Nov 2022


Loyalty first

China’s President Xi Jinping has picked acolytes to steer the country through an economic storm. Duncan Bartlett reports on themood of panic that ran through financial markets after the new team was announced


Some investors responded to October’s political speeches by Xi Jinping by buying weapons of war.The day after the 20th Party Congress in Beijing concluded, there was a rise in the share price of Anhui Great Wall Military Industry Company, which manufactures rockets, mortars and bullets.

The firm, which is based in Hefei but lists its shares on the Shanghai stock exchange, was among several Chinese defence firms to increase in value, in response to an amendment to China’s constitution which formalises opposition to Taiwanese independence.

President Xi Jinping – who has gained athird five-year term in office – refused to rule out the use of force to ‘reunite’ the self-governing island with the mainland. He told Congress: ‘Resolving the Taiwan question is a matter for the Chinese, a matter that must be resolved by the Chinese.’

He added: ‘We will continue to strive for peaceful reunification with the greatest sincerity and the utmost effort, but we will never promise to renounce the use of force, and we reserve the option of taking all measures necessary.’

Despite reassurances by President Biden that US troops would come to Taiwan’s defence if it is attacked, Xi Jinping then used a remark which was widely quoted in the international media: ‘Complete reunification of our country must be realised, and it can, without doubt, be realised.’

The prospect of war with Taiwan may be relished by a few extremists in China but most investors deplore the prospect.

After the Congress, Hong Kong stocks fell to levels last seen during the financial crisis. Tech companies such as Albibaba and Tencent did particularly badly and China’s currency slumped to its weakest level against the US dollar in 14 years.

Alongside worries about Taiwan, investors fear a further clampdown on tech companies, more tough zero-Covid lockdowns and weak economic growth.

Symbols of Chinese & US currency
After the Congress, China’s currency slumped to its weakest level against the US dollar in 14 years

A decision to delay the publication of economic data created further uncertainty. When the figures were finally issued in late October, they stated that China’s economy grew 3.9% in the July-to-September quarter, compared to the same period last year.

During the Congress, Xi Jinping claimed: ‘The Chinese economy has great resilience and potential. Its strong fundamentals will not change and it will remain on a positive trajectory over the long run.’

However, many economists take a different view.

The concept of common prosperity was mentioned frequently at the Congress meeting

‘Our research suggests that output declined in September by the most since the Omicron wave,’ says Julian Evans-Pritchard, Senior China Economist at Capital Economics.‘The main culprit – renewed disruption from virus curbs – appears to have worsened further this month. We think the economy will contract this year and will continue to struggle in 2023.’
There is little prospect of China lifting its zero Covid-policy in the near term and Mr Evans-Pritchard does not expect a meaningful relaxation before 2024. ‘Recurring virus disruptions will continue to weigh on in-person activity and further large-scale lockdown cannot be ruled out,’ he says.
Dr Yu Jie, Senior Research Fellow on China at the Asia-Pacific Programme at Chatham House, says that the zero-Covid policy ordered by Xi Jinping discourages much-needed investment and has failed to win the hearts and minds of Chinese youth, who have suffered economically and socially.
She sees other problems too, especially related to a slump in the property market. Sales of new homes are down sharply, causing difficulties for local governments which supply land. The danger is that debts spread through the banking system, destabilising the economy.
‘The challenge facing Xi Jinping over the next five years will be to manage the financial risks in downsizing China’s property sector, while coming out of a rigidly imposed Covid lockdown, without reducing economic growth to such an extent that it damages the personal wealth of millions of people,’ says Dr Yu.

STORM WARNING: At the Congress, Xi Jinping predicted‘strong winds and high waves’ for China’s economy

The concept of common prosperity was mentioned frequently at the Congress meeting. The phrase has a socialist ring to it and there are moves to boost lower and middle-class earnings, as well as to expand China’s welfare and social security programmes.

However, these are limited in scope and common prosperity can also be used as an excuse for the CCP to move against the private sector. Dr Yu notes that Xi Jinping has clamped down on China’s most successful enterprises. ‘Private companies provide 80 percent of China’s jobs but they are worried that the common prosperity initiative may jeopardise their business,’ she warns.

The Chinese Communist Party’s 2022 Congress was not a forum to debate policy. Rather, it was a ceremony to legitimise the party and for delegates to approve high level decisions, according to Dr Holly Snape, a China expert from the University of Glasgow.

Investors are concerned there is no scope for compromise on the relationship between the Communist Party and private business

The Congress started with a summary of the party’s recent achievements before setting out its priorities for the future. Dr Snape believes that as Xi Jinping tightens his grip on power, collective leadership is being phased out.

‘The crucial process of drafting the opening speech was under Xi Jinping’s control. This is a break from the past. Previous leaders stepped back from the drafting process, passing on that responsibility to their successors. This time, it was Xi himself who took direct control of the report’s themes and content. The slightly more collective approach of past decades has become even more rigid and closed,’ says Dr Snape.

Another way in which General Secretary Xi has consolidated power is to select a group of loyalists to serve alongside him on the Standing Committee of the Communist Party.

According to Professor Steve Tsang, director of the SOAS China Institute, the country’s top policy-making body will be filled by people who are exclusively political co-cooperates of Xi Jinping. ‘None of them have shown expertise on how to handle the economy or the financial sector,’he says.

Such loyalists have little inclination to challenge their leaders’ decisions, even if they feel they are illogical or in conflict with the national interest. Investors are concerned that there is no scope left for compromise on the relationship between the Communist Party and private business.

At the Congress, Xi Jinping warned people to be prepared for ‘strong winds and high waves and even dangerous storms’.

Professor Tsang raises another warning flag.‘The Chinese economy is slowing down and facing headwinds,’ he says. ‘China is entering this storm with a group of leaders who are ill-suited to meet the challenges.’

Duncan Bartlett is the Editor of Asian Affairs

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