Communist Party Congress: China’s economy is losing steam and why that should worry us | economy and business

It’s remarkable how real estate bubbles always seem to burst in the same places: metropolitan suburbs, abandoned farmlands and empty lots where rows of empty concrete shells rise above closed-to-traffic streets, and cheery billboards touting civic dreams. “Central Mansion” is announced by one such billboard in a residential area about 50 kilometers from downtown Beijing. Unfinished projects stretch in every direction, including a cluster of apartment buildings owned by Evergrande, a Chinese developer that has a reputation for being the world’s most indebted real estate company and has now become the poster child for China’s deflated real estate sector. There is a gatehouse at the entrance to Evergrande’s Royal Peak apartment complex where visitors must scan a QR code to confirm they are Covid free. The empty buildings and ubiquitous Covid checks, a product of China’s ambitious zero-Covid strategy, have become a symbol of the challenges facing the world’s second-biggest economy.

The International Monetary Fund (IMF) warned in mid-October that the Asian giant’s economic slowdown poses one of three major threats to the global economy; the other two are Russia’s invasion of Ukraine and persistent inflationary pressures. The Washington, DC-based international credit agency cut China’s real GDP growth forecasts to 3.2% in 2022 and 2.7% in 2023 (after 8.1 % in 2021). That’s fine under Beijing’s target of 5.5% GDP growth for 2022 – if China stumbles, the rest of the world will take notice.

The IMF is not alone in its gloomy forecasts for China. The World Bank predicts the country will fall from its 30-year reign as Asia’s main economic powerhouse due to global uncertainty, shrinking domestic consumption and falling exports. It forecasts meager GDP growth of 2.8% in 2022, meaning China will grow less than any other country in the East Asia and Pacific region for the first time since 1990. The World Bank economic forecast blames the same factors for China’s slowdown: anti-Covid measures disrupting supply chains, industrial and services production, and domestic sales and exports; and a real estate sector hampered by pre-existing difficulties, exacerbated by unsustainable debt accumulation by developers. On a slightly positive note, the World Bank reported that the country’s “systemically important banks have limited direct exposure to lending to the real estate sector.”

Declining exports

More warning signs emerged as the year progressed. Exports of Chinese goods are declining. According to Caixin, a Beijing-based business and financial news agency, export growth fell to 12.3% in July and August this year from 23.9% yoy in the third quarter of 2021. After three straight months of growth, service sector activity contracted in September, Caixin reported, as did the manufacturing activity index, which has now fallen for two straight months.

The world watched in anticipation as the 20th National Congress of the Chinese Communist Party got underway on October 16. Every five years, delegates representing the 96.7 million members of the Chinese Communist Party (CCP) gather to elect their leaders, and it is widely believed that Xi Jinping will serve as CCP general secretary for a third term re-elected in a manner not seen since the days of Mao Zedong. In his opening remarks, Xi defended China’s zero-Covid approach to the coronavirus pandemic, emphasizing continuity rather than change. The anti-Covid strategy is a controversial issue for a pandemic-weary populace, and even sparked a rare political protest at Beijing’s Sitong Bridge on the eve of the National Congress.

China is one of the few countries still pursuing a strict zero-Covid strategy, which includes massive testing and full or partial lockdowns if cases are discovered. In the spring, when most of the world took off their face masks and decided to coexist with the virus, Chinese authorities locked down Shanghai for more than two months. In September, more than 30 cities were under partial or total isolation, affecting more than 65 million people. China has also strangled incoming foreign travel by requiring quarantines of up to 10 days to enter the country, restricting visas, driving ticket prices into the stratosphere and causing frequent flight cancellations.

A Chinese soldier patrols a market selling Chinese New Year decorations.Kevin Frayer (Getty Images)

It doesn’t appear that the Covid containment policy will change anytime soon. The CCP-owned People’s Daily news agency recently published an article defending the “dynamic zero Covid” strategy and praising its results. The Chinese leadership claims that containing any outbreak before it spreads and overwhelms the country’s healthcare system is more profitable than trying to live with the virus like the United States and the European Union are doing.

