Xi rules supreme: new Politburo Standing Committee

• Xi won big at the 20th Party Congress and stacked the party’s top bodies with his own loyalists
• Xi’s conservative, quasi-Maoist economic and political policies, including an ironclad Covid lockdown policy, will endure for the foreseeable future
• With no obvious restraint at the top levels of the party, the return to “one-man rule” portends an administration that will prioritise national security and “waging struggles” ahead of economic development or international economic integration

Is China uninvestable?

• Beijing’s decisive lurch into “one-man rule” at the Congress has reenforced Western investors’ perception that long-term investing in China is neigh impossible and certainly imprudent in the context of the Great Decoupling
• With China sentiment rock-bottom, it's not a surprise that some zero-Covid and property sector relaxation buoyed stocks, bonds and the yuan in the first half of November. But we argued that this was likely to be just a dead cat bounce

• The resurgence of Covid we suggested was the key immediate risk to this misplaced search for any sign for optimism. Beijing will double down on its commitment to its current strategy of control as cases are surging, but it has now also started to open its monetary taps much wider
• In this tug-of-war, we expect the consumer and economy to lose, so even short-term speculative plays on Chinese A-shares may not be worth it

Beijing unlikely to abandon lockdowns amid Covid resurgence

China’s difficulties finding an exit strategy

• As Covid cases surge and the economic and social costs from Beijing’s zero-Covid strategy mount, Xi Jinping is between a rock and a hard place and needs an exit strategy
• But this is currently lacking and for now China has little choice but to stick to its current policies, with minor adjustments at best, at the expense of growth and social stability

China’s ICU capacity is low

Number of critical care beds per 100K people

• It is difficult to imagine an exit strategy which will not come with a high cost of losing human lives, which will continue to depress consumers
• Vaccination rates and ICU capacity are two of China’s main challenges, and Beijing will have to rely more on antiviral medication and building natural immunity

Old-style growth is all Xi can muster to steady the ship

• Quarterly annualised real GDP growth averaged 2.4% in Q3 and Q2, compared with an average of 3.8% since the start of 2021 and 5.5% in 2019, the year before Covid hit
• We expect Beijing to struggle to boost growth much above 2% in coming quarters despite the more upbeat message of our nowcast

• With consumption and the real estate sector in the doldrums, as expected Beijing has doubled down on old-style growth to prop up its ailing economy
• Total real fixed asset investment rose in Q3, but private investment still fell. At its 22nd November meeting the State Council vowed to catalyse more investment from the private sector, but this will remain a challenge

Enodo nowcast offers a glimmer of hope

• On November 20th Enodo’s nowcast of the official GDP report pointed to a quarterly growth rate of 2.6% for Q4 2022 and 1.6% for Q1 2023
• It also suggested the official annual real GDP growth will reach 5.4% in Q4, allowing the government to claim it achieved its growth ambitions this year

• A faster-than-expected increase in imports and a lower-than-expected decline in PPI, both indicative of higher factory activity, contributed positively to the Q4 forecast.
• At the same time, disappointing exports dynamics, steel production and residential construction activity provided negative “news” and dragged the Q4 forecast down

Don’t bet on the Chinese consumer

• Beijing struggles to engineer a sustainable boost to consumer spending as relentless lockdowns have left people across China with frayed nerves and depleted resilience
• The tech sector crackdown and the ordeals of SMEs have battered employment; and Xi’s “common prosperity” has hurt household income and wealth

• The dichotomy between freight traffic and express delivery shows the gaping divergence between the consumer and production side of the economy
• With Alibaba and JD.com for the first time not disclosing final gross merchandise volume figures from their Singles’ Day promotions, it has become even more difficult to gauge the true state of play

“Common prosperity” pushes households to save more

• Official survey data suggests households are more willing to hold savings deposits as Xi’s assault on both their financial wealth, mostly held in interest-bearing deposits, and property, continues despite the authorities relaxing policy and trying to boost housing demand
• But as house prices decline, households are less willing to invest in property

• Xi is determined to arrest house price inflation, which he identifies as the main source of gaping wealth inequality in China. Indeed, he wants property prices to come down and has no intention to change tack on this front
• Beijing is now trying to throw money at viable real estate firms, deliver pre-paid homes and provide cheaper housing, but this is unlikely to make up for the loss of investment demand for housing

Beijing opens China’s liquidity taps wider

• Broad money growth has started to accelerate in the past few months as the authorities have been easing policy more aggressively. Enodo uses its comprehensive M3 measure to gauge overall monetary conditions in China
• The PBoC cut banks’ RRR by 25bps, effective Dec 5th, releasing Rmb500bn of liquidity alongside other measures to prop up the property sector

• The PBoC has been cutting interest rates to spur lending and at its latest meeting the State Council stated that financial support for the real economy will be scaled up
• Banks will be guided to offer concessional rates as appropriate for inclusive loans made to micro and small businesses, and support the transportation and logistics sector

Yuan weakness reflects dollar strength

• The war in Ukraine and Beijing’s support for Moscow spooked foreign investors, who pulled out of Chinese markets in droves. The yuan fell, its decline also exacerbated by mounting concerns that China has become uninvestable
• Dollar strength is expected to persist in the near term and we do not expect the yuan to regain much lost ground

• Xi prizes stability (including currency) and wants to offer the yuan as a more reliable alternative to China’s Asian trading partners so Beijing can start to decouple from the dollar
• But on a 3-year horizon, we expect the yuan to weaken sharply as China battles excess debt and demand deflation. The timing will depend on how Xi’s strategic and national security vision unfolds

Debt-deflation to plague China’s economy

• The three Ds – default, demand deflation and devaluation – are the solution to an excess debt problem, and typically countries resort to a combination of all three
• China’s current pump priming is set to raise its debt burden further, with the government progressively taking on more of it directly rather than through the SoEs

• Enodo has combined bottom-up analysis of China’s quoted sector loans with a top-down macro evaluation of the returns on credit to estimate expected loan losses following its post-GFC borrowing binge.
• We estimate credit losses at a startling range of between 26% and 31% of GDP for 2021 and poised to grow further in 2022

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