China Is Pulling Out All The Stops To Stimulate Economic Growth
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Chinese Communist Party (CCP) Credibility
It should be obvious that the suite of policies promoted by the CCP under the direction of President Xi has been a big mistake, the credibility of the Party and the President taking a big hit. The policy reversals underway will not be temporary, notwithstanding their vulnerability to political whims of the party strongman. Extreme economic weakness, property sector deflation, and the population’s fatigue with the nonsensical COVID-19 policy erupted into rare criticism and protests that are an existential threat to the current regime. The authorities have been forced to act.
The CCP has thrown in the towel on the zero-COVID policy championed by President Xi himself and now seems determined to get it over with as fast as possible. How the public reacts to this dramatic reversal remains to be seen. For three years they have been warned endlessly about the dangers of this disease. To go from that to complete laissez-faire in the blink of an eye has been incredible. More protests and criticism are certainly possible, depending on the number of deaths from the virus, although an accurate assessment of the pandemic trends or death rates may never be fully disclosed by this authoritarian regime.
President Xi has also taken the property sector off his hit list and put it on the help list. There are reports that the authorities are preparing to relax restrictions on developer borrowing and dial back the “three red lines” policy, the financial regulatory framework introduced in 2020 and aimed at reining in the property sector excesses. In addition, government officials are talking up business and the private sector after previously stifling them over much of Xi’s rule. China has placed orders for Australian coal, suggesting that even its foreign policy is shifting. All these developments imply China is pulling out all the stops to stimulate economic growth.
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Property price deflation has directly impacted the Chinese household, with real estate making up roughly half of household net worth and 25% of economic growth. Weakness in the property sector also has undermined provincial governments, which depend on land sales and debt funding for financing. The threat of provincial defaults was rising amid reports of government employees in certain provinces not being paid for months. Lastly, weakening U.S. imports of Chinese goods knocked the one leg out from under the economy that was providing support.
Observing all these developments, our bias is to believe that the authorities will be successful in encouraging a rebound in the Chinese economy. The CCP needs to see growth. Plus, Chinese households are sitting on a potential tinderbox of accumulated savings, which would provide added spending firepower—provided confidence returns to the population, which is no guarantee. A second COVID wave is expected in May/June, which may stall any rebound in confidence. In addition, we suspect there must have been some behindthe-scenes turbulence in the upper echelons of the CCP, given how opposite the new policy initiatives are to those personally championed by the president himself. Instability in leadership is never a positive for an economy.
Author: Francis A. Scotland, Director of Global Macro Research
