The question of China’s ‘investability’ first arose late last year when Beijing’s harsh regulatory crackdown on big tech and real estate companies wiped billions of dollars off the books of foreign investors. The answer seems sealed after President Xi Jinping outmaneuvered rival political factions to pack China’s top leadership with his longtime aides at the Communist Party Congress last weekend.
How Xi Jinping can make Chinese markets investable again
The financial markets have sent an unequivocal message. U.S.-listed Chinese stocks tumbled on Monday, posting their steepest decline on record. The offshore yuan fell to its lowest since the unit began trading in 2010. Stocks remained jittery on Tuesday. The rout came despite China posting better-than-expected third-quarter gross domestic product figures.
Ironically, investors may not care about a strong politician. After the 2012 party congress, when Xi first came to power, and the party rally five years later, when he started to beef up, Chinese stocks have performed well. Financial markets tend to prefer a focused administrative team to internal conflicts and competing goals between politicians.
But investors this time have doubts as they are unsure whether Xi’s so-called new development model, which focuses on closing the wealth gap and the role of the state in the economy, will work. Now that there are no dissenting voices at the top, Xi’s aides could sink China’s financial markets into the ground.
When investors flee, they sell indiscriminately. A weaker yuan, for example, exacerbates outflows from the Chinese government bond market. Shares of electric vehicle and battery makers, such as BYD Co. and NIO Inc., also fell despite the sector being favored by policymakers.
As such, Beijing still has an interest in keeping the markets open to fund its budget deficit and big industrial tech ambition. So how can Xi make China investable again?
At this point, optics matter a lot more than pink macro data. All it takes is a few gentle gestures from Beijing to stabilize the market.
First, show what “common prosperity” is not. This slogan, which aims to expand the middle class and narrow the wealth gap, received renewed attention at the party convention. While Xi has been careful to explain that this is not about egalitarianism and that China wants a bigger economic pie for everyone, investors and businesses are nevertheless spooked, seeing it as a prelude to a further destruction of wealth. After all, history has given them a bitter pill: this drive for common prosperity arose amid Beijing’s big tech crackdown last year.
So how about bringing the tech billionaires, such as Jack Ma of Alibaba Group Holding Ltd., Pony Ma of Tencent Holdings Ltd. and Wang Xing from Meituan, to Beijing for a constructive dialogue? Don’t “summon” them because investors associate that word with other crackdowns. Instead, invite them to discuss how China can push its technological frontiers and show that Beijing still values the entrepreneurial spirit and contribution of these self-made billionaires to Chinese society.
Second, it now feels like China is closing itself off from the world. “Dual circulation,” another economic slogan promoted by Xi that focuses on the domestic economy and promotes exports in higher value-added sectors, is now included in the party constitution. With Covid Zero and a closed border for nearly three years, investors are rightly concerned that China is isolating itself. If so, why would China need foreign capital?
Xi says China is still open, so its bureaucrats must show it. How about reopening the border and reducing the number of quarantine days for incoming travellers? Let foreign businessmen come to see China for themselves, and let overseas Chinese go home to visit their families. It’s been too long. The Covid-Zero policy is a fiscal disaster anyway.
True, Xi does not care about optics. Had he done so, he would have included a woman in the new Politburo or helped a frail Hu Jintao avoid his predecessor’s unceremonious exit from the party congress.
But optics and gestures matter. To restore confidence in Chinese stocks, bonds and currency, welcoming self-made billionaires and foreigners to Beijing is the first step Xi can take.
More from Bloomberg Opinion:
• What a Defiant Xi at the Party Congress Tells Us: Shuli Ren
• Minsky’s real risk in China may be political: Matthew Brooker
• Xi’s ‘zero Covid’ is wrecking China’s economy: Niall Ferguson
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She holds the CFA charter.
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