Commentary on Political Economy

Sunday 3 April 2022


What China’s leaders are discussing behind closed doors

China’s political leaders have been extremely reluctant to disclose what was discussed at last week’s meeting - which suggests that the topics are considered to be extremely sensitive.

Karen MaleyColumnist

It was an astonishingly brief release, even by the tight-lipped standards of China’s political leadership.

At only 114 characters, the statement released after important meeting of the Communist Party Politburo last week was by far the shortest in President Xi Jinping’s decade-long rule. It was also the first time that there was no mention of the specific topics that were discussed.

Now, it’s clear that the world’s second largest economy is confronting some huge challenges. And that this is politically sensitive time.

Chinese President Xi Jinping is applauded by members of the government as he arrives at the opening session of the National Peoples Congress in Beijing on March 5. Getty

After all, Xi, who is China’s most powerful leader in decades, is anxious to avoid disruption ahead of an important Communist Party Congress late this year when he is expected to secure another term in power.

But the extraordinary brevity of last week’s statement signposts that the 25-member Politburo not only discussed issues that are important to China, but that these matters are so highly sensitive that China’s leadership is reluctant to even acknowledge their concerns.

And this suggests that one of the items of discussion was the difficult issue of Beijing’s support for Russia’s invasion of Ukraine.

Before the invasion, Xi met Russian President Vladimir Putin and highlighted their warming relationship on the sidelines of the Beijing Olympics, releasing a long joint statement which declared that the bonds between China and Russia had “no limits”.

Since then, Beijing has refused to condemn Russia’s invasion of Ukraine and has sharply criticised what it calls illegal and unilateral Western sanctions.

The problem is that Beijing’s tacit support for Moscow could prove counter-productive, given the European Union’s stance on China.

And that could jeopardise one of China’s most important economic relationships at a time when Beijing’s relationship with Washington has frayed. Bilateral trade the European Union and China amounted to $US828 billion in 2021.

It’s also probable that the Chinese leadership discussed the mounting threats to the Chinese economy, from soaring commodity prices and the country’s persistence with its zero-Covid policy.

Last week Shanghai – one of China’s largest and most prosperous cities - imposed a two phase lockdown in an attempt to curb a growing coronavirus outbreak.

Shanghai, which has a population of 25 million people, accounts for roughly 4 per cent of China’s total economic output and is an important financial centre as well as boasting the world’s busiest port.

The economic cost of the lockdowns, however, is becoming increasing apparent.

Official surveys show that China’s massive manufacturing sector contracted in March, as lockdowns hit factories in industrial regions ranging from the northeastern city of Changchun to the southern tech hub of Shenzhen.

China’s official purchasing managers index for the manufacturing sector dropped to 49.5 in March from 50.2 in February. A reading below 50 indicates contraction.

Even more alarming, foreign demand for Chinese-made goods is also ebbing, with a measure of new export orders falling to 47.2 in March from 49.0 in February.

Meanwhile, the lockdowns are also slowing activity in the services sector, as people stay away from shopping centres, restaurants and hotels.

Although Chinese premier Li Keqiang last week repeated the government’s growth target for the year of about 5.5 per cent, many believe this is over optimistic.

In the latest budget, Treasury forecasts that China’s economy will grow by 4.75 per cent in 2022.

“Chinese growth is expected to be hampered this year by challenges managing the pandemic, higher prices for energy imports and an already slowing property sector,” Treasury says.

“China is likely to experience more frequent and severe COVID-19 outbreaks this year than in 2021, with a continuation of its aggressive suppression approach to managing the virus likely to lead to more frequent lockdowns and disruptions to industrial production and normal consumption patterns.”

Still, Treasury expects Beijing will boost spending to prevent Chinese economic activity from braking too sharply.

“These headwinds will be partly offset by more supportive macroeconomic policy settings as central authorities have signalled an increasing willingness to support their ambitious growth target over other policy objectives in the near term.”

Meanwhile, the downturn in the China’s property market appears to be gathering momentum, with the country’s 100 biggest property developers recording a 53 per cent drop in sales in March from a year earlier, according to China Real Estate Information Corp.

The vicious slowdown in property sales is putting yet more pressure on cash-strapped developers, which have now been almost completely locked out of global debt markets. Investors have shied away from lending to debt-laden Chinese property developers after a string of defaults rattled their confidence.

Beijing has been forced to intervene to shore up the property sector – which accounts for around 25 per cent of the country’s economic output – and has urged banks to boost real estate lending.

And Chinese authorities are also preparing plans to provide a capital backstop for banks that are saddled with a growing number of problem loans to debt-laden property developers.

The problems in the property sector, however, means that Beijing will be heavily depending on infrastructure spending to bolster economic growth this year.

China’s Xi Jinping with Russian President Vladimir Putin earlier this year. The two declared the bonds between China and Russia had “no limits”. AP

Local governments have ramped up their bond issuance in the first three months of the year, raising more than double the funds raised in the first quarter of 2021.

Much of the money raised is ear-marked for infrastructure investment, including for industrial parks and transport projects.

The surge in local government borrowing represents a reversal of Beijing’s efforts to tackle the huge levels of debt that local governments have built up, much of which has been spent on projects of little economic merit.

Still, the country’s ongoing property slump, and its resort to low-quality infrastructure spending to boost economic growth, will do little to raise the sagging confidence of foreign investors.

Indeed, it’s likely that at their meeting last week Chinese leaders discussed the threat to financial stability from the accelerating capital outflows from the country.

According to the Institute of International Finance, there’s been an “unprecedented” surge in outflows from China starting in late February.

It appears that global investors are becoming increasingly nervous about the political risk of their financial exposure to China following Russia’s invasion of Ukraine.

They fear that Beijing might feel obligated to provide military equipment to Russia and that China would then itself face punitive economic sanctions.

As a result, foreign investors slashed their holdings of Chinese government bonds by $US5.5 billion in February, the largest monthly reduction on record.

In late January, hedge fund billionaire George Soros warned that the highly infectious Omicron COVID-19 variant “threatens to be Xi Jinping’s undoing”, and warned that the problems in China’s property market woes put the country at risk of an economic crisis.

“It remains to be seen how the authorities will handle [the real estate] crisis,“ he said in a speech at Stanford University’s Hoover Institution.

“Xi Jinping has many tools available to reestablish confidence – the question is whether he will use them properly. In my opinion, the second quarter of 2022 will show whether he has succeeded.”

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