Reasons why Chinese investors are optimistic that the worst is over

Bloomberg published an article on the Chinese economy that was greatly affected by President Xi's strict COVID-19 policies that led to intense contractions within the markets, however recent market-friendly moves seem to indicate a positive trend of improvement. Caliber.Az reprints this report.

"After years of watching China’s economy take a beating from Covid Zero and moves to rein in the property and tech sectors, investors are suddenly optimistic that the worst is over.

The abrupt U-turn on strict Covid restrictions in early December 2022 has been swiftly followed up by other market-friendly changes. China is ending a two-year ban on Australian coal imports, easing up on tech giants like Alibaba Group Holding Ltd. and dialing back the stringent 'three red lines' that exacerbated a property meltdown.

The question now is whether the policy overhaul represents a swing toward the flexibility that helped fuel China’s economic rise over the past four decades, or simply a knee-jerk response to a deteriorating economy and spontaneous anti-lockdown protests. Fresh off securing a third term in October, President Xi Jinping is now surrounded by his closest allies for the foreeseable future.

'The fundamental cause of policy reversals, or swings, is the personalization of decision-making power in one man: President Xi', said Yuen Yuen Ang, a professor of Chinese political economy at Johns Hopkins University. 'Policies become overly dependent on Xi’s personality and ideology, his whims, and the information he receives and doesn’t receive'.

For now, market players are enjoying the ride up. Alibaba and Tencent Holdings Ltd. have gained some $100 billion of market value in 2023, after a year that saw both shed more than a quarter of their capitalization, while the MSCI China Index is up roughly 50% since it hit an 11-year low in October. China’s economy is now forecast to expand by 4.8% this year, compared with little growth in the US and a potential contraction in the Eurozone, according to data compiled by Bloomberg.

Hao Hong, chief economist at Grow Investment Group, called China’s recent changes 'breathtaking', noting there were 'policy pivots in just about every single sector'.

'The environment is more friendly but clearly there are lingering concerns', he said. 'Implementation, consistency and follow up are key'.

One big question mark is the tech sector, which only a few years ago was worth trillions of dollars and hailed as the vanguard of a modern China that would drive economic growth for decades. All that changed in 2020, when regulators killed the initial public offering of Jack Ma-backed Ant Group Co. and then opened the floodgates on probes into tech giants like Alibaba, Meituan and Didi Global Inc.

The messaging around the crackdown fed into a wider political campaign aimed at 'common prosperity', as the Communist Party pushed to build nationalist support in the face of slower growth. Xi cast himself as the 'people’s leader' who served no privileged groups or wealthy special interests, while top officials and state media villainized social-media firms for exploiting user data and gaming companies for creating a generation of lazy, addicted, unproductive youths.

Now, just as suddenly, Xi is enlisting the industry to revitalize the economy. Guo Shuqing, party secretary of the People’s Bank of China, said over the weekend that a regulatory overhaul was ending, with rectification work involving 14 unspecified platform companies 'basically completed'.

Last month Xi’s administration approved new games from Tencent and even foreign developers, and also permitted a sharp expansion of capital for Ant’s consumer-lending affiliate. Ma’s weekend announcement that he was ceding control of Ant raised hopes the company might eventually get to resurrect its IPO — albeit at a fraction of its previous, record-shattering valuation.

'There have been certain sectors and themes that were heavily pressured over the past few years, but I don’t believe the intention was ever to destroy innovation or growth', said Christina Woon, investment director for Asian equities at abrdn plc. 'Ultimately, the consistent thing we see here is a desire for sustainability, be it in growth or stability in the economy, and to avoid systemic risks'.

China’s slowing economy has prompted Xi to call for quality growth and emphasize issues of security, a broad concept encompassing things like preventing pandemics and insulating the financial system from risks. He has also cited the need for self-reliance and breakthroughs in key technologies, particularly as the US moved to curb China’s access to advanced chips and hobble its future growth prospects.

‘Ad Hoc Basis’

But what that looks like in reality remains unclear, and the latest policy tweaks suggest uncertainty over the best way to accomplish those goals.

On chips, China is now pausing massive investments aimed at building a semiconductor industry to compete with the US as a nationwide Covid resurgence strains finances. Despite the latest easing moves, China still hasn’t figured out the best way to harness data from private tech giants to benefit the wider economy. And moves to help the property sector won’t fix the problem of falling demand that could weigh on China’s growth through the end of the decade.

'Xi’s dealing with problems on an ad hoc basis', said Alfred Wu, associate professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy. 'To quote a Chinese idiom: he’s treating the head when there’s headache, and treating the feet when they’re in pain'.

Xi’s consolidation of power also makes it harder for him to get timely information from local officials or divergent viewpoints from his inner circle. Having amassed more power than any Chinese leader since Mao Zedong, Xi has used similar campaign-style mobilization tactics that give lower-ranking cadres even less incentive to speak out against bad policy. Indeed, anything but full-fledged support can mean a missed promotion, loss of a job or even time in jail.

The economic consequences of missteps are particularly great in China, where provinces are the size of European countries and have vastly different economies, making one-size-fits-all policies unlikely to work. Still, it’s uncertain if top Communist Party leaders who backed Xi to ensure promotions will find the nerve to speak out when they disagree.

'In the wake of the zero Covid fiasco Xi’s authority is diminished', said Susan Shirk, a former US State Department official who wrote Overreach: How China Derailed Its Peaceful Rise. 'And therefore these other politicians may be more willing to advocate pragmatic domestic and foreign policy corrections to help revive the domestic economy and repair foreign relations'.

As usual in China, so far there’s little evidence to suggest any wider revolt against Xi. On Monday, he urged officials on the Communist Party’s disciplinary body to enforce rules strictly and ensure there’s no corruption.

Indeed, the swift barrage of changes over the past few months suggests Xi can roll out new orders as quickly as ever — underscoring the potential for the pendulum to swing back again at some point.

'We will see fewer policies in 2023 that leads to market shocks and loss of market confidence, given some lessons that Beijing (or Xi in particular) learned about messing with key sectors', said Adam Ni, publisher of the China Neican newsletter on Chinese politics. 'But will I bet my house on it? No. We just don’t know' ".