Does Xi Jinping have a Plan B for China’s Economy?

The Wuhan Greenland Center, which towers over the Yangtze River in Central China, was intended to be Central China’s answer to Burj Khalifa – the tallest building in the world.

The tower, which was first unveiled in 2011, was to be 120 stories high and host a five star hotel. It was also intended to attract Wuhan’s wealthy and powerful due its cathedral-sized lobby and helipad. The “service center” of the Communist Party was intended to be a large space where patriots could conduct their affairs while taking in the views. The marketing materials refer to it as “a building for individuals who have the ability to personally impact GDP”.

The colossus is a symbol of the real estate bubble that collapsed in China and the challenges the second largest economy faces.

The President Xi Jinping ordered that the height of the building be reduced by 25% mid-construction to 475m. The hotel is yet to open, and many wealthy apartment-owners have not received their keys on time. This situation is common in China after the collapse of the property market over the last three years.

One person who is close to the developer of the building explains that most homebuyers here are wealthy, and can tolerate long delays. The developer had promised the building would be completed by the end this year, six years after the original deadline.

Property is only one of many indicators that are flashing in red for China’s 18tn dollar economy. In the last few months, after a strong rebound in the first quarter following the Covid restrictions that saw authorities lock down major cities, including Shanghai, the economy has underperformed analysts’ expectations.

China reported Monday that its gross domestic product increased by 0.8 percent in the second quarter, compared to the previous three-month period. This was a decline from the first quarter when the economy grew by 2.2%.

China’s poor performance has led to a growing number of calls to revert to its past playbook by launching an extensive monetary and fiscal stimuli to support traditional debt-fueled growth engines such as infrastructure and property.

But President Xi Jinping, and his top policymakers, adhere to a stance that they call dingli or “maintaining a strategic focus”. This is interpreted by many economists as continuing to reduce the debt, particularly in the over-leveraged real estate sector, while also pursuing leadership in advanced technologies and other strategic areas, such a a shift to green energy.

Arthur Kroeber is the founding partner of Gavekal Dragonomics and the head of its research. He says that Xi Jinping doesn’t define economic success by GDP growth. “He defines it as tech self-sufficiency.”

He says that as long as the government is able to hit their targets, they can find a way to distribute the growth to make people happy.

Will Beijing, whose engines of growth are stalling out, be able stay the course when the engines stop? Will the old calculation that it must maintain a certain level of growth in order to ensure social stability be brought back into play, paving the path for a return to large scale stimulus?

The second quarter saw a sharp slowdown in China’s trade, which is another key engine of growth. This is a problem for Xi who started an unprecedented third term as president in March.

During the Covid pandemic, people around the world looked to China to buy electronic devices to work from home and personal protective equipment to protect themselves. China’s export figures were also buoyed by online shoppers, who helped offset the negative effects of China’s own lockdowns.

As western central banks increased interest rates in order to combat inflation, the demand for China’s imports decreased. Official data on Thursday showed that in June, the number of Chinese exports fell by 12.4%, their largest year-on-year drop since the pandemic began.

The geopolitical tensions between the US and the West have exacerbated the negative sentiment about trade, leading western companies to speak more loudly of “de-risking’ supply chains by moving them away from China.

Richard Chan, the managing director of Golden Arts Gift & Decor in Dongguan (southern China), which produces artificial Christmas trees, decorations, and other items, is one Chinese manufacturer who has been hit by falling trade numbers.

Chan said that his company exports around 80 percent of its products to Europe and the US, but saw a drop in orders by 30 percent this year, compared to last year. Most of the company’s orders are received by May every year.

The Hong Kong businessman claims that inflation has flattened out the market. “A Christmas tree that cost EUR100 retail now costs EUR150 and people no longer buy it.”

The factory hired half as many temporary summer workers to cover the peak months of production compared to the years before the pandemic. Chan says, “the manufacturing industry is dying.” The outlook is pessimistic. . . We can only cut costs in small places.”

The property slump has affected other manufacturers, not only by reducing exports but also by the weak domestic demand for household durable goods and construction materials. Danny Lau, of Kam Pin Industrial in southern Guangdong, who produces aluminium curtain wall systems for commercial and residential buildings, says that doing business in mainland China is harder today, due to a smaller market.

Lau’s clients are mainly from China. The US accounts for about 30% of his business. He believes that the world economy will improve by 2025 and then there will be a major recovery.

He says that orders in mainland China fell by more than 60% between 2023 and 2022. He adds that a recovery will depend on Beijing’s stimulus policy and any ease in US-China tensions.

Economists report that there are signs on the domestic front that Chinese consumers and businesses are still dealing the fallout of the pandemic. This is especially true from last year when many large cities were subjected to long lockdowns.

China’s stimulus was mainly aimed at the supply-side. While the US, and other western nations, supported consumers directly with handouts. According to economists, the result is a cyclical decline in business and consumer confidence. The domestic demand for local tourism and other services has recovered, but consumers have not made large-ticket purchases.

Tao Wang is the chief China economist of UBS Investment Bank. He says, “With orders and earnings down over the last 16 months, it’s hard for businesses in this environment to be confident.” Many businesses have excess capacity, so they don’t want to expand.

