With Covid-19 receding, the Chinese government has an opportunity to return to a more pragmatic approach to public health and the economy. Once the lockdowns are lifted, significant stimulus measures should be introduced, which should lead to a recovery in the second half.
The number of new cases of Omicron among Shanghai’s general population (excluding those in quarantine facilities) has steadily declined, meaning the end of lockdowns in the city is expected to come soon. On each of the five days through May 18, there were no new cases in the general population and three cases on May 19, compared to 1,246 cases on April 10. There have been fewer than 10 cases per day for the past 12 days in Shanghai. The total number of Omicron cases nationwide (including in quarantine facilities) has dropped 96% from the peak in April.
Shanghai officials have, for the first time, announced detailed plans for the reopening of the city in the coming weeks. Soon after people are released from home confinement and allowed to return to factories, offices and shops, I expect the government to launch a major stimulus package, designed to support a recovery visible economy by the Party Congress in the fall of this year, when Xi Jinping will be officially awarded a third five-year term as party leader.
Expect stronger credit flows for businesses and households and more rate cuts, including for mortgages. There will be more public spending, including for public works projects. Support will be provided to small businesses, including loan and rent relief, as well as additional tax cuts. And there may be direct consumer support to kick-start post-lockdown spending.
The consumer price index is rising in China, but not enough to make the People’s Bank of China nervous about easing, unlike the Federal Reserve’s tightening plans. In the first four months of 2022, China’s CPI rose at a healthy pace of 1.4%, compared to 8% in the US and 6.9% in the UK. This follows the experience of 2021, when the CPI rose 0.9% in China, 4.7% in the US and 2.5% in the UK.
Most news from China is bleak, which makes it easy to feel pessimistic. I remain optimistic, however, because the main problems are bad short-term policy choices by the government rather than deeper structural problems that are harder to fix. Over the past three decades, Beijing has made many bad choices, usually motivated by misguided political factors. But the government has generally changed course to a more pragmatic course, and I expect that to happen again.
It should be remembered that the leadership of the Chinese Communist Party, including under Xi, succeeded when it was pragmatic.
When I first visited China as a student in 1980, its gross domestic product per capita was lower than that of Afghanistan, Haiti and Bangladesh, and 80% of the Chinese population lived in below the World Bank poverty line. Today, Chinese consumers are estimated to account for 20% of global luxury goods sales. Last year, the Covid-19 recovery in inflation-adjusted private consumption was larger in China, compared to 2019 levels, than in the United States and the eurozone.
All of this was the result of pragmatic policies that emphasized market-based reforms and reduced the economic role of the state. When I returned to China in 1984 as a young American diplomat, there were no private companies, everyone worked for the state. Today, around 90% of urban employment is in small private enterprises. As the public sector continues to contract, almost all net job creation comes from private companies.
Some investors worry that the regulatory crackdown in recent years is an effort to roll back China’s private sector. However, Xi is trying to address the same socio-economic concerns that most democracies grapple with, though initial implementation has been chaotic. If the regulatory process is improved and Xi manages to reduce inequality and strengthen business competition, it could lay the foundation for the next phase of China’s market-based development.
There has been evidence of a return to pragmatism on Beijing’s part. Negotiations between the Chinese and U.S. governments over a process for the U.S. Public Company Accounting Oversight Board to inspect the audit books of accounting firms in China working for Chinese companies listed in New York had been deadlocked since. many years. With a deadline approaching that could lead to all Chinese companies being delisted from US markets, Beijing has announced that it is now open to accepting the same PCAOB inspection process that is in place in 25 other countries.
I expect the PCAOB to undertake several test inspections of Chinese accounting firm manuals in the coming months. If all goes well, an agreement to avoid delisting should be announced by the end of the year.
Andy Rothman is an investment strategist at Matthews Asia, responsible for developing research on China’s economic and political developments. Previously, he lived and worked in China for over 20 years and was a China-focused US diplomat.
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