The 'Beijing put'
Greenspan supported U.S. markets. Now it's President Xi Jinping's turn in China.
With Chinese markets struggling, its economy sputtering and a Communist Party gathering where he will seek a third term looming, President Xi last week took a page out of former Fed Chair Alan Greenspan’s playbook. He had his right-hand man, Vice Premier Liu, issue what we’re calling the “Beijing put,’’ a policy shift aimed at encouraging stronger growth by supporting private enterprises and markets that were so critical to the country’s rapid rise to the world’s second-largest economy.
At a meeting of the influential Financial Stability and Development Committee under the State Council, Liu said the government would “actively release policies favorable to markets” and make sure any regulation that could have “a significant impact on capital markets” is coordinated with financial management departments in advance. The stilted language of officialdom may sound benign. But it sent a rather strong signal that the party will hold accountable those who don’t follow the new rules. The changes were an implicit recognition that in their zeal to achieve shared prosperity for all under the so-called Common Prosperity directive, state regulators went too far. Their crackdown on technology, education and entertainment firms dramatically slowed growth, raising concerns that even a modest goal of 5.5% GDP growth this year may be a bridge too far for China.
In this time of Covid, geopolitical divisions and competition with the U.S., the Chinese government needs stronger growth. While his election to an unprecedented third term as China’s leader is all but certain next October, Xi certainly would prefer to arrive at the 20th National Conference with an economy that’s gathering steam. If that means some Common Prosperity measures that choked off growth must be modified or temporarily set aside, so be it. The course correction doesn’t end Xi’s goal of creating a “great modern socialist country,” but only serves to ensure the resources are in place to ultimately achieve it.
‘Follow the money’
It's notable that China’s stock market rallied hard since Liu’s speech. Does it mean that China, and its market, have hit bottom? It’s too soon to say. But there is a parallel. In the post-global financial crisis era, the China economy boomed, first on massive stimulus to pull out of the crisis and then on widespread speculation and investment that drove its stock market to new highs. When Chinese authorities began to pull back the punch bowl in 2015 and tighten regulations, market panic set in as tighter controls and deleveraging spooked investors. The markets never fully recovered but did stabilize when the government eased off.
With Chinese authorities backing off again, it’s clear a policy bottom is here. But for a market bottom, investors still need a better grasp of the potential outcome of two big tail risks—Covid and Russia-Ukraine. After nearly two years of relatively few infections, Covid cases have started to break out. In the past, China’s strict zero-tolerance Covid policy shut down entire cities, stifling growth and worsening global supply chain bottlenecks. To be sure, those measures were highly effective. Had China followed the haphazard Western approach, it undoubtedly would have suffered millions of deaths. It’s hard to be critical of a country that put safety first during this deadly pandemic. Now, however, China is refining its Covid protocols to be much less restrictive, with a focus more on treatment and less on isolation.
Then there’s Russia. Its all-out assault on Ukraine, and the fallout for global energy and commodity prices—not to mention Putin’s emerging pariah status—doesn’t do China any favors. Xi continues to express neutrality, but it’s hard to see him taking any steps at this point that would be viewed as embracing China’s neighbor to the north. Such moves could bring secondary sanctions and worsen relations with the West. The reality is China does about $700 billion annually in trade with the European Union (EU) and roughly the same with the United States, and the U.S. and EU economies represent about 42% of global GDP. As for Russia, its trade with China comes to about $80 billion and its share of global GDP is under 2%. So, as my colleague Peter Smith puts it, we would expect China “to follow the money.”