Xi Jinping's Unexpected Moves Lead to $100 Billion Market Surge, But Sustainability is Uncertain

After years of watching China's economy take a beating from Covid Zero and moves to rein in the property and tech sectors, investors are suddenly optimistic that the worst is over. Many believe that the Chinese government's recent actions have put the country on a path to recovery, and that the worst of the crisis is behind us.

China's recent policy changes suggest a shift towards more market-friendly policies. The country has ended a two-year ban on Australian coal imports, eased up on tech giants like Alibaba Group Holding Ltd., and dialed back the stringent "three red lines" that exacerbated a property meltdown. These changes suggest that China is moving away from its previous stance on strict Covid restrictions and towards policies that are more favorable to businesses and investors.

Now that China has overhauled its economic policy, the question is whether this represents a shift toward the flexibility that has helped the country's economy grow over the past four decades, or simply a reaction to a deteriorating economy and spontaneous anti-lockdown protests. With President Xi Jinping's allies surrounding him after he secured a third term in October, it's unclear what the future holds for China.

According to Yuen Yuen Ang, a professor of Chinese political economy at Johns Hopkins University, the fundamental cause of policy reversals, or swings, is the personalization of decision-making power in one man: President Xi. Ang says that policies become overly dependent on Xi’s personality and ideology, his whims, and the information he receives and doesn’t receive.

After a difficult year in which both Alibaba and Tencent Holdings lost more than a quarter of their value, market players are enjoying a rebound in 2023. Both companies have gained more than $100 billion in market value, while the MSCI China Index has risen by 50%. This is in contrast to the US economy, which is forecast to see little growth this year, and the Eurozone, which may see a contraction.

Hao Hong, chief economist at Grow Investment Group, called China’s recent changes “breathtaking.” He noted that there were “policy pivots in just about every single sector.”

He said that the environment is more friendly but that there are still some concerns. He said that it is important to have a plan and to be consistent with it.

The tech sector is one area that is still uncertain. A few years ago, it was worth trillions of dollars and was seen as a driving force behind China's economic growth. However, 2020 saw a change in attitude from regulators, who killed the IPO of Jack Ma's Ant Group and began to investigate tech giants like Alibaba, Meituan and Didi Global. It remains to be seen what the future holds for the tech sector in China.

The messaging around the crackdown fed into a wider political campaign aimed at “common prosperity,” as the Communist Party pushed to build nationalist support in the face of slower growth. Xi cast himself as the “people’s leader” who served no privileged groups or wealthy special interests, while top officials and state media villainized social-media firms for exploiting user data and gaming companies for creating a generation of lazy, addicted, unproductive youths.

Now, just as suddenly, Xi is enlisting the industry to help revitalize the economy. Guo Shuqing, party secretary of the People’s Bank of China, said over the weekend that a regulatory overhaul was ending, with rectification work involving 14 unspecified platform companies “basically completed.”

Last month, the Chinese government approved new games from Tencent and foreign developers, and also allowed a sharp expansion of capital for Ant's consumer-lending affiliate. Ma's recent announcement that he was ceding control of Ant raised hopes that the company might eventually be able to resurrect its IPO, albeit at a fraction of its previous, record-shattering valuation.

"I don't believe that the goal was ever to stifle innovation or growth," said Christina Woon, investment director for Asian equities at abrdn plc. "What we see here is a consistent desire for sustainability, whether in terms of economic growth or stability. Avoiding systemic risks is also a key concern."

As China's economy has slowed down, Xi Jinping has called for a shift to quality growth, with a focus on security issues like preventing pandemics and protecting the financial system from risks. He has also emphasised the need for self-reliance and breakthroughs in key technologies, especially as the US has moved to restrict China's access to advanced chips and limit its future growth potential.

It remains unclear what the reality of the situation looks like, and the latest policy changes suggest that there is uncertainty over the best way to achieve the desired goals.

China is now pausing massive investments aimed at building a semiconductor industry to compete with the US as a nationwide Covid resurgence strains finances. Despite the latest easing moves, China still hasn’t figured out the best way to harness data from private tech giants to benefit the wider economy. And moves to help the property sector won’t fix the problem of falling demand that could weigh on China’s growth through the end of the decade.

Alfred Wu, associate professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy, said that Xi is dealing with problems on an ad hoc basis. He added that, to quote a Chinese idiom, Xi is treating the head when there’s headache, and treating the feet when they’re in pain.

As Xi Jinping consolidates power, it becomes more difficult for him to get timely information from local officials or divergent viewpoints from his inner circle. With more power than any Chinese leader since Mao Zedong, Xi has used similar campaign-style mobilization tactics that give lower-ranking cadres even less incentive to speak out against bad policy. Indeed, anything but full-fledged support can mean a missed promotion, loss of a job or even time in jail.

The economic consequences of missteps are particularly great in China, where provinces have vastly different economies. This makes it difficult to implement one-size-fits-all policies. It is uncertain if top Communist Party leaders who backed Xi to ensure promotions will find the nerve to speak out when they disagree.

There's little evidence to suggest that Chinese people are revolting against Xi Jinping. In fact, the swift barrage of changes over the past few months suggests that Xi can roll out new orders as quickly as ever. This underscores the potential for the pendulum to swing back again at some point.

Adam Ni, publisher of the China Neican newsletter on Chinese politics, believes that Beijing has learned its lesson from past market shocks and will be less likely to cause them in the future. However, he remains cautious, saying that it is impossible to know for sure what the future holds.