China confronted with a many-headed crisis
China is currently in the grips of a multifaceted crisis that is undoubtedly the most complex since the Mao era, such is its intricacy.
On the political front, the 20th National Congress of the Chinese Communist Party (CCP) paved the way for an autocratic concentration of power. The nation’s keys are now in the hands of a single man, Xi Jinping, who is surrounded exclusively by a band of ultra-loyalists. The public humiliation of former General Secretary Hu Jintao being manhandled out of the Congress was a clear symbol of this. Concentrating power may work, as long as Xi Jinping remains in good shape. But if he goes, the whole edifice could crumble.
Then there is real estate. Initially hit by a crisis among real estate developers, the sector is seeing house prices fall month in and month out. Accounting for nearly a quarter of GDP and 70% of household wealth in China, the backbone of the Chinese economy is gradually eroding.
On the healthcare front, the country is facing a COVID-19 wave of an unprecedented scale – the number of daily cases is now higher than in the January 2020 and spring 2022 waves. Although the government has recently loosened its zero-COVID policy, the logic remains unchanged. Drastic measures are imposed as soon as new cases emerge, regardless of economic or social cost.
On the geopolitical front, the desire to annex Taiwan is likely to further cool already glacial relations with the US. This risks isolating the country, which would be all the more costly given that the Chinese economy is still largely reliant on exports.
Social discontent seems higher than ever in China. Of course, in a country stifled by the grip of the CCP, this may look moderate in comparison with the movements that occasionally rock western democracies. Images of demonstrations linked to the real estate crisis or against COVID-19 restrictions are nonetheless proliferating. In a country where youth employment is running at close to 20%, this is a major challenge for the authorities.
Lastly, on the economic front, growth for 2022 is forecast at just 3.3% – its lowest level for the last 40 years. The Chinese engine of the global economy is slowing dangerously. If the healthcare situation continues to deteriorate, this risks endangering growth in the coming quarters.
As of 23 November, the Chinese equity market, represented by the MSCI China, is down 33% since the beginning of the year, while the fall in the S&P 500 in the US is half of this at 16%, and the Euro Stoxx 50 is down just 6%. This is a sign that financial markets are already properly discounting the present and forthcoming difficulties facing China. Before looking to open up a new Silk Road, China must undoubtedly start by strengthening its Great Wall.
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