Each of our CHINARoundtables begins by asking each of the members what China issues are top of mind. At the last CHINARoundtable, an institutional investor told the group:
- 'My biggest short-term concern is the extent to which we're going to see easing in 2022.'
- ‘It’s clear that easing is coming but how much - this will be very important when it comes to market impact. But it's a big uncertainty.
My thought is this:
- Every politician going into an election wants a strong economy.
- Xi Jinping is aiming to be reelected (and all indications are he will be) to a third five-year term at the National Party Congress this autumn.
- So Mr. Xi will ease (and stimulate ) as much as he can without creating major headaches to deal with after his reelection.
Not only does Mr. Xi want the economy to be as strong as possible, he also doesn't want any of the many brewing crises to erupt in the runup to the Congress.
- Because, while Mr. Xi looks invincible, he does have enemies and detractors among the political elite who would love to see any crises they could use to make him a two-term leader.
For that reason, I don't see Mr. Xi creating a crisis by, say, invading Taiwan.
- Sure, he'll ramp up the pressure on Taiwan to stoke nationalism, but he won't risk the international sanctions that an invasion would bring - or the risk of defeat.
There are even some indications that he might dial back 'wolf warrior' diplomacy.
- And maybe even be more accommodating in China's relations with the U.S.
When it comes to the economy the often-stated watchword is 'stability.'
- That same word could be applied to everything else in 2022.
In other words, this is Mr. Xi's big year - and nothing better spoil it. Stability.
- And that's the lens you should use to understand everything that happens in China until Mr. Xi's third term is in the bag.
BTW, after I highlighted the recent CHINARoundtable in the last CHINARoundtable, many of you wrote asking me just what the CHINARoundtable is all about.
- So you'll find a short explanation between the discussion of 'stability' and the three examples of the impact of the policy using real estate, monetary policy, and the stock market.
All the best,
1 | My 2022 China Lens
An institutional investor recently asked me to say what the appointment of a hardline general to the command of the Hong Kong garrison ‘means through your lens.’ [Not covered here, but I’m happy to share my take – just shoot me an email.]
- My answer was that my lens for a first-cut to understanding China politics, economics, foreign relations - well, everything - in 2022 is Xi Jinping's reelection.
Mr. Xi is expected to have his third five-year term as China’s leader confirmed at the 20th National Congress of the Chinese Communist Party this autumn.
- Even though his third term appears certain, Mr. Xi is a belt & suspenders kind of guy.
So until his third term is confirmed, I expect that Mr. Xi will do all he can to:
- Increase his support from the Chinese people.
- Avoid any crises that bring into doubt his ability to lead China.
Both of these are crucial because, while Mr. Xi appears invincible, he has enemies and detractors among the political elite – all of whom would happily see him leave after ten years.
- Xi’s bulwark against this is his popularity with the Chinese people – removing him with good cause could result in a popular backlash against the Party.
- And so that his enemies don’t have cause, Mr. Xi doesn’t want any of the many brewing crises to erupt.
So as you try to evaluate anything that happens or to predict what will happen in China in 2022, the first question to ask:
- Does the action bolster Mr. Xi in the runup to the election at the National Party Congress? If not, look deeper.
- If upon a deeper look, you don’t see how an action serves to bolster Mr. Xi, you have probably encountered one of the many tough trade-offs that confront Chinese decision makers.
- The same applies when you don’t see an action that would help Mr. Xi but might be too damaging in the long run (he still has to govern after he’s gotten this third term).
The most obvious example for this last point is juicing the weakening economy with massive investment.
- China's experience has shown, the only way to pay for that investment is by increasing the already bloated debt/GDP ratio.
- Still, we can still expect to see this during the coming year (in fact, it’s already started).
The challenge of us who try to analyze the Chinese economy is to figure out what officials will decide is the right balance of investment-induced GDP growth and added debt.
- And that applies to other aspects as well, such as finding that balance in regulating industries and cracking down on real estate debt, and so on.
The comments to come are about the Chinese economy.
- But the same logic could be useful in analyzing Chinese foreign policy actions, as well as just about everything else.
