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After a year of crackdowns, investors welcome Beijing’s new focus on ‘stability’

December 16, 2021, 10:06 AM UTC

“Stability” was the watchword at China’s Central Economic Work Conference, which concluded Friday in Beijing.

The annual conference is a bureaucratic ritual, but one that’s closely scrutinized by China watchers because it is attended by members of the Politburo Standing Committee, chaired by President Xi Jinping and sets the agenda for economic policy decisions in the coming year.

At the close of this year’s session, the group issued a 4,700 word mission statement warning that China’s economy faces the “threefold pressures” of shrinking demand, supply shocks, and “weaker expectations.” The statement cites the need for “stability” 25 times.

A sample passage: “We need to concentrate on stabilizing the macroeconomy, keeping the economic operation within a reasonable range and maintaining social stability.”

That may sound like a dire assessment, but it’s one that global analysts and investors cheered. Many are interpreting the work conference’s fixation on stability as evidence China’s leaders recognize the need for a policy course correction, to prop up their nation’s floundering economy. Optimists hope Beijing is signaling it will back off on the heavy-handed regulatory crackdowns that have roiled markets over the past year, and may even be readying more stimulus, both fiscal and monetary, to shore up China’s troubled residential property sector.

In recent months, analysts from a host of global investment houses—including Goldman Sachs Group, BlackRock, UBS Group, and HSBC—have turned bullish on China shares. Many say the MSCI China Index, which lags the performance of its global peers by 37% for the year, is a bargain and poised to rally in 2022. (See Grady’s “Final Figure” item below.)

Meanwhile, economists at several major investment firms have raised their 2022 growth forecasts for the broader Chinese economy. A tally of predictions of ten economists, published today by Bloomberg, found that seven expect Chinese officials to aim for a growth rate of 5% or higher in 2022, with three others seeing the possibility of a slightly lower goal. Achieving that target would almost certainly require looser fiscal and monetary policies.

Beijing has set a growth target of 6.0% for 2021 and is likely to clear that threshold easily despite weak growth of 4.9% in the third quarter compared to the same period last year. But the world’s second-largest economy is struggling on many fronts.

China’s zero-tolerance approach to battling the coronavirus could keep borders closed to global travel for another year, or even longer, weighing down growth. China remains locked in a trade war with the U.S., which imposes tariffs on an estimated 66% of Chinese exports to one of its largest markets, while U.S. sanctions deny leading Chinese companies like Huawei Technologies access to critical markets and technologies.

But the biggest threat to economic stability lurks in China’s property market. Two of China’s largest developers, China Evergrande Group and Kaisa Group Holdings, defaulted this month, and this week at least one other, Shimao Group, teetered on the brink of collapse.

One way of looking at the work conference’s new emphasis on “stability” is to applaud the pragmatism of China’s technocrats. When policies overshoot and strangle growth, China’s policymakers recognize their mistake and scramble to reverse course.

But it is also worth wondering, when it comes to managing the economy, why China overshoots in the first place—and seems to overshoot so often, and by so far. The Wall Street Journal‘s Josh Chin offers a possible answer to that question in a recent analysis of Xi Jinping’s leadership style. The Chinese president, he notes, has consolidated power over vast swathes of his nation’s economy and is also “a micromanager who intervenes often, unpredictably and sometimes vaguely in policy matters big and small.”

The result, typically, is confusion and panic among bureaucrats who, because they are uncertain about how far to push Xi’s agenda, “err on the side of aggressive interpretation [which] sometimes means reversing policies later.” Chin offers many examples of how that management style has strangled growth.

A couple of personal notes. I was saddened to learn this week that M on the Bund, the fantastic Shanghai restaurant managed by the inimitable Michelle Garnaut, will be closing its doors in February of next year. Beyond its glamor, and great food, M on the Bund was a cultural institution where people from all over the world gathered to exchange ideas, wheel and deal, and just have fun. I’ll miss it terribly.

And, alas, Eastworld, too, is officially folding up shop. This will be the last Eastworld newsletter you recieve. Thank you for all your suggestions, comments and support over our two-year run!

You can still follow my reporting and coverage, and that of Fortune’s entire Asia team using the “My Favorites” function on Fortune.com. My Favorites allows subscribers to follow their favorite topics and journalists and receive personalized emails curate with the stories that matter most to them. Look for me under “Authors” and be sure to also follow the rest of the Eastworld team: Eamon Barrett, Nicholas Gordon, Yvonne Lau, Grady McGregor, and Claire Zillman.

Keep in touch!

More Eastworld news below.

