China’s economic rebound remains distant. Investors remain unnerved by Beijing’s zero-Covid policy of strict lockdowns and widespread crackdowns on private enterprise. These crackdowns have hit both property and tech industries hard, leading to some healthy developers such as Evergrande to miss payments or default.
China’s governance structure is generally decentralized; policies can come from both bureaucracies and ministries as well as advisors or think tanks.
China
China (officially the People’s Republic of China) is a large East Asian country spanning five time zones and fourteen nations, boasting 1.4 billion people and the second-largest economy globally. The Communist Party of China holds power within this socialist-governed state nation.
Since President Xi’s ascent to power, his party has tightened its hold over power by implementing policies designed to muzzle dissent, limit foreign investment and tighten state control of the economy. These actions have caused tension with Western governments as well as decreased investor trust in China.
Last week, an important meeting helped shape China’s economic strategy for 2019. The official readout reveals regret at the harm caused by overzealous policy; yet also sets forth plans for higher quality growth and security in 2019. China seeks to move away from low-skill manufacturing towards an economy more closely aligned with Western standards in order to compete more successfully against them.
Why is the government cracking down on negativity over the economy?
Entrepreneurs with confidence tend to spend, yet Chinese entrepreneurs have been disillusioned by a combination of paralysing lockdowns and unprecedented crackdowns against private companies’ alleged excesses. Coupled with property market decline and geopolitical tensions with the U.S., these policies have contributed to slowing the economy and decreasing consumer spending.
China’s leaders understand this and have begun making incremental course corrections to restore trust. At an important leadership meeting this week, the National Development and Reform Commission pledged to bolster countercyclical regulation while expanding policy options available to them.
These steps may not be sufficient to revive the economy and lift markets immediately, but they signal a return to pragmatic politics – a reason for hope that Beijing’s efforts will eventually succeed despite any delays; just remember how China built its economy through market-based reforms that minimized state involvement in its economy in the first place.
What are the implications for China’s economy?
Many believe the government must act swiftly if it hopes to restore consumer and business trust. A recent survey shows consumer sentiment peaked early compared to previous recoveries and appears to be declining rapidly.
Beijing had long resisted fiscal and monetary stimulus, fearful that such measures might interfere with efforts to deleverage its economy and lower systemic financial risk. But this may now be changing as China grapples with growing economic imbalances including an enormous debt overhang.
Chinese leaders recently met to discuss economic targets and policies for next year, signaling they intend to increase support for the economy. Meanwhile, private investors and consumers remain exposed to challenges from record high youth unemployment (China stopped publishing official statistics last year), deflation and an anemic property sector as evidenced by an upsurge in missed payments on overseas bonds issued by developers like Evergrande and Country Garden this year.
What are the implications for foreign businesses?
As China struggles with an economic slowdown, foreign companies operating within its borders face several hurdles, from ownership caps and restrictions on industry sectors to pressure to give up technology. According to companies operating here, Beijing prioritises industrial policies, national self-reliance and maintaining social stability over fairness and the rule of law.
The European Chamber survey revealed that one out of ten members have made moves away from China, with many others either postponing or considering this action. Property firms in particular appear concerned as government efforts to boost sales to state firms have come to nothing.
Foreign businesses are on edge following police raids of Bain & Co, Capvision and Mintz Group offices without offering an explanation, raising fears of an increased crackdown on business conduct in China. Authorities declined to comment further. Such raids could have significant ramifications for overseas investors–particularly those working in technology fields–living outside China.