2 | ‘Stability’
‘Stability’ is the watchword for keeping or increasing the support of the people and avoiding crises.
As Han Wenxiu, deputy director of the Office of the Central Financial and Economic Commission notes in his influential essay, ‘Stabilizing the macroeconomy is not only an economic issue but also a political issue’:
- ‘The 20th National Congress of the Communist Party of China will be held in 2022 [and will likely see Xi Jinping reelected to a third term], and it is extremely important to do a good job in economic work [so that Mr. Xi is elected without a hitch].’
- "Stability" is the most prominent keyword of this Central Economic Work Conference CEWC, with ‘stability’ or ‘stabilize’ mentioned 25 times in the readout.’ [That wasn’t missed in the Chinese analyses – one was titled: ‘What is the significance of the 25 "stability" mentioned in the Central Economic Work Conference Report?’].
- ‘The CEWC meeting emphasized that the economic work in 2022 must be at the forefront and seek progress while maintaining stability.’
‘All regions and departments must shoulder the responsibility of stabilizing the macroeconomy.’
- ‘This is not only an economic issue but also a political issue.’
But just what does ‘stability’ mean?
- Consider this from China’s 2022 growth outlook: Threading the policy needle for economic stability from Trivium China’s Neopol newsletter (a subscription service that is well-worth it - excellent).
‘2022 is set to be yet another trying year for China’s economy.’
- ‘At the Central Economic Work Conference– the Party’s most important annual economic strategy meeting – in early December, Xi Jinping warned policymakers of the challenges China faces:’
- ‘ “We must see that the economy is facing the triple pressures of contracting demand, supply shocks, and weakening expectations.” ’
‘And remember: 2022 is not just any year.’
- ‘In the fall, the Party will hold its most important political gathering in five years, the 20th Party Congress, kicking off Xi’s second decade in power.’
‘This means that economic stability will be the priority leading up to the congress – but it will be a different kind of economic stability than we might be used to.’
- ‘The mission for economic policymakers:’
‘Thread the needle of supporting some basic level of economic growth, without resorting to the massive stimulus of the past – as the latter would derail the Party’s longer-term priorities for the economy.’
- ‘One thing is sure: The government will gradually ramp up economic support measures to ensure a positive economic picture for the Party Congress.’
As Trivium points out, the meaning of stability itself has changed.
- ‘It’s important to understand that what officials mean when they talk about economic stability has changed dramatically over the past few years.’
- 'In the past, economic stability meant ensuring high economic growth rates.
‘But in 2017, Xi underscored defusing and containing financial risks as one of his top three policy priorities – or “three tough battles” – and the leadership’s focus on financial risks has not shifted since.’
- ‘This priority includes not only reducing excessive financial speculation, but also increasing scrutiny over local government debt, better supervising corporate governance at financial institutions, and clamping down on property developers’ ability to borrow.’
- ‘Xi has even stated that financial risk is a national security risk.’
‘This means that a high GDP growth rate, alone, no longer cuts it:’
- ‘China’s top economic policymakers now consider containing financial risk and reducing debt as critical to economic stability.’
3 | The Central Economic Work Conference
A note about the Central Economic Work Conference (CEWC) just mentioned above by both Trivium and Han Wenxiu.
- Chinese officials have a lot of meetings – and by far the most important this year is the upcoming National Party Congress.
- Yet just as reading Xi Jinping’s and his colleagues’ speeches will give you heads ups about his next moves (remember my mantra: ‘Take Xi at his word – he means it’), so do the readouts from key meetings – and as heads ups go for how Beijing plans to manage the economy in the coming year, none beats the CEWC.
The 2022 CEWC, held from Dec 8-10 in Beijing, attended by all members of the Politburo Standing Committee and chaired by Mr. Xi, set the agenda for economic policy decisions for the coming year. As for the significance of some of the policy clues, this from Caixin’s ‘Roundup: China to Roll Back Some of Its Stricter Economy Policies in 2022, Experts Say’:
- ‘After China’s top leaders held two key meetings [the other, also important, was a Politburo meeting that preceded the CEWC] was the on 2022’s economic policies, some experts see that a pragmatic easing-off of some strict measures imposed this year could be on the cards, as goals such as overhauling the property market and cutting carbon emissions fueled pressure on economic growth.’
