No Exit Strategy Seen for China

Focus on Domestic Affairs Ahead of the Party Congress Confirming Xi Jinping's Third Term as State President
Growth Rate Slowdown Inevitable if Zero-COVID Policy Prolongs
Signs of Global Capital Outflow

[Asia Economy Reporter Kim Hyun-jung] Ahead of the 20th Party Congress that will confirm Xi Jinping's third term as State President, China is focusing on domestic governance by going against global trends in COVID-19 prevention and monetary policy. However, with the worsening epidemic situation, no exit strategy to absorb the economic shock is visible, raising market concerns that the Chinese economy will further deteriorate in the second quarter of this year as COVID lockdowns and the repercussions of Russia's invasion of Ukraine intensify.

The British current affairs weekly The Economist, in its latest issue published on the 16th (local time), stated that China is strengthening its authoritarian system for stable national operation ahead of Xi Jinping's third term, noting, "Although the central government has taken control over local autonomy such as the Shanghai lockdown, there is no exit strategy."

◆ COVID Prevention, Monetary Policy, and Diplomacy... China Moving Backwards = China is going against global trends in all aspects: COVID-19 prevention, monetary policy, and diplomacy related to the Ukraine war. While countries including the United States are removing masks and significantly easing prevention guidelines, China continues its toughest-ever 'Zero COVID' response, locking down Shanghai for the third consecutive week.

The Economist emphasized, "The Zero COVID policy has become a dead-end from which the Chinese Communist Party cannot escape," adding, "Moreover, the problems China faces amid economic recession and the Ukraine war all share a common root: 'arrogance in public policy, obsession with private control, but questionable results.'" It further explained, "This year is the 'Year of the Chinese State President,' when everything must go according to plan, and the third term will be decided at the Party Congress this fall," adding, "For these processes to proceed smoothly, China must be stable and successful."

Despite global interest rate hikes and tightening moves to counter inflation, China has instead lowered the bank reserve requirement ratio (RRR) by 0.25 percentage points, injecting liquidity. This measure is expected to supply about 530 billion yuan (approximately 102 trillion won) in liquidity.

This is interpreted as a measure to support the real economy (consumption), which has been hit by the spread of COVID-19 and inflation, as much as possible before the Party Congress this fall. The scale of social financing, a credit indicator of the Chinese economy, exceeded 4.65 trillion yuan in March this year, a 38% surge compared to the previous year. The amount of loans extended by Chinese banks last month reached 3.1 trillion yuan, 2.5 times that of February.

[Image source=Yonhap News]

◆ 2Q Growth Rate Could Record in the 3% Range = Experts predict that if the city lockdown policy to combat COVID-19 prolongs, the economic damage will be even greater.

According to Barclays, if Shanghai's city lockdown continues for one month and partial lockdowns in other cities persist for two months, China's GDP growth rate in the second quarter could fall to 3%. Consequently, the annual growth rate is expected to drop to 4.2%, far below the Chinese government's target of 5.5%. Barclays stated, "Ahead of the Party Congress, with strengthened COVID-19 responses and a failure of the real estate market to rebound, the People's Bank of China will prioritize growth."

Jiang Ziwei, Chief Economist at Pinpoint Asset Management, pointed out, "The RRR cut in China is not very significant for the economy at this stage." He argued, "The main challenges facing the economy are the Omicron outbreak and mobility restrictions such as lockdown policies," adding, "If effective policies to resolve mobility issues do not appear, China's second-quarter GDP growth rate could turn negative."

◆ 'De-China' Capital Outflow Becoming a Reality = Global investors are showing signs of 'de-China' considering China's economic slowdown outlook and its diplomatic decisions in response to the Ukraine war.

According to Bloomberg News, the size of U.S. dollar private equity funds investing in China raised $1.4 billion in the first quarter of this year, the smallest amount since the first quarter of 2018. British investment firm Artemis Asset Management recently disclosed that it has sold all shares of China's Didi Chuxing and Ant Financial, the financial subsidiary of Alibaba.

The Chinese stock market is also in a steep decline. The CSI 300 index has dropped 15% since the beginning of the year, marking its lowest level since 2014. The risk-adjusted return, a fund performance measure considering investment risk, was -2.1%, the lowest in the world for China.

This content was produced with the assistance of AI translation services.