Xi Jinping's pivot

I recently returned from a short trip to Hong Kong. The mood on the ground was relatively upbeat—certainly more buoyant than when I visited this time last year—likely due to a recent policy shift in China (more on that in a bit), the large fiscal deficits being run by the government (~6.2% of GDP in the financial year that ended yesterday), and the recent easing by the US Fed which—due to the island's US dollar peg—has slightly loosened domestic monetary policy in what is an interest rate-sensitive, property-heavy economy.

But it has still been a rough few years for the Chinese entrepôt. Its local stock market, the Hang Seng Index, has seen zero nominal returns over the past five years (for context, the ASX200 has grown by 55% over the same period):

It's also struggling to retain its current population, let alone grow: the all-too familiar combo of low fertility rates and an aging population—at 0.72%, Hong Kong's fertility rate ranks only above Macau's 0.66%—has meant its total population has been shrinking.

Years of negative net migration outflows have only added to its woes, although last year it finally bucked that trend—perhaps the result of the city's "talent admission drive"—but only just enough to offset the ongoing exodus of (presumably skilled) locals:

"It seems the government has put more emphasis on attracting foreign talent than retaining home-grown local talent. Could the push-and-pull factors for locals leaving Hong Kong be similar to the reasons for the government's struggle to retain foreign talent?"

But none of that means Hong Kong won't be around for some time. It's more populated than the entire state of Victoria, and is still useful to the Chinese Communist Party (CCP)—unlike the mainland, the city's capital account is open and people and goods flow freely, making it a good place for Chinese companies to raise offshore capital—so will retain a semblance of 'independence' until China decides to float the renminbi (perhaps never).

But I digress. What I really want to get into today is the mood change in mainland China. Specifically, Xi Jinping's pivot back to the market forces that he had so brutally cut down only a few years ago, and what it might mean for Australia.

The return of the market

In mid-February, Xi met publicly with local tech leaders like Jack Ma, the billionaire he 'disappeared' in 2020, signalling a thaw in his relationship with the sector:

"China's leader urged the assembled founders and CEOs to maintain their competitive spirit and have confidence in the country's future, emphasising that the challenges they faced were 'temporary'. He promised to abolish unreasonable fees or fines against private firms and level the competitive playing field — a common complaint of entrepreneurs in a state-dominated system. On Monday, China's parliament said it would review laws centred on promoting the private economy."

To understand why Xi Jinping is suddenly pivoting back towards the tech sector requires an understanding of his motives. For Xi, there are two concerns that sit above all others: ensuring that the Chinese Communist Party (CCP) maintains power; and that Xi himself retains a grip on the CCP.

By 2020, billionaires like Jack Ma had become so successful and popular that Xi felt threatened. Ma's financial group, Ant, was directly competing with state-controlled banks. Private tech companies gathered and controlled vast swaths of data. Meanwhile, state-owned enterprises and all levels of government—largely due to their heavy dependence on the property sector for revenues—were, and still are, struggling amidst a bust for the ages.

Xi perceived the relative success of entrepreneurs like Ma, as compared to the state, as a potential challenge to the CCP's centralised authority—no individual or entity, no matter how successful, can be above the party!

So, Xi spent the next few years—which were interrupted by the pandemic—neutralising the potential rivals whom he believed risked inspiring alternative visions for China's future. Enter "common prosperity", Xi's Mao-inspired slogan for "affluence and prosperity for all, rather than the few", but which was really just a cover for increased CCP control over the Chinese economy.

That goal has now been achieved, but at the cost of economic growth. And just as a private sector that grows too big is a threat to Xi and the CCP, so too is anaemic economic growth, which risks social unrest.

Hence, the pivot.

The special action plan

China's 'special action plan', unveiled in mid-March, focused heavily on raising Chinese consumption:

In his annual speech to China's parliament on March 5th, Li Qiang, China's prime minister, listed 'vigorously' boosting consumption as the first of ten priorities. The state has doubled the size of a trade-in scheme that invites households to swap old appliances, cars and gadgets for new ones. It will also increase the subsidy for medical insurance and raise the basic pension collected by rural people and city folk who do not work from a miserly 123 yuan ($17) a month to a paltry 143 yuan. All told, Mr Li announced extra fiscal stimulus worth 2% of GDP. Although that is better than nothing, it is not quite as much as had been hoped.

Fiscal stimulus is being used because China is mired in deflation caused by a bursting property bubble and its mostly-closed capital account, which—as I wrote last year—means it largely imports monetary policy from abroad:

"China desperately needs to ease monetary policy. But doing so would cause one of two things: a depreciation in the exchange rate, which would probably force a retaliation from the US and other countries with potentially even larger impacts on the domestic economy than the monetary easing itself; or capital flight, which would raise the risk that the current malaise becomes a full-blown financial crisis.

Neither of those are likely to be particularly appealing to Xi Jinping."

An escalating trade war with the US has also brought the existing problems with manufacturing overcapacity to the fore, which Xi Jinping directed following the property bust.