- ‘Based on the official statements issued in the wake of the Central Economic Work Conference (CEWC) last week and a politburo meeting earlier this month, it’s expected that the authorities will likely relax some regulations on sectors including property and energy, as well as easing monetary and fiscal policies to maintain the stability of economic growth.’
As I said before, every politician wants the best economy he can have going into an election/
- And Mr. Xi is going to see to it that he has one.
And he will also do his best to keep all crises at bay.
- Whether it's exploding real estate developer debt, or a dust-up with Taiwan, or renewed dissident actions in Hong Kong, or...anything.
This is the lens you should use to evaluate China in the runup to Mr. Xi's reelection at the National Party Congress in the fall.
If understanding the direction of China’s economy and specific policies are key to your work, you should know the CEWC readout.
- You can go over the details of policies in the CEWC readout yourself in Chinese on Xinhua or in the English translation from Pekingology.
And the best commentaries are in Chinese (just Google 中央经济工作会议 and let Google translate do the rest - for the hardcore, read about the provincial CEWC meetings held after the main CWEC too.)
- Among the influential Chinese commentaries is ‘Stabilizing the macroeconomy is not only an economic issue but also a political issue’ by Han Wenxiu, mentioned above.
- And I also like ‘Interpretation of the Ten Key Points of the Central Economic Work Conference’ from the Anbang Think Tank.
The impact of stabilization is already being felt.
- I’ve included three examples below about the impact on real estate, monetary policy, and the stock market to show that in action.
But first, an interlude.
4 | CHINARoundtable
The last CHINAMacroReporter highlighted our recent CHINARoundtable and Columbia’s Shang-Jin Wei’s presentation on how China’s gender imbalance is impacting housing prices, consumption, savings, and investment.
- So many of you wrote asking about the CHINARoundtable I thought it would be good to tell you briefly about it here.
I started the CHINARoundtable in 2012.
- Each month leading China experts met with a small group of CHINARoundtable members - senior institutional investors and business executives - at the Harvard Club of New York to discuss the top China issues of the day.
Because in-person meetings are problematic, the CHINARoundtable now convenes on Zoom.
Same expert insights, same lively discussion among the members - and same agenda:
- Each member tells the group the issues that are currently top of his or her mind.
- The speaker or speakers give a short presentation(s) on the topic of the day.
- Then the floor is opened for discussion where all members ask questions and share opinions.
In this way, each member absorbs a range of views on each China issue.
- And comes to his or her own conclusion.
That’s the CHINARoundtable in a nutshell.
- If you have any more questions, just shoot me an email
Now back to how 'stability' is impacting real estate, monetary policy, and the stock market.
5 | ‘Stability’: Real Estate
With Evergrande the 2021 poster child for regulators getting tough with China’s real estate industry, we might expect them to keep turning the screws in 2022 – and any other year they might.
- But nope. Stability here means backing off enough so that an industry that overall accounts for nearly 30% of GDP so it doesn’t tank the economy or cause such a crisis that Mr. Xi would appear to lack the chops to resolve - a crisis his enemies could exploit in an attempt to stymie his reelection.
A January 14 Reuters headline sums it up: ‘With Evergrande debt relief deal, China signals stability trumps austerity.’
- ‘If this week's developments at China's most indebted property developer are anything to go by, 2022 might see Beijing soften its attempts to purge the sector and make more allowances for economic stability.'
- ‘Evergrande got a reprieve this week after investors agreed to extend a payment date on a yuan bond, a proposal, which had been implicitly greenlighted by regulators’
'The sector has been at the fore of Beijing's attack on bloated industries, high debt levels and over-investment as it strives for common prosperity and higher-quality growth.'
- 'But no one's quite sure how far the Communist Party is prepared to go to sacrifice the heavy contribution that real estate makes to the economy, or dispel unhealthy investor expectations of state bailouts.'
- ‘Regulators seem to favour market-based debt workouts while trying to shore up investor and homebuyer confidence and soften the economic impact at a time of renewed focus on stability.'