The government also launched crackdowns in several sectors, including real estate, e-commerce, Jack Ma’s Ant Group and finance.

Some hope that the state will now call a truce with some of these actions.

Last week, the government announced that Ant would be fined Rmb7.1bn (USD984mn). Despite its size, analysts saw it as a positive move, possibly signaling the end of so-called “rectification”.

Premier Li Qiang of China, who is also , met with tech executives from TikTok’s owner ByteDance and food delivery group Meituan, as well as Ma’s Alibaba Cloud. He assured them that the government will normalise regulation. This follows a Chinese government Charm offensive aimed at foreign businesses and governments, culminating with the resumption after a long break of dialogue with Washington, as US Treasury Secretary Janet Yellen visited Beijing this month.

Wang from UBS says that the authorities have attempted to reassure the private sector of the normalisation and standardisation of regulations. She adds that “the private sector probably is waiting for more specific concrete policies to support this kind of rhetoric, and even when these specific policies are implemented it will take them some time before they feel reassured.”

The usual topics of conversation at a dinner for local businessmen were discussed: who was the most popular communist party lingdaoor boss, and which Chinese liquorwas preferred by the top leaders .

The majority of people were still struggling to recover from the devastating pandemic that began in Wuhan. Before the pandemic, streets were busy. Now, they are quieter. This is especially true for restaurants located in central areas, as many closed down during Covid.

Some cited evidence to show that government policies, like infrastructure financing, are helping businesses stay afloat.

One businessman who specializes in government-funded civic projects and the construction of tunnels says, “Things may be bad, but we’re managing to get through.”

A former Wuhan government official says that the slowdown in this year is partly due to the fact that companies have built up inventory for 2022 while the lockdowns were in place. He says that the sharp drop in producer prices in June is related to this. There is a large amount of inventory. You can’t sell so you cut prices.”

He says that the recovery pace so far has been in line with expectations. He says that a recovering sick person cannot be expected run a full marathon the next year.

Liu Guoqiang – deputy governor of People’s Bank of China – reaffirmed this point last week, stating that most countries take a year to recover after the Covid restrictions are lifted. China abandoned its pandemic control measures only six months ago.

Analysts say that the question is whether the government will be able to hold its line and not have to further stimulate the economy if the situation continues to worsen this year.

The biggest challenge is the property sector. It has been slipping again since the beginning of the year after stabilizing early on. Nomura, citing Beike research institute data, said that a sample of 25 major cities showed that prices for existing homes fell by 1.4% in June, compared to May. This was an acceleration of the declines in previous months.

This week, the government announced that an existing credit support program for developers will be extended by one year. The government has also announced measures to help the sector, including a reduction in benchmark lending rates. There are questions about whether they will stabilize the market.

One real estate expert in Wuhan says that developers and consumers are not interested in investing, especially after the bankruptcy Evergrande . Evergrande is one of the largest and most indebted companies in the country.

“You couldn’t have imagined that Evergrande, a developer, would explode overnight. “Buyers feel uncertain about the market,” says he.

He estimated that there were 250 unfinished housing projects on the market in Hubei province alone, whose capital is Wuhan.

Central government funds were channeled to local authorities in order to assist developers to complete these projects, which are considered vital to restore consumer trust. Local governments did not want to be accused of favoritism by selecting which developers they should fund.

Many local governments are struggling to pay their creditors, due to the fact that they have lost revenue from selling land to developers and because their LGFVs (local government finance vehicles) often invest in infrastructure projects with low returns.

Wuhan’s real estate expert said that Beijing may not be in favor of using property for short-term stimuli, but local pressure is strong. He says that local people are expecting a large stimulus, but this is not happening.

Many economists, however, believe that things would have to worsen before Xi Jinping will yield and announce a much larger stimulus effort.

Most people do not expect the same level of “bazookas”, as in 2008, after the global financial crisis when China invested Rmb4tn (approximately $559bn) to the economy.

Economists say that while the financial markets clamor for stimulus, Xi’s policymakers appear to believe the property downturn is a necessary, if difficult, adjustment to the old, debt-ridden economic system.

Kroeber, of Gavekal Dragonomics, says that there is a general perception among the market participants that the leadership has a more optimistic view than the markets about the current property crisis and slow consumer confidence recovery.

Xi says that while the growth rate will probably reach the target of 5% this year, he may be willing to allow it to drop even further in the future as the economy adjusts to the new reality. The calculation is that the majority of families have already purchased their own homes, and that private businesses will adapt to a new, slower growth trajectory.

Xi says that he is most concerned about achieving the strategic goals of self-sufficiency in technology and security, as the rivalry between China and the US intensifies. Kroeber believes that the system will work well for quite some time. “Most Chinese have had a good life over the last 30 years.”

This message is not welcome in sectors like the real estate market of Wuhan, which is currently depressed.

In a showroom in the city’s suburbs, away from the Greenland Center and the Greenland Center Center, another building rises above houses which were bought for demolition during the boom.

A salesperson confides in her colleagues that the business has been so bad for the last couple of months, she’s had no customers. People who were already invested in the project became angry when her boss reduced prices.