Xi Jinping has become unassailable. Here’s why investors are scared
When Chinese leader Xi Jinping secured a historic third term in office over the weekend and piled his best team with loyalists in a sweep unparalleled since the Mao era, investors were quick to pass judgment.
Chinese stocks listed in Hong Kong and New York tumbled on Monday, and the yuan hit its lowest level against the U.S. dollar in nearly 15 years a day later. In offshore markets, the Chinese currency has traded at its weakest point since data provider Refinitiv began keeping records in 2010.
Xi’s preference for personal loyalty over technocratic competence bodes ill for China’s already bleak economic outlook, analysts said. Replacement seasoned economic managers with people with far less experience also signals a more ideologically driven policy that could further hurt private sector growth and worsen Beijing’s ties with the United States, they added.
« The market is clearly disappointed with the new seven-member Politburo Standing Committee which is filled with Xi allies, » said Lilian Co, who manages the Strategic China Panda Fund at Eric Sturdza Investments.
« Since Xi’s ideology has not been pro-market in recent years, a leadership team loyal to Xi means no change in political direction while he is in power, » she said. declared.
The yuan rebounded slightly on Wednesday and stocks were also slightly higher, following coordinated statements Tuesday night from China’s central bank and various financial regulators that they would maintain stability in China’s currency, markets and financial system. . But there were few signs of enthusiasm in the markets.
Absent from the new management team are senior officials who have supported market reforms and the opening of the economy. Those dismissed included Premier Li Keqiang, Vice Premier Liu He and central bank governor Yi Gang.
Investors fear Xi’s tightening grip on power will mean a continuation of policies such as the zero Covid strategy and a crackdown on the private sector that have already done serious damage to the world’s second-largest economy.
Analysts also fear that the withdrawal of reformists from the Communist Party leadership will mean that no one will dare to tell Xi he is wrong if his political program fails.
« The fact that Xi has broken with a long tradition of representing members of both wings of the party in China’s highest political committee paves the way for a style of leadership that prioritizes personal loyalties over skill and competence. to productive speech, » said Sonja Opper, a professor at Bocconi University. and an expert on the Chinese economy.
“Indeed, Xi Jinping is establishing an echo chamber around his own ideas,” she said. « The risk is that Chinese leaders will isolate themselves and lose sight of alternative, or even better, ways to address the many challenges facing the country. »
Frequent Covid lockdowns have hampered consumer spending, disrupted supply chains and caused massive job losses. The country’s once vibrant private sector is suffocating under Xi’s « common prosperity » campaign. A lingering real estate crisis and a weakening global economy compounded the problems.
The World Bank recently lowered its forecast for China’s growth to 2.8% in 2022, the first time it predicted the Chinese economy would lag the rest of Asia since 1990. The official target Beijing is 5.5% growth for this year.
Analysts say if Xi closes the door on market liberalization, policies could be increasingly driven by ideology, further harming private industry and heightening US-China tensions.
« Xi’s vision is nothing less than a new economic order steeped in ideology, » said Craig Singleton, senior China researcher at the Foundation for Defense of Democracies, a Washington-based think tank.
Extending his term only locks in China’s current economic orientation – one « unabashedly hostile » to free market forces, he said.
Xi’s announcement last week that China’s definition of national security should be expanded to include at least 16 different areas – including military, territorial, technological, economic, food, energy, resource and supply chains. supply – will further complicate matters.
« These economic issues intersect with key facets of the U.S.-China relationship, which means that the deterioration of ties will not be limited to traditional points of cleavage, such as Taiwan or the South China Sea, » Singleton added.
Personnel changes have also been remarkable.
Li Qiang, the Shanghai party leader who presided over the city’s chaotic two-month lockdown, is now the party’s second-highest ranking official after Xi. This puts him in line to succeed Premier Li Keqiang when he steps down in March. He will be faced with the task of managing economy of nearly $18 trillion.
Li, 63, would be the first prime minister since the Mao era not to have previously served in the State Council – China’s cabinet – as a deputy premier, analysts have pointed out.
“Li has no central government experience,” said Julian Evans-Pritchard, senior China economist at Capital Economics. « And his track record at grassroots level isn’t perfect – he missed Shanghai’s initial response to the Omicron wave earlier this year. »
His nomination over more qualified candidates is a clear example that « official promotion has become less meritocratic under Xi », with loyalty and personal ties increasingly taking precedence over bureaucratic credentials, he added. .
Equally remarkable are those who have been discarded.
Liu He, who led negotiations with the United States during the trade war in 2018 and 2019, lost his seat in the Party’s Central Committee, which has 205 members.
« [His] The departure means the loss of one of China’s few foreign-trained, reform-minded economists to a top leadership position,” Evans-Pritchard also said.
Liu was seen by many as « a bridge between East and West, and someone who understood the value of the market and the private sector, » Singleton said.
The man tipped to replace Liu as deputy prime minister for economic affairs is He Lifeng, head of the National Development and Reform Commission and new face of the 24-member Politburo. The NDRC is China’s chief economic planner, responsible for developing the country’s economic plans and supervising major state investment projects.
« Although He Lifeng is a university-educated economist, like Liu He, his background suggests he is likely to favor a more statist approach to economic management, » Evans-Pritchard said.
It remains to be seen who will occupy the most important economic positions until the official announcements are made in March. But given the way the leadership reshuffle has unfolded so far, analysts fear that loyal but less capable people will be chosen.
« The quality of policy-making has suffered in recent years as officials have increasingly focused on demonstrations of loyalty and less on good governance and economic performance, » Evans-Pritchard said.
« This trend could get worse now that Xi has surrounded himself with ‘yes’ men, » he added.
Xi’s consolidation of power risks undermining productivity and growth, rather than boosting them as he hoped.
« As Xi now closes the door on market liberalization, American businesses and especially American financial services firms may have to reconsider their current and future investments in China, which could only further exacerbate the many serious economic challenges the country is facing, » Singleton said.