Xi Jinping’s year of triumph has been derailed by turmoil

This was supposed to be a year of triumph for China’s Xi Jinping. It’s not begun well.

Late this year, the Communist Party’s National Congress will extend Xi’s leadership of the party for an unprecedented third term, confirming his place alongside Mao Zedong and Deng Xiaoping as one of the pivotal leaders in China’s history.

Xi Jinping is caught in the middle of the confrontation between the West and Russia over the invasion of Ukraine.Credit: AP

After last year’s frenzy of disruptive reforms, as Xi shifted the balance between socialism and capitalism that had underpinned China’s growth since Deng opened up its economy in the 1980s, tilting it towards “common prosperity”, this was supposed to be a year of consolidation for China’s economy.

As the global economy gathered momentum as it emerged from the pandemic, China, which prides itself on its management of the pandemic, was supposed to emerge faster and harder as the rest of the world still struggled with outbreaks of new strains of the virus.

It’s not quite working out as Xi might have expected.

Last year’s crackdowns on China’s property developers and big new economy companies caused an implosion in the property sector, a key driver of China’s economy, while the wave of assaults on the big tech companies saw trillions of dollars of wealth evaporate and enormous uncertainty generated.

The impacts of China’s forced deleveraging of its property developers have been so acute and persistent that Beijing has been compelled to introduce measures that seek to alleviate them. Investors had thought the worst of the property crisis and the crackdowns on tech companies had passed last year but are no longer convinced that is the case.

China’s growth has slowed – its target of about 5.5 per cent this year would, excluding the initial hit from the pandemic in 2020, be its weakest growth since the 2008 financial crisis – despite interest rate cuts, liquidity infusions and fiscal stimulus since the start of the year.

Now it is facing economic threats on a number of new, and some old, fronts.

It is experiencing the worst outbreaks of coronavirus infections since it was forced to completely lock down Wuhan in early 2020 and is now locking down entire provinces, including the key tech hub of Shenzhen, in response. The “COVID zero” approach to which Xi is committed is brutal and economically damaging.

China’s sharemarkets have had a horrific 2022.Credit: AP

It is caught in the middle of the confrontation between the West and Russia, with whom Xi agreed to a “no limits” friendship earlier this year, over Russia’s invasion of Ukraine. The US has threatened secondary sanctions on China if it supplied military aid to Russia or tries to help it evade the West’s sanctions to any material extent.

Potential multibillion-dollar fines for China’s Tencent Holdings for violations of anti-money-laundering laws and America’s naming of the first of potentially 200 Chinese companies that will be delisted in the US if they don’t show their audits to US accounting regulators have sparked another bout of selling of China’s biggest stocks by foreign investors.

Last year, the crackdown on big tech companies saw China’s two heavyweights, Alibaba and Tencent, lose more than $US1 trillion of their combined market capitalisation amid a $US2 trillion sell-off of Hong Kong-listed tech stock amid the fear and uncertainty generated by the sudden deluge of new and value-impacting regulation and massive fines (Alibaba was fined $US2.75 billion for alleged anti-trust violations).

This week, the continuing concerns about regulation of the sector, the outbreaks of COVID, and the potential for a collision between China and the West raised by US claims that Russia has asked China for military assistance triggered a sharemarket rout.

Monday was the worst day for the Hong Kong market since the global financial crisis and the Hang Seng tech index, which fell 11 per cent, had its worst day ever. On Tuesday, the CSI300 index of large stocks listed in Shanghai and Shenzhen was down another 4.6 per cent. The tech index fell another 8.1 per cent.

All of a sudden, China and its companies are experiencing a flight of capital from nervous foreign investors worried about its economic prospects, concerned about a continuing uncertainty weighing on its big tech sector and very fearful of the threat that China’s stance on the invasion of Ukraine might lead to it being sanctioned by the West.

China has been trying to have a bet each way on Ukraine, so far refusing to condemn the invasion, rule out helping Russia or applying any pressure to Russia to halt the bombing of Ukraine’s cities and ordinary citizens. Its public stance is one of non-involvement, even as its officials and stage media echo Russian propaganda.

China’s economy, and its economic and geopolitical ambitions, are far more at risk if it goes to Russia’s aid than if it remains on the fence.

With most of Russia’s foreign exchange reserves either frozen by the sanctions on its central bank or in hard-to-cash-out gold, its yuan-denominated reserves, albeit amounting to less than $100 billion, provide a potential workaround if China is willing to co-operate.

China is also the obvious market for Russia’s energy and commodity exports, having signed a $US188 billion long-term oil and gas deal with Russia just ahead of the invasion.

China has shown some concern about the prospect of being caught up in the West’s response to Russia’s aggression but has said it would retaliate if secondary sanctions were imposed on it.

Having seen how draconian the unprecedented financial sanctions on Russia are and how united the US, European Union and their allies have been in imposing them, China will be reluctant to take on much of the developed world to support a relatively minor economic player and now international pariah such as Russia, even if Vladimir Putin is Xi’s new “bestie”.

China’s economy, and its economic and geopolitical ambitions, are far more at risk if it goes to Russia’s aid than if it remains on the fence.

China signed a $US188 billion long-term oil and gas deal with Russia just ahead of the invasion.Credit: Bloomberg

The West will be just as anxious that China doesn’t force its hand. It’s one of the world’s biggest economies with myriad entanglements with the economies and financial systems of the rest of the world.

Severely sanctioning it would have extremely unpleasant repercussions for the global economy and financial system as well as raising the already heated temperature of the relationship between China and the US and its allies to more dangerous levels. A global depression might be the least worst of the outcomes.

Xi now has a lot of domestic issues to deal with if he wants his coronation at the party’s congress to be a smooth and celebratory one.

Overtly helping Russia to avoid the sanctions would – as Russia’s experience of a currency crash, hyperinflation, soaring interest rates, bank runs and an exodus of foreign companies and investment demonstrates – make it something other than triumphant.

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