There’s just over two weeks to when President Xi Jinping becomes the ruler of China for a third five-year period and the most powerful man in the country since Chairman Mao, and it won’t do the economy he has shaped in the past 10 years one bit of good.
Under Xi, China is looking at slowing growth, a shrinking population, the growing potential of a property crisis, and growing isolation globally as his belligerent foreign policy and attacks on business success stories like Alibaba feed rising suspicion about the country’s future direction.
His hardline attempts to crush Covid have driven the economy to the edge of a recession with no apology. That has helped pushed the value of the yuan down to more than 7.2 to the US dollar – a 14 year low, with no change in sight as the global investors pour money into the greenback in fear of a growing global recession.
So it should come as little surprise that with the economy tanking, there’s a growing list of economic downgrades for China in recent weeks.
Surveys of manufacturing activity for last month were issued on Friday before the break from both the National Bureau of Statistics (NBS) and the Caixin group. Both showed manufacturing activity just back in expansion (50 is the dividing line between expansion – above – and contraction – below).
But the official survey of services by the NBS showed a sharp slowing in the pace of expansion (retailing etc) because of the repeated partial lockdowns.
The World Bank has cut its economic growth forecast for China this year to 2.8%, down from an April estimate of 5% while at the same time revising upwards its 2022 expectations for the rest of developing East Asia and the Pacific, from 4.8% to 5.3%.
2023 growth for China has been estimated at a weak 4.5%, less than the April estimate for this year and confirmation the economy is now going to perform anywhere near its potential in the first full year of President Xi Jinping’s historic third term.
China heads into the week-long National Day holiday break from today (October 1) and then the Communist Party Congress on the 16th with 2,296 delegates representing the Party’s estimated 90 million members.
They will vote to install Xi as President for an unprecedented third term since he had the rules changed to allow him to stand again.
He could get new titles such as ‘leader for life’ or Chairman of the Chinese Communist Party, a title not used since 1982 when it was replaced by the title General Secretary.
The congress will of course ignore the negatives from Xi’s policies, unlike the World Bank which highlighted damage from Xi’s zero-Covid policy and the country’s continuing property market slump, while the rest of developing East Asia and the Pacific is poised to grow much faster.
The World Bank is just the latest organisation to revise down its growth forecast for China, a discomfort for President Xi.
His election will come as the country’s economy suffers its greatest problems for two decades (excluding the brief slump and surge in the first wave of the China-originating Covid pandemic in 2020).
On Monday the Organisation for Economic Co-Operation and Development (OECD) cut its growth estimate for China this year to 3.2%, “but policy support could help growth recover in 2023,” it added.
The OECD forecast China’s growth to rebound to 4.7% in 2023 which is still well short of the first official estimate from President Xi’s government of “about 5.5%”.
Last week the Asian Development Bank also downgraded its forecast for China’s 2022 growth, from 5% in April to 3.3%. It also predicted China’s GDP in 2023 would now only grow 4.5% instead of 4.8%.
In August, Standard Chartered and Goldman Sachs lowered their growth expectations to 3.3% and 3%, respectively.
In July, the International Monetary Fund downgraded its forecast to 3.3% from 4.4% in April, in what is seen around the world as the best estimate.
The slide in growth estimates came as China’s policymakers, from the Politburo down stopped talking about the official 2022 GDP growth estimate of ‘about’ 5.5% growth in an apparent acceptance of the continuing weakness.
All the factors blamed for the slowdown in the economy – Covid lockdowns, weak growth, a harsh crackdown on business, especially private tech companies, the strange idea Xi has for Chinese self-sufficiency and the refusal to extend any significant help to the tottering property sector (piecemeal assistance has been announced, but that’s all) – can be laid at Xi’s door, and that of his supporters in the Communist Party.]
The threats to Taiwan and the support of Russia’s invasion of Ukraine are two other stances that have helped undermine China’s economic strength and standing – both are key Xi policies.
The only factor beyond his control has been the severe drought in much of the southwest and centre of the country.
All this has left China vulnerable to the slowing global economy and the effects on inflation and demand from Putin (with Xi’s support) invasion of Ukraine.
Much to the chagrin of the Chinese and Xi, the strength of the US dollar has crushed the yuan to 28-month lows and while that has made Chinese exports more competitive (without much gain in August) it has also lifted the cost of imports at a time when global prices have fallen sharply (especially for oil, copper and other metals).
“Amid multiple domestic and external headwinds, China’s GDP growth is expected to slow sharply,” the World Bank said in its October economic update for the region, which was released this week.
“Tight mobility restrictions in response to Omicron outbreaks have weighed on growth while persistent stress in the real estate sector has exacerbated downward pressure on economic activity.”
Neil Shearing, group chief economist at Capital Economics, called China’s recent economic performance “dismal” in a recent update, adding he does not “expect the Chinese economy to grow at all” this year.
He highlighted constraints preventing policymakers from shoring up growth, such as recent moves by the People’s Bank of China to offset a surging US dollar, as well concern about re-inflating the property bubble.
“If anything, the direction of travel is away from the measures needed to reinvigorate growth,” he said.
In contrast, the World Bank revised upwards its 2022 expectations for the rest of developing East Asia and Pacific region from 4.8% to 5.3%^, thanks to a rebound in domestic demand and exports as countries relax their Covid-19 restrictions.
Vietnam’s economy, which saw the second largest upward revision in East Asia, is expected to grow 7.2% this year, up from the 5.3% forecast in April. Malaysia has had its growth estimate pushed up to 6.4% from 5.5%.
However, slowing global demand amid rising inflation and recessionary risks is clouding the regional outlook for next year.
The slide in the value of the yuan though is the most accurate downgrade of China’s prospects – so much so that in typical Xi fashion, regulators have warned against speculating or ‘gambling’ in currencies to force the yuan lower.
Wednesday saw China’s central bank officials warn investors to not bet on the depreciation of the yuan, after the onshore yuan extended losses and hit its lowest level against the dollar since 2008.
“The foreign exchange market is of great importance, and maintaining stability is the first priority,” said Liu Guoqiang, deputy governor of the People’s Bank of China in a meeting this week with the China Foreign Exchange Market Self-Regulated Body, a group of banks that helps oversee China’s foreign-exchange market, according to western media reports.
In the same meeting, the central bank asked banks to consciously maintain the stability of the foreign exchange market and curb swings in the exchange rate, according to a statement released at the end
There is a small number of enterprises following the trend of ‘ foreign exchange speculation ‘ and some financial institutions have illegal operations, said Mr. Liu, adding that the government will ” strengthen guidance and correction.”
The offshore yuan weakened to more than 7.2 to the dollar this week amid recent attempts by the country’s central bank to support the yuan by allowing banks to hold fewer assets against their foreign exchange holdings.
The People’s Bank of China trimmed the amount of foreign currency deposits Chinese banks are required to hold as reserves to 6% from 8% as of September 15.
That increases the amount of dollars and other foreign currency available to buy yuan, which should push up the exchange rate. It hasn’t – the rate was 6.99 Yuan to the US dollar on September 15, Thursday it was 7.20.
