China’s economic pledge stoked investor euphoria, but analysts now wonder if Xi Jinping has really abandoned his anti-markets crusade

March 19, 2022, 11:15 AM UTC

Investors cheered Wednesday when China’s top economic policy czar promised a package of sweeping measures to support the nation’s economy and financial markets. 

The pledge, announced by Vice Premier Liu He after convening a special meeting of the powerful State Council’s Financial Stability and Development Committee, reversed a historic rout in China shares on mainland and global equity markets Monday and Tuesday. China stocks roared back on Wednesday and Thursday, with many posting double-digit gains, as investors bet Liu’s intervention meant Chinese President Xi Jinping had finally abandoned his two-year crusade to rein in what he has called the forces of “disorderly capital.” 

But the rally stalled on Friday, and as the dust settles on a tumultuous week, the skeptics are creeping back. 

Analysts and insiders cite a host of reasons to doubt that Liu’s assurances signal a fundamental shift in China’s approach to managing markets and regulating the nation’s technology and property giants. Rather, many argue, Wednesday’s unusual announcement should be seen as a modest course correction—or worse, a cynical attempt by China’s leaders to shore up stock prices with empty rhetoric. 

“China’s mother of all stock market rallies, following the mother of all stock market falls, looks to be pausing for breath today,” wrote Jeffery Halley, senior market analyst for Asia Pacific at Oanda, a foreign currency exchange and brokerage firm, in a note to clients Friday. “With China having effectively said they will backstop the stock market, markets probably want to see the color of their money through action now.” 

“The current investor enthusiasm looks overdone to us,” said analysts at Trivium China, a Beijing-based market research firm. “Nothing has materially changed in terms of the policy stance, despite officials’ promises to ‘do better.’ Meanwhile, the headwinds to China’s economy continue to mount.”

Liu’s declaration of support for China’s markets and entrepreneurs follows a fraught two-year period in which the leaders of China’s Communist Party unleashed a hail of harsh policies designed to control and undermine them. 

Since October 2020, when Xi scrapped the $34 billion public share sale planned for billionaire Jack Ma’s Ant Group, Chinese regulators have pummeled China’s largest tech companies relentlessly, forcing them to pay multi-billion dollar antitrust penalties, implement radical restructurings, and submit to sweeping new security and data protection rules. Officials have pressured founders to retire early and cough up billions in contributions for government-sanctioned charities. With a handful of edicts, they wiped out China’s $100 billion online tutoring sector almost overnight.

The rolling crackdowns battered profits, triggering a predictable exodus by panicked investors. wiping out more than $2 trillion in market value before Wednesday’s turnaround. The catalysts to selloffs Monday and Tuesday were Russia’s invasion of Ukraine and a series of unexpectedly severe COVID-19 outbreaks in Shenzhen, Shanghai, and China’s northern Jilin province. The former kindled investor fears that the U.S. might slap further sanctions on China and Chinese companies because of a ‘no-limits’ pact Beijing signed with Moscow only a month ago. The latter conjured the specter of cascading lockdowns in China’s major cities and invited speculation that China’s borders will remain closed to foreign travel indefinitely.    

The financial stability committee sought to dispel the gloomy sentiment with a broad promise that the government would “actively introduce policies that benefit markets” and “boost the economy” in the first quarter of 2022. The committee pledged relief from the regulatory crackdown on internet companies, stating that the “rectification of the major platform companies” should be completed “as soon as possible.” 

The committee also hinted that securities regulators in the U.S. and China are close to resolving differences on accounting and disclosure requirements that could lead to hundreds of Chinese companies being forced to delist from U.S. exchanges, and promised looser monetary policy and state support for China’s troubled real estate sector.

Andrew Batson, senior analyst at Gavekal Dragonomics, a market research firm, suggests in a recent client note that the tone of the committee’s assurances seemed aimed at convincing global investors of the return of the “old China”—the halcyon pre-Xi days when China’s leaders prioritized growth above all, encouraged integration with the world economy, and didn’t fuss over the enrichment of a few internet or real estate tycoons.

But Batson, too, is among the skeptics: “The basic political structures that were ultimately responsible for the recent loss of market confidence have not changed,” he argues. “And the fact that the share prices of China’s largest companies are moving by double-digit percentages in single trading sessions, based on purely political speculation and signals, only reinforces how much their fortunes depend on government direction.” 

The financial stability committee’s declaration avows that, henceforth, “for any policy that will have an impact on financial markets, it should first be coordinated with financial regulators.”  

But that promise does nothing to roll back dramatic changes in China’s regulatory landscape over the past two years. China’s financial regulators must now jostle with officials in other agencies including the Cyberspace Administration of China (CAC) and the nation’s antitrust watchdog, the State Administration for Market Regulation (SAMR), that have been granted sweeping new powers under Xi.

The CAC, which began as a small entity in China’s propaganda department, now has broad authority over internet regulation including data security and algorithm regulation. The SAMR, created only four years ago, last year slapped Alibaba Group Holding with a record $2.4 billion antitrust fine and ordered 34 other internet companies to undertake an extensive review of their competitive conduct.

These agencies aren’t going away, analysts warn, and their regulatory mandates haven’t changed.

Analysts at Trivium caution: “The tech crackdown is not over, but it may slow down some, and become a bit more predictable.” 

Other analysts point out that the financial stability committee has little power to alter China’s geopolitical and macroeconomic challenges. Biden administration officials say that in his two-hour video call with Xi on Friday, the U.S. president warned explicitly that China will suffer economic sanctions if it supports Russia’s Ukraine invasion or seeks to help Russia lessen the pain of Western sanctions. China has said that it hopes for a peaceful resolution of the Ukraine crisis, but Xi hasn’t ruled out aiding Russia. 

On Thursday, Xi hinted that China would show more flexibility in the effort to fight COVID outbreaks in order to minimize the economic costs—a shift in tone from his earlier position of zero tolerance for the virus. Factories in Shenzhen and Dongguan were permitted to resume operations on Friday, and Chinese officials expressed confidence in their ability to halt the virus’s progress in those cities and the rest of the nation. But the threat of further outbreaks remains. 

And China’s policy priorities could shift with changes in leadership. Liu, the economic czar, was the point man in China’s tumultuous trade negotiations with former President Donald Trump. He has degrees in both finance and economics, and has long been considered one of China’s most experienced pro-market advocates. But Liu is 70 and due to retire later this year, along with a host of other senior cadres thought to favor market-oriented policies. The man widely expected to succeed Liu is He Lifeng, who befriended Xi in the southern port city of Xiamen where both served in the 1980s and is now considered one of Xi’s closest confidantes. He has a doctorate in economics from Xiamen University and currently serves as chairman of the National Development and Reform Commission. But his views on economic policy are not well known.

The enigma at the center of the debate about whether China is signaling a fundamental policy shift is Xi himself. Does the statement issued by Liu and the financial stability committee reflect a shift in the thinking of the Chinese leader? It’s a crucial question because Xi has emerged as the most powerful Chinese leader since Mao Zedong. And despite market turbulence, a slowing economy, and growing frustration with the COVID-zero policies, he is widely expected to win an unprecedented third five-year term as China’s president. 

“This is a change in short-term tactics, not long-term strategy,” argues Batson. “There is some speculation that the recent missteps in economic management have weakened Xi’s position. But the reality is that he has consolidated power within the Communist Party more effectively than either of his predecessors, and no real rival has been permitted to emerge.” 

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