The writer is chief economist at Enodo Economics
For a long time, foreign investors’ favourite adjective for the Chinese Communist party was “pragmatic”. The CCP would not do anything that would harm China’s economic interests, the argument went, and so short-term glitches in policy would always be ironed out before they made a durable dent in growth.
But in Xi Jinping’s China politics overrides everything else. This extends even to the battle against Covid-19. The supreme leader has staked his personal reputation on China’s success in taming the pandemic, and avoiding the deaths and overwhelmed hospitals suffered elsewhere.
He is unlikely to change his zero-Covid policy before this autumn’s Communist party congress, when he is all but certain to secure the unprecedented third term for himself that he sees as critical to cementing his legacy.
Foreign investors have begun to realise that China is willing to take a significant economic hit rather than relinquish its commitment to its dynamic zero-Covid strategy or roll out the mRNA vaccines developed in the west.
Over the past few weeks, the chair of one of Asia’s largest private equity funds has complained privately that the economic impact of zero-Covid is real, and growing. And the head of the European Chamber of Commerce in China has warned Beijing about the disruptions that businesses face.
Investors may seek some hope in the series of new stimulus measures Beijing announced over the past few weeks. But this will be misguided. It is critical to realise that since coming to power, Xi has placed importance on economic development but within an all-encompassing context of national security, which trumps all other considerations.
He has demonstrated again and again that national security, and this year stability, are top concerns for his administration. The zero-Covid policy has been framed as a matter of stability and national pride. At a recent ceremony celebrating the success of the Winter Olympics, Xi said China deserved a “gold medal” in its efforts to contain coronavirus.
Introducing flexibility — to allow, for instance, a higher threshold of asymptomatic spread, or using a different metric for imposing lockdowns — carries the risk of a very public and embarrassing failure in the health system.
What does this mean for investors? We will witness an increasingly difficult juggling act as technocrats try to square the zero-Covid policy with Xi’s demands for stability on every other front.
Investors should be prepared for a slump in growth and supply chain disruptions, at least until the party congress, as well as more dirigiste government intervention as Beijing tries to keep its economic indicators stable. Policymakers will attempt to defend the value of the renminbi, too, all in the name of stability.
All this carries a cost, of course. Attempts to paper over the present impact of zero-Covid policies and Beijing’s return to pump-priming the economy only deepen the structural problems that must be resolved in future. Recent pledges to spur infrastructure investment will result in further debt build-up in an economy already saddled with massive bad loans.
Coronavirus has undone the gradual but good work done over the past few years in deleveraging the economy and de-risking the financial system. In our estimate, expected credit losses climbed to between 20 and 27 per cent of gross domestic product in 2021.
To be sure, plans outlined on April 10 to build a unified national market will bring efficiency gains, if successful. However, for now domestic protectionism and red tape affect manufacturers in China less than the disruptions of the zero-Covid policy. More importantly, Xi’s focus on the production and distribution side of the economy is a dead end if consumption is not fostered to recover.
As a true Marxist-Leninist, Xi sees individual consumption and wealth creation in a negative light. He has embarked on an ambitious but uncharted path as he aims to make good on the party’s promise of a socialist system that does not put the “needs of the few over the needs of the many”. Households remain financially repressed and Xi’s assault on housing wealth has depressed well-off urbanites.
Eventually, Beijing will need to find an alternative to its rigid zero-Covid policy but by then the damage it has done to the economy may be too difficult to reverse. This is yet one more reminder that in Xi’s China, politics, ideology and national security come before economic pragmatism. Investors would be wise to take note.