- ‘It is a difficult balance.’
- ‘The stakes are high in a year in which President Xi Jinping is expected to secure an unprecedented third five-year term as president at the 20th Party Congress this fall.’
Michael Pettis, a non-resident senior fellow at the Carnegie–Tsinghua Center for Global Policy, expressed skepticism that Beijing would make significant progress in addressing property sector debt risks this year.’
- ‘He notes that moves such as relaxing the three red lines have simply allowed the shifting of debt burdens to state-owned firms from the more constrained private sector.’
- ‘ "China hasn't really resolved the fundamental issue ... You can't have less debt and the same amount of growth. There's just no way.’
- ‘And because this is a politically important year, my guess is growth is going to win over yet again." ’
6 | 'Stability': Monetary Policy
Here’s a January 11 headline from Bloomberg, ‘China Moves Toward Rate Cut Just as World Starts to Tighten’:
- ‘Expectations of an interest-rate cut in China are increasing after authorities pledged to ensure economic stability this year.’
- ‘China’s central bank fueled speculation it will ease monetary policy sooner rather than later with its vow in December to take “proactive” action.’
- ‘Fresh pandemic outbreaks and lockdowns add to challenges for an economy already grappling with weak private consumption and a property market slowdown.’
‘China’s policy shift became evident in early December.’
‘President Xi Jinping oversaw a meeting of the Communist Party’s Politburo that concluded with a signal of an easing on real estate curbs -- a key overhang for the economy.’
- ‘The PBOC then lowered the amount of cash banks needed to hold in reserve, adding liquidity to the financial system.
- ‘Chinese banks followed with a cut to their key lending rate in December for the first time in 20 months.’
‘Looser policy contrasts to the U.S., where traders now expect the Federal Reserve will hike rates four times this year.’
- ‘ “It has historically been very rare for the PBOC to be cutting rates while the Fed is hiking -- the last one was more than 20 years ago in June 1999,” said Becky Liu, head of China macro strategy at Standard Chartered./
- But then this is an election year.
7 | 'Stability': Stock Market
From Bloomberg January 6, ‘China Regulator Vows Stability After Stock Market’s Rocky Start’:
- ‘Traders kicked off this year by dumping last year’s best performers in favor of old economy stocks. The rotation came amid a government policy shift to prioritize economic stability this year over structural adjustments.’
- ‘Chinese stock market’s ugly start to 2022 has forced its securities regulator to assuage investors’ frayed nerves by pledging measures for stability.’
‘China Securities Regulatory Commission Chairman Yi Huiman said the watchdog will adopt various measures to avoid volatility and “firmly” prevent big fluctuations, according to an interview with a state TV network.’
- ‘CSRC will evaluate the timing and conditions before rolling out major policies.
‘Mr. Yi’s comments are similar to those he made a week ago.’
- ‘But they may hold more significance after the stock market’s rocky start to this year and Communist Party officials drumming up macroeconomic stability ahead of its 20th congress later this year.’
And consider this January 6 headline from the Shanghai Securities News, ‘Yi Huiman: In 2022, the China Securities Regulatory Commission will strive to achieve "three stability and three advancements" and deepen the reform and opening up of the capital market,’ translated from the Chinese and this from the interview with Mr. Yi:
Q: ‘The Central Economic Work Conference has put forward several requirements for the development of the capital market this year.
- 'In 2022, how will the China Securities Regulatory Commission promote macroeconomic stability and serve high-quality development? How will the market-wide registration system be implemented?'
A: 'In 2022, the China Securities Regulatory Commission will strive to achieve "three stability and three advancements" and actively contribute to stabilizing the macroeconomic market.'
- ‘We will highlight market stability, take multiple measures to promote the smooth operation of the market, and resolutely prevent major ups and downs and rapid ups and downs; highlight policy stability, and prudently evaluate the conditions and conditions for the introduction of major policy measures in the capital market.’
- ‘Those measures include timing; highlighting the stability of expectations, introducing more policy measures that are conducive to stabilizing growth and stabilizing expectations, and prudently introducing policies that have a contractionary effect.’
- How many times can you say ‘stability’ or a variation in one paragraph?