What lies beneath China’s murky economy

‘Zero-Covid’ fallout has only added to the turmoil after years of ballooning local government and corporate debt

Two words are forcing American companies to radically rethink their investment plans in China.

As the world’s second-largest economy “stalls,” pressure is building on President Xi Jinping’s controversial “zero-Covid” policy and incessant flash lockdowns.

The situation has even caused a crisis of confidence among firms linked to the US-China Business Council. More than half of its members have either “paused, delayed” or shelved investment in the country.

There have also been rumblings of discontent domestically. Earlier this week, a Chinese think tank warned of the damage being inflicted on the economy by vice-like Covid curbs.

“China is at risk of stalling. Preventing [that] risk should be the priority task,” Anbound Research Center said in a report entitled, It’s Time for China to Adjust Its Virus Control and Prevention Policies.

Pressure points:

  • China’s “zero-Covid” redline has become a sensitive subject.
  • The Anbound Research Center study was posted on the Twitter-like Weibo site on Sunday.
  • It was deleted 24 hours later, the Associated Press reported.
  • Already there are fears that China is facing an economic crisis on an unparalleled scale.
  • Unemployment is soaring, the property sector is in meltdown and consumer spending is on life-support.
  • Business confidence has also been hit as factory activity declines.

Trick will be to maintain political [and] social stability as it happens.

China Beige Book

Delve deeper: Major Chinese cities are again on “zero-Covid” alert. On Tuesday, high-tech metropolis Shenzhen closed down businesses while Dalian locked down millions. Mass testing is also being enforced nationwide.

Between the lines: The fallout has left the economy reeling after years of spiraling local government and corporate debt. Underlying problems in the property and banking sectors have only added to a toxic mix.

Big picture: “We keep hearing everyone say how desperately there needs to be a policy solution to this slowdown. The Party needs to … do something,” China Beige Book tweeted.

Wait for it: “But that’s incorrect, the slowdown is the solution. It’s baked. Trick will be to maintain political [and] social stability as it happens,” the research group pointed out.

Postscript: “China’s economy is weak – much weaker than markets understood at various times during the [first half] of 2020,” China Beige Book stated last week in a key report.

China Factor comment: The red tide is turning around the House of the Dragon, heralding a new wave of economic uncertainty.