuhan in 2019, the country has imposed the world’s strictest lockdowns, shutting down entire cities and bringing businesses and factories to a halt, while isolating millions of people in their homes.
That policy has dramatically slowed the economy, with China’s Q2 GDP falling 2.6% from the previous quarter, at the height of the most recent covid lockdowns in the spring, bringing major cities including Shanghai to a halt.
However, a recent communique issued ahead of the 20th Party Congress hints that a few changes may be on the horizon. The statement invokes battleground language, calling the fight against covid ‘an all-out war.’
“Putting the people and their lives first, we organized the people's all-out war against the COVID-19 pandemic and protected the people's lives and health to the greatest possible extent,” the statement reads.
In its annual China Pathfinder report, published in partnership with the Atlantic Council’s GeoEconomics Center, the Rhodium group writes the policy has placed China at a “crucial moment” when foreign firms are reassessing their presence in the country, and determining whether it remains “investible.”
“Nothing has disrupted China's economy as much as going to the core of China's society as the zero-COVID policy. And it's really unlikely that there is going to be a real kind of aggressive shift unveiled at the party congress,” Salidjanova said. “But looking forward at what happens, it's going to be a much better situation for China if there is a stronger signal that the policy is going to be stopped rather than kind of a fudging and slurring its way through a kind of gradual decline.”
PROPERTY SECTOR RECKONING
A structural shock in the property sector threatens to create an even greater chasm across the Chinese economy. The country has come to rely on the sector to drive roughly a quarter of its growth over the past decade.
A reckoning brought on by real estate bubbles and developer defaults that have ensued has reverberated across China’s financial systems. Local governments that have long been dependent on infrastructure and housing investments to balance their books have suddenly found themselves short on funds.
Salidjanova said there is little expectation for a shift in policy related to this key growth driver, given that party congresses have rarely been triggers for major announcements of economic policy. Any course correction that follows is likely to take “years to filter through to the real economy,” leading to a prolonged period of anemic growth, she said.
“There's no substitution for [the real estate sector],” she said. “The government has not been really able to set up new drivers of growth which will take China forward and be able to deliver the same kind of growth that China and observers have been able to enjoy.”
REGULATORY CRACKDOWN
Foreign investors will be keenly watching for any hints on China’s approach towards data collection and advanced technologies, at a time when major high-growth companies have been targeted by the government.
From the sudden cancellation of Ant Group’s record IPO to the U.S. delisting of ride-hailing giant Didi Global and the regulatory crackdown of TikTok’s parent company Bytedance, Chinese officials have taken a more heavy-handed approach at a time of heightened global competition and skepticism towards these firms.
In some cases, CEOs have been summoned by regulators to reportedly ensure that their loyalty and priorities lie with Beijing, not global profits.
The domestic crackdown has coincided with global efforts to reign in China’s tech prowess, amid fears of the country’s growing influence both in technology and geopolitics. Just last week, the Biden administration imposed the strictest restrictions on China’s semiconductor industry, all but banning American firms from supplying chips and chipmaking equipment to Chinese firms.
This has coincided with growing fears about China’s strategic partnership with Russia, and concerns about a military invasion of Taiwan.
Those tensions have led to a drop-off in foreign direct investments and prompted multinational companies to rethink their presence in China. In a recent member survey conducted by the U.S.-China Business Council, 65% of respondents said they had reduced confidence in the Chinese market. 40% said they were pausing or canceling investment projects or expansion plans in China.
“It is certainly true that political considerations and in many cases, security considerations have been overriding a lot of the economic priorities,” Salidjanova said. “I think regardless of what happens at the 20th Party Congress, China faces a prolonged period of growth. And this is because even if Chinese officials really decide to sort of go all in on a new aggressive reform package of tangible structural changes will take years to be realized.”
Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita
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