Events in China over the past few days have been a culmination of what has been a very challenging couple of years for the world’s second largest economy.
The fall from grace was initially driven by regulatory crackdowns, with China’s ruling party flexing its muscles and reminding everyone who is in charge, as the technology and education sectors came under fire.
But it is the heavily enforced – and growth-inhibiting – Covid-19 zero policy that seems to have finally seen patience snap among the population, resulting in large demonstrations and an unprecedented challenge to President Xi Jinping.
These protests have now spread to some of the biggest cities, with police detaining some of the protestors.
Further concerns include the deliberate clampdown on property development – resulting in a severe liquidity crunch – and geopolitical tensions, notably with the US, leading to worries that productivity growth might slow.
There are also fears that foreign direct investment may be reduced, particularly among sectors that are seen to be sensitive to national security.
Of course, we are also in the midst of a slowdown in growth in China – something that is not helped by the ageing population. The economy grew by 6.7 per cent in the past decade, but growth is now expected to be closer to 3 per cent at the end of the next one.
The coupling of political risks and slowing structural growth rates has created a huge wave of negative sentiment towards the region.
However, there are some positives to remember – not least that it is the only major economy continuing to focus on financial easing while much of the world is tightening.
You also have to consider that Chinese households have been saving since the start of the pandemic, with family bank balances up 42 per cent since the start of 2020 – the money is there to fuel a consumer rebound.
Since February 2021, the market has fallen almost 50 per cent, making it undoubtedly cheap versus its peers and its own recent history. In these difficult times we often look for a catalyst for change, but perhaps we have already seen a turning point for the Chinese economy.
Patience needed – but it is wearing thin
We recently saw China’s 20th Party Congress take place – it occurs every five years to unveil the mid to long-term policy agenda and reshuffle its leadership.
The salient points were that economic growth remains China’s top priority – with the hope of growing China to an income level on par with medium-sized developed countries by 2035.
It also took aim at the aforementioned triumvirate of challenges facing the economy – Covid-zero, the battered property sector and geopolitics.
We will start with Covid – where 20 measures have been put in place to bring some sense of normality to China and prompt an economic recovery.
These include: stopping the tracking of people with minor exposure to Covid cases; reducing those going into quarantine; easing of rules for high-risk cities and towns; and promotion of vaccination amongst the elderly. Attempts are also being made to make it easier to visit from abroad.