According to a recent report by the European Union Chamber of Commerce in China: “China’s isolation from the rest of the world, resulting from its adherence to inflexible Covid-19 policies, shows that for the time being, ideology trumps economics… While China Once characterized by globalization, the country is now viewed as “less predictable, reliable and efficient”, leading to a “loss of business confidence” and opening the door to “other emerging markets” in the region.

Zhang Jun, director of the China Center for Economic Studies at Fudan University in Shanghai, does not expect the national congress to announce initiatives to restore the ailing real estate sector. In a phone interview with EL PAÍS, Zhang said, “I believe China’s leaders hope that the economy will find new sources of growth,” and they will choose to promote high-tech and curb traditional industries. “Have the property [sector] Resurgence as the primary economic engine is not consistent with the goals of the [CCP’s] Leadership.” But he is confident that Beijing will not make any major economic moves until the new government takes over in March 2023.

Evergrande’s looming shadow

Beijing has taken some measures to prevent the real estate market from collapsing completely. Chinese real estate developer Evergrande is the most indebted real estate company in the world and defaulted on dollar-denominated debt for the first time in December 2021. However, these tentative government measures have so far had little effect. According to data compiled by Bloomberg from China’s National Bureau of Statistics, new home prices fell for the 12th straight month in August, home sales fell 30% in the first eight months of 2002 and investment fell 7% % return.

Facing stalled development projects across China, the CPC Politburo, the country’s top decision-making body, has urged “stabilization of the real estate market” and said local governments are responsible for ensuring the provision of prepaid housing under construction. The announcement came after homebuyers initiated a mortgage boycott to protest any unfinished housing projects in the months leading up to the national convention. In September, the People’s Bank of China announced it would allow some local governments to relax mortgage loan requirements for first-time home buyers in a bid to stimulate the housing market

Evergrande’s unfinished Royal Peak housing development in Beijing.William April

Zhang Jun likens Xi’s decade in power to “the progressive era in the United States” of the late 19th and early 20th centuries, when popular movements and coalitions were formed to address the problems of rapid industrialization and urbanization following the US Civil War. “Xi has tried to solve these problems at the expense of slowing growth,” Zhang said. In his view, China’s post-pandemic growth rate will be close to 5%, a far cry from the early 21st century’s heyday.

A Sputnik moment

In terms of Chinese innovation, multinational financial giant Citigroup believes we could be in for another “Sputnik moment,” a nod to the late 1950s when the Soviet Union shocked the world by putting the first satellite into orbit. Citigroup experts stated, “Heavy public R&D spending, a large domestic market and a pool of highly qualified talent put China in an increasingly competitive position with developed countries.” They also believe that China’s cheap manufacturing model will shift to other countries.

Scott Kennedy, an expert on Chinese economics and economics at the Center for Strategic and International Studies in Washington, DC, recently quarantined to enter China to conduct his first fieldwork in the country since the pandemic began. Eventually, after flight cancellations and other mishaps, Kennedy arrived in Beijing to find a country “tightening controls” in several areas. “If you look at the level of interference in the economy, I think it has increased,” he told foreign correspondents.

Kennedy says that in his early years in power, President Xi waited to see if market mechanisms would solve some challenges like housing. But after the turmoil of 2015 and 2016, the devaluation of the yuan and the turmoil in China’s stock markets, he says, the government “has become nervous. Since then we have observed more and more interventions in the economy.”

Over the past decade, the Asian giant has taken a few steps forward and a few steps back, Kennedy says, calling it “a mixed record.” He points to the country’s advances in manufacturing electric vehicles, which are heavily subsidized by the government. China is also getting closer to the government’s goal of “shifting value chains up and strengthening basic scientific research [its] Applications.” But in today’s connected world, no country can innovate successfully on its own, he says. “It doesn’t matter whether you’re up front, midfield or back, you always have to be able to rely on everyone else.” China and the United States would face “monumental problems in their ability to innovate and increase productivity” as the world becomes more isolated.

China-US relations are at their lowest in decades and suffered another setback as the US dealt a fresh blow to China’s tech sector. The new semiconductor chip export restrictions aim to limit Beijing’s access to cutting-edge technology it can use for technological or military development.

Scott Kennedy calls China a “fat tech dragon, capable of innovation but squandering an incredible amount of resources in the process.” He does not believe that they will ever achieve absolute self-sufficiency – it is “like waiting for Godot”. In this story, Godot never arrives.