BEIJING (BLOOMBERG) – Chinese President Xi Jinping took a big gamble shaking up key industries ahead of a political gathering that could decide whether he rules the country indefinitely. Now, he is starting to hit the brakes.
In recent weeks, the Chinese authorities have moved to soften sweeping policies designed to make the economy less dependent on debt, monopolies and fossil fuels.
While Beijing’s edicts chastened China’s corporate elites, they also began showing signs of hitting ordinary citizens with higher power bills, lost savings and – if the economy continues to struggle – potentially fewer jobs.
Premier Li Keqiang expressed caution a week ago, saying China needed to rethink the pace of the country’s energy transition as a power crisis threatened to keep factories in the dark and homes without heat during the winter.
By last Friday (Oct 15), the central bank finally spoke on the debt crisis at China Evergrande Group, saying the risks were “controllable” and lenders should keep credit to the real estate sector “stable and orderly”. That came shortly after Bloomberg reported that financial regulators told some major banks to accelerate approval of mortgages in the last quarter.
“China is confronting now a confluence of rising structural economic headwinds,” said Mr George Magnus, research associate at Oxford University’s China Centre. “Stability and order will be craved above all things but within the context of a very defined political agenda. The (Communist) Party cannot afford to have anything like Evergrande or inflation go off the rails.”
The pullback shows the difficult balancing act Mr Xi faces in overhauling the world’s second-biggest economy in a way that does not cause too much pain for the nation’s 1.4 billion people, about 40 per cent of whom earn just 1,000 yuan (S$210) a month on average.
Mr Xi’s push for “common prosperity” has underpinned a slew of policies aimed at tackling widening inequality, which poses a long-term threat to the legitimacy of the Communist Party – and ultimately his own political future.
While it is important for Mr Xi to assert his authority ahead of next month’s plenum and next year’s Party Congress – a twice-a-decade leadership reshuffle at which he is expected to secure a precedent-breaking third term – any economic downturn that leads to social unrest risks weakening his grip on power. Slowing the pace of change in key areas would allow Mr Xi to ease immediate pressure without altering his broader plans to remake China’s economy.
“Xi has a low tolerance for outcomes that directly cause a lot of ordinary Chinese to suffer, because that would create serious risks to political stability and party legitimacy,” said Mr Neil Thomas, Eurasia Group’s analyst for China and North-east Asia. “The key stakeholder that Mr Xi is determined to protect above all others is the Communist Party itself.”
The severity of China’s energy crisis and property slowdown has surprised economists, prompting many to downgrade their full-year economic growth forecasts. Third-quarter figures released on Monday showed the challenge: Gross domestic product expanded 4.9 per cent from a year earlier, down from a previously reported 7.9 per cent in the preceding quarter. China’s stock benchmark CSI 300, one of Asia’s worst performers this year, fell about 1.2 per cent.
While Chinese policymakers have expressed confidence they can hit modest growth targets and have not signalled plans for stimulus, the authorities have recently struggled to calibrate their approach.
Last month, Bank of America economists Miao Ouyang and Helen Qiao warned that the credit crunch was “unnecessarily aggressive” and would work against “the policy goal of a healthy and stable property market”.
At a virtual round-table session last week on the power crisis, representatives from European businesses in China said their factory managers received late-night text messages from government officials demanding they halt production the next day. The local authorities, they said, could not differentiate between companies based on their energy use, instead taking a rigid one-size-fits-all approach largely out of fear of angering Beijing.
At the same time, top leaders did act quickly to ease price controls on the sector that had been in place for years in a bid to ease the crisis, which was stoked by a combination of rising global commodity prices and overzealous local officials seeking to hit emission-reduction targets. The State Council this month announced that China would raise maximum electricity rates and gradually allow all coal-fired power to be traded on the open market.
‘Impossible to achieve overnight’
In some ways, the start-stop nature of Mr Xi’s reform push is a built-in feature. The Communist Party’s Qiushi Journal on Friday published a more complete version of one of Mr Xi’s speeches in August, which emphasised the need for “gradual and orderly progress” in achieving common prosperity.
“It is impossible to achieve overnight,” Mr Xi said.
The goal, he added, was ultimately to ensure social harmony through growing the middle class and reducing the proportion of rich and poor “to form an olive-shaped distribution structure”. He called for a stronger public sector and improved social safety net, while also emphasising the need for upward mobility and mobilising “the enthusiasm of entrepreneurs”.
At one point, he acknowledged that China still has not figured out how exactly that will work. He said: “We have a complete solution to the problem of poverty, but we still have to explore and accumulate experience in the issue of how to get rich.”
One key aspect to Mr Xi’s plan involves strengthening patriotism, seen most clearly by China’s moves to press its claims on Taiwan, a self-governed democracy. Chinese warplanes conducted a record number of sorties near the main island earlier this month, leading the United States to denounce Beijing for “provocative military activity”.
At the same time, China is dialling down tensions with the US and its allies. Beijing had a relatively muted response to reports that a small number of American military advisers were deployed to Taiwan, and Mr Xi agreed to a virtual summit later this year with US President Joe Biden. The Chinese leader last week also set up a summit with the European Union later this year.
Goldman Sachs Group recently won approval to take 100 per cent ownership of its securities joint venture in China, and Commerce Minister Wang Wentao told state broadcaster CCTV on Monday that the government will keep expanding market access for foreign capital.
While China’s use of nationalism shows it needs a “non-economic means of trying to promote regime legitimacy”, right now, Mr Xi is focused on getting the economy stabilised, according to geopolitical strategist Matthew Gertken at Montreal-based BCA Research, which provides global macro research.
“On the current trajectory, there is a clear and present danger of widening illiquidity, collapsing property prices, credit crunch, financial and economic crises, and sociopolitical problems,” he said. “These outcomes may ultimately be unavoidable, but first the regime will moderate policy to try to avoid them.”
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