March 18th, 2022 by Nathan Levine and Danny Li | 22/14

What’s Happening: China’s economic tsar, Vice Premier Liu He, convened an urgent meeting of China’s top economic policy-making body, the Financial Stability and Development Committee (FSDC), on March 16, in reaction to a plunging Chinese stock market and rapidly slowing growth expectations. The rare public statement released following the meeting is highly significant. The document:

• Highlighted that “concrete actions must be taken bolster the economy in the first quarter” and pledged to “actively introduce market-friendly policies” to “maintain stable operation of the capital market.”
• Called for “effective risk prevention and mitigation solutions” to deal with a struggling property sector.
• Signaled a quick end to Beijing’s ‘anti-monopoly’ policies, tasking “relevant agencies with completing rectification work on large platform companies as soon as possible.”
• Tellingly ordered that any government policy that could impact the capital market “be coordinated with the financial regulatory authorities in advance.”

The Background: China’s economy was already on shaky ground, thanks to Xi Jinping's “pivot to the state” and crackdown on private sector leaders like China’s technology giants. Now the aftershocks of the war in Ukraine and significant local outbreaks of COVID-19 have contributed to a rapidly worsening outlook.

• Investors have been deeply spooked, leading to a dramatic sell-off in Chinese equities. The Shanghai Composite Index fell by more than 12% between March 1 and March 15, while the Hang Seng China Enterprises Index plunged an unprecedented 24%.

The Impact: Liu He’s intervention sparked a temporary rally, with stocks like the Hang Seng Tech Index surging 20% that same afternoon, but this enthusiasm proved short-lived.

• The following day the index tumbled 11%, in its worst-ever decline, continuing a $2.1 trillion wipeout for Chinese tech companies’ value since their peak a year earlier.
• And though the Shanghai Composite remained steady, the Hang Seng China Enterprises index fell 7.2%, marking its biggest drop since November 2008.
• Investors do not appear to yet be wholly convinced by the government’s reassurances that they, and the Chinese private sector as a whole, are really going to be made a priority.

Behind the Curtain: The meeting is the latest sign that Beijing is scrambling to try to course correct as Xi Jinping’s signature state-centric “common prosperity” economic policies collide with reality.

• Pullback began at the key Central Economic Work Conference (CEWC) meeting in December 2021, which dropped previous emphasis on redistribution policies. In the months since there’s been a gradual readjustment in economic policy toward more “market-friendly policies,” combined with growing government stimulus measures.
• But China’s leaders have been startled by recent economic assessments, according to economic advisers in Beijing recently quoted by the Wall Street Journal. While they expected the common prosperity campaign to hit certain sectors, the sheer “speed of the slowdown was a surprise” to leadership.
• Now capital appears to be fleeing China as investors reassess the risks of remaining in the China market amid sharp geopolitical tensions with the United States and Europe, and as growing coronavirus outbreaks threaten to upend China’s “zero-COVID” strategy and slam already strained supply chains.
• The FSDC meeting underlines that Chinese policymakers are now seriously perturbed,  revealing deep concern that China may not be able to achieve the ambitious 5.5% GDP growth target for 2022 set at the Two Sessions meeting earlier in March without resorting to state intervention to support the economy.

The Bottom Line: That Liu He felt the need for such an intervention to stem market panic draws attention to the fact that China’s economic woes are likely beginning to increase political pressure on Xi Jinping.

• Increasingly, there are bubbling signs of discontent with how Xi has handled the economy, as well as foreign policy.
• If Xi can’t successfully stabilize the economy and minimize the blowback from the geopolitical tensions he himself has egged on, he may find himself on uncertain ground heading into this fall’s crucial 20th Party Congress, where he has long hoped to secure a third term in office – and then perhaps rule for life.

Beyond the Bottom Line: Xi declared at the CEWC last year that 2022 was to be a “year of stability” for China as he focused on his political goals. That hope has already been shattered.