Xi Jinping became unassailable. This is where investors get scared

Hong Kong
CNN business

When Chinese leader Xi Jinping secured a historic third term in power over the weekend and packed his core team with loyalists not seen since the Mao era, investors were quick to pass judgment.

Chinese shares traded in Hong Kong and New York fell on Monday, and the yuan hit its lowest level against the US dollar in nearly 15 years. In offshore markets, China’s currency traded at its weakest point since data provider Refinitiv began keeping records in 2010.

Xi’s preference for personal loyalty over technocratic prowess bodes ill for China’s bleak economic outlook, analysts said. replacing skilled economic officials People with far less experience also represent a more ideological policy that could boost private sector growth and strain Beijing’s ties to the US.

“The market is clearly disappointed by the seven-member Politburo Standing Committee full of Xi allies,” said Lilian Co, which manages Eric Sturdza Investments’ China Strategic Panda Fund.

“Since Xi’s ideology has not been pro-market in recent years, a leadership group loyal to Xi has not said any change in political direction while in power,” he said.

The yuan rebounded slightly on Wednesday, and stocks also rose slightly, after China’s central bank and various financial regulators signaled late Tuesday that they would maintain stability in the currency, Chinese markets and financial system. But there was little sign of enthusiasm in the markets.

He is missing from the new management team they are high officials who have supported market reforms and the opening of the economy. Those sidelined were Premier Li Keqiang, Vice Premier Liu He and central bank governor Yi Gang.

Investors fear that Xi’s tightening of power will mean a continuation of policies such as the zero-Covid strategy and crackdown on the private sector that have severely damaged the world’s second-largest economy.

Analysts also worry that the removal of reformists from the Communist Party leadership means that no one will dare to tell Xi he is wrong if his policy agenda fails.

“Xi’s break with the long tradition of having members of both parties represented on China’s highest political committee establishes a leadership style that prioritizes personal loyalty over competence and productive discourse,” said Sonja Opper, a professor at Bocconi University. and an expert in the Chinese economy.

“In fact, Xi Jinping sets up an echo chamber around his ideas,” he said. “The danger is that China’s leadership will become isolated and lose sight of alternative, perhaps even better, ways of dealing with the many challenges facing the country.”

Frequent Covid lockdowns have hampered consumer spending, disrupted supply chains and caused massive job losses. The country’s once vibrant private sector is stifling under Xi’s “shared prosperity” campaign. A persistent real estate slump and a weakening global economy have compounded the problems.

The World Bank recently cut its growth forecast for China to 2.8% in 2022, the first time since 1990 that it predicted China’s economy would lag behind the rest of Asia. Beijing’s official target is 5.5% growth for this year.

Analysts say if Xi closes the door good in the liberalization of the market, politics would be increasingly driven by ideologies, which would further damage private industry and worsen US-China tensions.

“Xi’s vision is nothing more than a new economic order steeped in ideology,” said Craig Singleton, senior China fellow at the Foundation for Defense of Democracies, a D.C.-based think tank.

Extending his mandate blocks China’s current economic orientation — which is “shamelessly hostile” to free-market forces, he said.

Xi’s announcement last week to expand China’s definition of national security to include at least 16 different areas, including military, territorial, technological, economic, food, energy, resources and supply chains, will further complicate matters.

“These economic issues play into key aspects of the US-China relationship, which means the deterioration of ties will not be limited to traditional points of division such as Taiwan or the South China Sea,” Singleton added.

People watch the opening session of the 20th Congress of the Communist Party of China in Huaibei, east China's Anhui Province.

The staff changes have also been significant.

Li Qiang, the Shanghai party leader who presided over the chaotic two-month blockade of the city, is now the second-highest ranking party official after Xi. That puts him in line to replace Premier Li Keqiang when he steps down in March. He will have a task to manage in front of him nearly $18 trillion economy.

Li, 63, would be the first prime minister since the Mao era not to serve on the State Council — China’s cabinet, analysts said.

“Li has no experience of central government,” said Julian Evans-Pritchard, chief China economist at Capital Economics. “And its track record at the local level is far from perfect – earlier this year Shanghai’s initial response to the Omicron wave was thwarted.”

The appointment of more qualified candidates is a clear example that “under Xi, official promotion has become less meritocratic,” with loyalty and personal relationships increasingly taking priority over bureaucratic credentials, he added.

The ones left out are noteworthy.

Liu He, who led trade war negotiations with the US in 2018 and 2019, lost his seat in the party’s 205-member Central Committee.

“[His] His departure means the loss of one of China’s few foreign-educated and reform economists in a leadership position,” Evans-Pritchard also said.

Liu was seen by many as “a bridge between East and West and someone who understood the value of the market and the private sector,” Singleton said.

The man proposed to replace Liu as vice premier for economic affairs is He Lifeng, head of the National Development and Reform Commission and the new face of the 24-member Politburo. The NDRC is China’s main economic planner, responsible for drafting the country’s economic plans and overseeing major state investment projects.

“While He Lifeng is an academically trained economist, like Liu He, his track record suggests that he is likely to favor a more statist approach to economic management,” Evans-Pritchard said.

It remains to be seen who will take the top economic jobs until official announcements are made in March. But given how the leadership reshuffle has played out so far, analysts worry that loyal but less competent people may be elected.

“The quality of policy-making has suffered in recent years, with civil servants increasingly focused on displays of loyalty and less on good governance and economic performance,” Evans-Pritchard said.

“This trend may be even worse now that Xi has surrounded himself with ‘yes’ men,” he added.

Xi’s consolidation of power risks undermining productivity and growth, rather than boosting it as he had hoped.

“With Xi now closing the door on market liberalization, US companies, and US financial services companies in particular, may have to rethink their current and future investments in China, which will only exacerbate the country’s many serious economic challenges,” Singleton said.