To resuscitate an economy decimated by COVID-19, China’s next premier, who may well take the office in March, won’t have many choices but to increase stimulus, according to policy insiders and analysts on Monday as the announcement of Xi Jinping’s new leadership team shook the markets.
The Shanghai Communist Party boss, Li Qiang, who is now in a position to succeed Li Keqiang as premier, was introduced to the Politburo Standing Committee by Xi on Sunday after being confirmed for a record-breaking third term as president.
When Xi is placing an increasing emphasis on security, Li Qiang will have the task of fostering growth to fend against widespread lost jobs that could threaten social stability.
He will take over a second-largest economy in the world that has been negatively impacted by severe COVID restrictions and a worsening real estate crisis, and where prospects for any significant reforms have dwindled as the Communist Party in power tightens its control over the country’s finances.
The new composition of China’s top ruling body heightened concerns that Xi would continue to pursue ideology-driven policies at the expense of growth, which contributed to a Monday decline in Hong Kong stocks, Chinese stocks, and the value of the yuan.
A policy source who spoke on the condition of anonymity revealed the COVID limitations won’t be lifted significantly any time soon, the real estate market won’t rebound anytime soon, and the pro-reform movement has been entirely destroyed, which has hurt investors’ trust.
To strengthen the economy next year and put an emphasis on investment and large projects, the fresh economic team won’t have many choices but to turn to major stimulus measures, the source continued.
He Lifeng, another Xi follower, will take over as China’s economic tsar in lieu of Liu He, a U.S.-educated economist who is credited with being the driving force behind earlier reforms. Yi Gang, the pro-reform and deliberate central bank governor, is expected to leave in 2023 when he reaches the legal retirement age.
Many policy insiders were shocked by Li Qiang’s promotion and cited his lack of prior experience in a nationwide economic position as well as his handling of the disastrous COVID-19 outbreak in Shanghai that resulted in a two-month lockdown of its 25 million inhabitants.
Reviving the economy is what needs to be done immediately, according to Jia Kang, the current director of the Chinese Academy of Newer Supply-Side Economics and a former head of the think tank for the finance ministry.
Weakened expectations and confidence are a problem, and if individuals can’t revive the economy, their words will be meaningless, according to Jia.
Policy insiders and analysts warned that Xi’s quest for a state-led economic model at the expense of market reforms would jeopardise his long-held objective of making China a major global power by the middle of the century.
When Deng Xiaoping began historic reforms in 1978, unleashing more private firms and opening the industry to international investment, China’s economic miracle began.
How to find a balance between the development and security may be one of the most critical problems for the leadership in the coming years, Citi analysts wrote after Xi presented his new team. National security has been raised to its highest level ever amid mounting geopolitical dangers.
Investors will be looking for important policy agenda hints from a Politburo meet and the yearly Central Economic Work Conference, which are both scheduled in December after official statistics on Monday revealed a faster-than-expected improvement in the third quarter.
As COVID tightens its grip on enterprises, China’s surveyed urban unemployment rate increased to 5.5% in September, the highest level since June. The rate for job applicants between the ages of 16 and 24 was 17.9%.
China is on course to fall short of its 5.5% annual growth goal; the most recent poll predicted 3.2% growth in 2022. According to the poll, China’s growth could accelerate to 5.0% in 2023 thanks to a reduced base.
Investors who had hoped that Xi would retain some reform-minded officials, such as former Guangdong party chief Wang Yang, were disappointed by his selections for the Standing Committee.
Alvin Tan, the head of Asia FX Strategy at Singapore-based RBC Capital Markets, said that there would be more respect for Xi Jinping’s personal opinions on how to advance the nation and the economy.