Xi has incentive to crank up growth in 2022
The trajectory of China’s economy is even more impossible to predict this year than usual. Analysts aren’t struggling simply to track risks, headwinds or financial imponderables, but also the whims of one man: Xi Jinping.
More than ever, this is a time in which investors’ China bets depend on which President Xi shows up. As markets learned the hard way in 2021, policy schizophrenia is very much on the table in Beijing’s halls of power.
One Xi carried out a once-in-a-generation assault on Big Tech, froth in the property sector and deleveraging broadsides across China Inc. Among the wreckage: Jack Ma’s lost grip on the e-commerce and fintech juggernauts Xi’s men once celebrated; Didi Global’s once blockbuster of a share listing; the once-thriving tutoring business; and others.
The other Xi gave the People’s Bank of China (PBOC) space in the waning weeks of 2021 to safeguard growth. The PBOC’s move to loosen reserve requirements for banks and other steps to support demand is largely behind the current relative optimism about China’s 2022 prospects.
Xi’s overriding goal is securing an unprecedented third term as Communist Party leader. He’s realizing – it seems, and the world hopes – that commandeering control of tycoons must take a back seat to restoring rapid economic growth.
With the World Bank predicting the weakest growth for China in decades – 5.1%, which would be the second slowest pace since 1990 – Xi has every incentive to speed up the gross domestic product’s (GDP) trajectory.
Even more so with top economists like Wang Jun at Zhongyuan Bank flagging “triple pressures” to getting growth back to about 6%.
In Wang’s telling, Xi’s government confronts weakening demand, dwindling confidence and intensifying supply-chain disruptions all made worse by an Omicron variant now upending the globe.
“If demand improves, then expectations will improve,” Wang says.
The “if” here would be big enough if not for the Xi-versus-Xi question that investors confront between now and the 20th Communist Party of China Congress expected to start around November.
“Having led the country for almost a decade, Xi has undertaken unprecedented campaigns to fight corruption, reform the military and eliminate poverty,” notes Suzanne Maloney, a policy analyst at the Brookings Institution. “But what plans, priorities and challenges lie ahead for his anticipated third term?”
Only Xi and his most trusted allies know.
There’s an argument that Xi’s ambition to surpass Deng Xiaoping in the pantheon of Chinese leaders is GDP-positive for these next 12 months. At the very least, argues Larry Hu, Macquarie Bank’s chief China economist, it portends better days for the property sector.
“Property policy should shift from tightening to loosening,” as, “we expect policymakers to defend 5% GDP growth,” Hu said. “The risk is that they might react too late, given their reluctance in using property as the vehicle for stimulus.”
The contagion fears emanating from highly-indebted developers like China Evergrande Group devastated domestic confidence. Tighter financial conditions brought on by Xi’s multi-year effort to reduce leverage collided with the pandemic in unexpected ways, sending sales and prices spiraling lower.
This dangerous interplay makes the real-estate sector “the biggest growth headwind in 2022,” Hu says. Without bigger policy actions, investment in real estate could plummet, declining by 2% following a 4.8% increase in 2021.
In late December, Fitch Ratings noted the growing importance of property-related sales as “an important source of funding for local and regional governments in China.”
This economic engine, mostly from sales of land-use rights, accounts for about 25% of their annual fiscal revenues.
“A fall in these revenues would affect local and regional governments’ ability to support highly geared local-government financing vehicles,” says Fitch analyst Janice Chong.
Chong’s team conducted a stress test of Chinese property developers publicly rated by Fitch. It “highlighted potential liquidity strain for close to one-third of the portfolio under a severe scenario involving a 30% decline in residential home sales revenue in 2022,” Chong notes.
“Such a scenario could also worsen credit polarization among public-finance entities, as well as have ripple effects on related sectors, such as construction, engineering and commodities.”
Along with a downturn in housing sales, Fitch’s “severe scenario envisages tight financing conditions up to June 2022, with onshore and offshore bond maturities needing to be repaid from internal resources, and some net repayment of trust loans and bank borrowing,” Chong says.
The scenario differs from Fitch’s baseline assumption of a 10% to 15% drop in property sales revenue over 2022.
In other words, Xi and the PBOC have every incentive to cauterize these risks ahead of the 20th Party Congress. The urgency might only increase as fresh waves of Covid-19 imperil exports everywhere.
“The most important market-mover is Omicron,” says analyst Yohay Elam at FXStreet.com. Recently, Elam says, markets “see the glass half-full, hoping that this wave would subside as quickly as it rises. Optimism is good for stocks and weighs on the safe-haven dollar.”
Only time will tell. But other uncertainties abound, from the timing of US Federal Reserve interest rate hikes to the direction of global inflation.
“Other factors,” Elam says, “include worries about China’s Evergrande, tensions between Russia and Ukraine, and commentary by market analysts about the prospects of the global economy. These factors come into play only in the absence of virus or inflation fears.”
Uncertainty about US growth matters greatly for China. As Omicron rips through the biggest economy, there’s no telling how much global growth might undershoot expectations.
Yet Xi’s reputed designs on lifetime rule are the main source of intrigue. The key, notes economist Jianguang Shen at e-commerce giant JD.com, is “how consumption recovers” as this year unfolds.
Count economists at Morgan Stanley among the optimists as they bet Asia’s biggest economy is recovering from a “mini-downturn.” In a recent report, they made clear that their bank is “more bullish than consensus” and reckon China will grow 5.5% in 2022.
Deutsche Bank is a bit more pessimistic, expecting roughly 5%. Nomura Holdings is on the lower end, predicting 4.3%.
Morgan Stanley’s rationale for a better showing by China has four pillars.
One is an end to PBOC austerity and Xi’s regulatory crackdowns. China, the bank notes, has been carrying out “aggressive deleveraging” to curb property excesses. Morgan Stanley economists estimate that slashed the sector’s debt-to-GDP ratio by 10 percentage points in 2021 alone.
Two: the odds of even more assertive stimulus efforts. Morgan Stanley economists are expecting a “recalibration” or intensification of support policies “now well underway.” That includes Xi’s regulators prodding banks to boost mortgage loans and scaling back limits on property purchases in certain cities.
Three: less aggressive curbs on energy imports and emissions. While no boon for Beijing’s carbon footprint in the intermediate term, odds are high that energy targets will be “reset,” Morgan Stanley says. “Once the issue of coal shortages surfaced, policymakers have intervened quickly and effectively,” the bank’s economists say.
Four: export markets are likely to impress this year, offering Xi’s economy a timely pick-me-up. The strength of the export engine, though, is partly contingent upon exchange rates. The yuan’s 2.8% rise versus the dollar in 2021 is likely to continue in the months ahead.
That, says strategist Geoffrey Yu at BNY Mellon, will leave the PBOC “reluctant to let it strengthen aggressively” as the year unfolds.
Either way, Xi’s incentive structure appears different as 2022 begins to where it was in 2021.
A year ago, Xi’s designs on a third term had him showing tech billionaires and property tycoons who’s boss. Now his fortunes may be more aligned with hitting the GDP accelerator just as hard as he hit the tycoons in 2021.
Author: WILLIAM PESEK, Asia Times