Clay Chandler
clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Grady McGregor. Reach him at grady.mcgregor@fortune.com

Eastworld news

A definition boost

Singapore is changing its definition of what it means to be fully vaccinated to include booster shots. In Singapore, being fully vaccinated grants privileges like being able to dine at restaurants, go to the gym, and enter shopping malls, but those rights will soon only be available to those that get the extra jabs. Singapore and Israel are now among the first countries to change definitions of being fully vaccinated, in a trend that is gaining global momentum amid the rise of the Omicron variant of COVID-19. Fortune

South Korea's stalled reopening

Weeks after it started lifting restrictions, South Korea is backtracking on its reopening efforts after its highest single-day tally of COVID-19 infections since the pandemic began. The country recorded 7,850 cases on Wednesday, and is now imposing tighter restrictions on private gatherings, limiting hours for restaurants, and pushing more students and office workers to study and work from home. Nikkei Asia

Huawei

Chinese telecoms giant Huawei has a broader role in tracking Chinese citizens than it has publicly acknowledged, according to PowerPoint presentations reviewed by the Washington Post. The presentations showed that the 5G telecoms network widely deployed voice recording analysis to assist Chinese authorities in national security matters, helped design re-education and labor programs in prisons, and provided equipment for surveillance efforts in China’s western Xinjiang province. Huawei denied knowledge of the projects. Washington Post

Troll king

On Thursday, Hu Xijin, the editor of Chinese nationalistic tabloid The Global Times, announced his retirement. Hu, according to a profile published in The Guardian this week, has played a leading role in shaping China’s more combative communications style that has become popular among Chinese state media employees and diplomats. Hu largely parrots official government lines and attacks critics of China. But Hu’s Twitter account is also unusually restrained among prominent voices in China, such as when he criticized official messaging for making light of India's COVID death toll. His tweets also often move markets, after he accurately forecasted Beijing's moves during the U.S.-China trade war. The Guardian

Markets and movers

Golden shares – China’s government is expanding its practice into taking minority stakes in private companies, especially in firms that process large amounts of data like ride-hailer Didi. The management stakes, known as a golden share arrangement, started roughly five years ago when Beijing started taking stakes in online media companies.

Binance – The world’s largest cryptocurrency exchange is setting up a joint venture company with Indonesia’s state-owned telecom company PT Telkom to form a new digital-asset exchange in Indonesia. Binance already has investments in Tokocrypto, a major Indonesian crypto trading platform. Elsewhere in Southeast Asia, Binance recently ended its plans to have a local crypto trading platform in Singapore. 

Forced labor – On Tuesday, the U.S. House of Representatives passed legislation that would ban goods from China’s Xinjiang region unless companies can prove that they are not made with forced labor. The bill is expected to pass the Senate, and the White House also signalled its support for the bill on Wednesday. China denies all reports of forced labor in Xinjiang.

Grab –  The Singaporean ride-hailer and superapp is buying Malaysian grocery chain Jaya Grocer Holdings for an undisclosed sum. Jaya has 40 stores in Malaysia, and could help Grab bolster its food delivery business in the country. It's one of Grab's first moves since a tepid debut on the Nasdaq exchange two weeks ago.  

Chinaequity – Wang Chaoyang, founder of the private equity firm Chinaequity investment, has been absent from public view since late November, when he was last seen at his office in Beijing and authorities had sought him for questioning. Wang manages $1.7 billion in assets, but regulators have accused the company of wrongdoing related to some of Wang’s investments.

Sinovac – A new study from Hong Kong University suggests that the COVID-19 vaccine from Chinese maker Sinovac may not provide adequate protection against Omicron. Sinovac’s COVID vaccine is the most used vaccine in the world, but the findings have raised questions about its efficacy compared to vaccines from firms like BioNTech and Moderna.

DJI – On Thursday, the U.S. treasury department will add eight Chinese companies including drone maker DJI and artificial intelligence firm Megvii to an investment blacklist for allegedly aiding Chinese authorities in surveillance efforts in China’s western Xinjiang province, according to the Financial Times. The blacklist would block U.S. investors from taking stakes in the Chinese firms.

Final figure

40%

Wall Street is buying China’s dip. Amid China’s tech and property crackdowns this year, China’s MSCI Index, which tracks the performance of Chinese securities listed in Shanghai and Shenzhen, has lagged global peers by the largest point in decades. But JPMorgan’s global head of macro quantitive research Marko Kolanovic predicted this week that the MSCI China index will surge nearly 40% in 2022. In recent months, Goldman Sachs, UBS Group, BlackRock, and HSBC, have similarly taken bullish positions in the Chinese market, believing that policy makers will loosen their reins on the economy next year.

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