Current situation of China

Regarding Covid. China has loosened some of its Covid restrictions a bit, although the number of cases has risen to the highest levels in months. Quarantine for close contacts will be changed from seven days at a government facility to five days plus three days at home. Authorities will also stop registering secondary contacts-meaning many people will avoid going into quarantine.

However, despite minor changes, most restrictions are still in effect. Xi has insisted on adhering to a strict zero Covid policy that includes lockdowns, even as the rest of the world moves forward. This means that in many cities residents are subject to sudden restrictions on their movement and cuts to jobs and education.

For example, in Guangzhou, the current epicenter of the Covid wave in China, this week, locals in one area were banned from going out and only one person from each household was allowed to go to the grocery store. Public transport was suspended while schools and workplaces were also closed.

Quarantines in Zhengzhou, now another Covid centre, have caused many workers living at a large factory owned by Taiwanese iPhone maker Foxconn to flee the area on foot to escape restrictions.

Economy. When assessing China’s progress, the data spanning from 2010 to 2021 and covering financial system development, market competition, trade openness, moving towards a modern innovation system, FDI openness and portfolio openness, show that the Chinese economy is progressing unequivocally.

“As the rest of the world goes into recession, short-term demand abroad for Chinese goods is weakening and a long-term focus on export-led growth is no substitute for domestic consumption,” said Niels Graham, deputy director of the GeoEconomics Center.

Beijing needs to increase the country’s own household consumption for China’s transition to a sustainable growth model. The past decade has also seen China move away from the United States and the European Union as innovation partners, preferring instead to look inward. This trend will likely continue as Xi stresses the importance of greater “confidence and strength in science and technology” during the party congress.

This isn’t without risk: Graham said weakening foreign investment in China could reduce the country’s innovative potential by tightening funds and reducing opportunities for international cooperation.

Despite China’s progress in R&D spending, the country still lags behind the open market economy average in innovation quality measures. For example, in 2021, China’s payments for foreign use of its intellectual property amounted to only one-seventh of the average amount an open market economy receives when adjusted for GDP; This implies that Chinese intellectual property is unattractive compared to other leading economies.

Also, China’s progress towards market economy norms slowed in 2021 in most areas, including innovation. Beijing’s reforms to improve its financial system and increase market competitiveness have stalled, and its openness to both portfolio and direct investment has declined since 2020.

The Twentieth Party Congress showed no sign of opposition to this trend, especially since for the first time since 1989, the Politburo Standing Committee consisted entirely of people loyal to the party leader. The Atlantic Council reported that this would have dangerous consequences for China’s long-term growth rate.

The prospect of the collapse of China’s real estate sector and the damage done to China’s GDP growth prospects by its adherence to zero-COVID policies may force Beijing to return to the pro-growth reform path the CCP outlined in 2013 but largely abandoned in Xi’s second term.

The real estate market. China has prepared a 16-item plan to stabilize the real estate markets. The plan includes real estate development loans for developers, new home buying rules for individuals, extending developers’ outstanding bank loans, offering private loans to ensure projects are completed, market-based approaches including bankruptcy and restructuring, easing restrictions on banks’ real estate loans.

Still, if Covid restrictions continue, economists wonder if the new real estate policies will gain enough traction. The question that still hangs in the markets centers around whether Xi’s apparent U-turn in mass lockdowns is real or fake for global investors.

Still, Covid policies remain a question mark. “Low policy rates still seem necessary today, with the customs market in deep downturn, sluggish private loan demand and October trade data showing a clear downward turn in export growth,” Gavekal’s He says.

While the rate cuts will help soften the downturn, they are not the best tool for solving the two major growth problems China is currently facing: the decline in property sales and the financial crisis Covid restraints among property developers. While the rate cuts won’t hurt the currency much, they won’t help it much either.

Therefore, both increased bailout efforts and a mechanism to dispose of bad debts, as Japan did in the 2000s and the US in the 1980s, are needed. Speculation that Beijing could cut the number of real estate developers from 40,000 to 2,000 will also cheer investors.

Now, China’s deepening real estate crisis is intensifying pressures on the $1.6 trillion portion of the country’s inland bond market. This has cities and local governments stepping in to stabilize things. To cheer investors up, these government-backed proposals have generally been successful in the short run.

Conclusion? The reduction of seven days in hotel quarantine plus three days at home to five days plus three is only a minor change, but the expectation is that this could continue to decline at some point in the future.

Again, for a country where Zero-Covid has destroyed its economy, baby steps are better than no steps at all.

Raising the bar for central quarantine in China would also ease tensions for ordinary people as it only provides a flash of light at the end of the Covid tunnel.

Looking ahead, China’s progress in trade openness and innovation is likely to continue. The Twentieth Party Congress signaled that there was no major change in China’s economic-policy direction, and Xi pointed to trade and innovation as a priority for his third term. Still, there are gaps in this progress that point to deeper structural weaknesses that cannot be quickly overcome, putting China at risk of sliding back.

While China is making progress for a turnaround in the real estate sector, economists and investors abroad are adopting a “wait and see” strategy for the relaxation of Covid policies and the implementation of the aforementioned 16 articles.

Kaynak: Tera Yatırım-Enver Erkan
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