Xi faces ‘rockiest economy in decades’ on eve of party congress

On the eve of a landmark Communist Party congress that’s set to confirm Xi Jinping’s third term in power, China’s economy is confronted with one of its most challenging periods in decades as household and business confidence plummets.

Latest data paint a picture of a weak economy, largely a consequence of Xi’s zero-tolerance approach to combating Covid infections and a crackdown on property sector debt. 

Consumer-price figures for September raised the possibility of deflation in the economy as demand slumps. High-frequency indicators and a spike in Covid cases suggest economic weakness continued into October. Trade data — expected to be published Friday — will likely show exports, which have supported the economy through the pandemic, are slowing as European economies and the US stand on the brink of recession. 

“Xi needs to respond to the rockiest economy Beijing has faced in decades,” said Jacob Gunter, a senior economy analyst at the Mercator Institute for China Studies in Germany.

Confidence data is particularly concerning, with household expectations for the job market dropping to a record low in the third quarter, and a reluctance to spend meaning bank savings jumped 56% so far this year compared to 2021. Business surveys show their confidence is unusually low, making them reluctant to hire and invest. 

Ren Zhengfei, founder of tech giant Huawei Technologies Co., summed up the bleak mood of many business owners in a recent memo telling employees that the next decade would be “a very painful historical period” due to the pandemic, war in Ukraine and a “blockade” by the US on some Chinese companies. The priority is to “survive and earn a little money where we can,” he added.

“All the stimulus and policy signaling in the world isn’t going to improve consumer confidence in cities like Shanghai where people are only ever a moment away from another lockdown,” Gunter said. 

Evidence of a weak economy is everywhere. Households are reluctant to take on mortgage debt because of low confidence in their future income prospects. Property sales by China’s largest developers plunged 38% on-year during a key sales period earlier this month.

China’s currency, seen by many in China as a barometer of economic strength, is at a 14-year low against the US dollar.

Third-quarter gross domestic product data, due to be released in the middle of the congress next week, will likely show a “feeble recovery,” from almost zero year-on-year growth in the previous quarter, according to Bloomberg Economics. 

Economists still think China’s GDP can grow by about 3% this year because of considerable fiscal stimulus — possibly larger than 2020 by some estimates — being pumped into infrastructure spending. Stronger bank credit in September was driven mainly by lending for infrastructure while mortgage-related demand remained weak.

But despite that stimulus, the slowdown in housing investment means the infrastructure boom isn’t yet sufficient to drive a strong construction recovery, according to high-frequency data tracked by Bloomberg.

Xi is likely to double-down on his coronavirus and housing policies at the congress.

“I do not think that the government is spooked. They think it’s really necessary to constrain the growth of the property sector. And Xi has staked his own personal credibility on the Zero Covid policy,” Arthur Kroeber, head of research at Gavekal Dragonomics, said at a briefing on Thursday. “I don’t think we should be building in a significant pivot into our models for the next year to 15 months.”

Washington intensified a campaign against China’s technological development last week, imposing its strictest ever sanctions to curb China’s burgeoning microchip, artificial intelligence and supercomputing sectors. Xi could signal at the congress that the priority will be insulating China’s economy from such sanctions, even at the cost of short-term growth. Analysts say there’s a chance he could drop a slogan that development is the party’s “top priority” in favor of “balancing development and security.”

Xi has been trying to prepare China’s population for a tough period ahead. In a speech re-published as the lead article in September by the high-profile party journal Qiushi. he said “to achieve great dreams, we must have great struggles.” He added that “society advances in the movement of contradictions, and where there are contradictions, there will be struggles.” 

The president has tackled several economic crises since coming to power in 2012 — including a stock market crash and unprecedented capital flight around 2015, the collapse of several local banks, and the pandemic’s outbreak in 2020. In each case, GDP growth rebounded due to a shift in policies.

Kroeber said growth in 2023 is unlikely to be much higher than 3%. But he cautioned that “the current narrative is too much based on extrapolating some short-term factors that are likely to change in the next year or two.” A significant loosening in the property sector and relaxation of the Covid Zero policy after that would lead to a “bounce back” in demand, he added. – BLOOMBERG