IS CHINA READY FOR DANGEROUS STORMS?

On October 24, the headlines of international media outlets were teeming with excitement: "Panic in stock markets in Hong Kong, Shanghai and Shenzhen", "Sense of desperation grips Chinese markets", "Situation is worse than during the 2008 global financial crisis", "Foreign investors rush to get rid of Chinese securities".

These statements were understandable. The Hang Seng Enterprises index, which reports the value of Chinese stocks listed in Hong Kong Stock Exchange, fell by 7.3%, which is the worst figure since the index was created in 1994. The Hang Seng Tech Index tracking the top 30 technology companies fell by 9.7%. Shares of Alibaba and Tencent, the flagships of Chinese tech sector fell more than 11%, with their total market value falling by $54bn.

Panic has spread to the US as well. Shares of Alibaba, electric car makers Nio and Xpeng, search engine Baidu and other leading Chinese companies trading in NYSE fell drastically as well. The yuan weakened sharply hitting a 14-year low against the US dollar.

Why the panic?

The day before, the 20th Congress of the Chinese Communist Party concluded in Beijing, where Xi Jinping quite predictably been re-elected for a third five-year term. The business community knew this, but for some reason hoped to hear from the Chinese leader promises to provide more favourable investment environment.

However, the Chinese President reiterated his commitment to the zero-tolerance COVID policy and proposed nothing to resolve the crisis in the real estate sector. It became clear that the two main factors holding back China's economic growth will remain in place indefinitely.

What about reforms?

There are also a number of long-term structural trends adding to these disadvantages: rapidly ageing Chinese population, shrinking workforce, low productivity growth and high levels of public and private debt. There are fears that the economy will soon begin to stagnate, gaining a maximum of around 3% in the 2020s and then falling to around 2% in the 2030s.

Yet with little or no emphasis on economic reforms, which both local and international shareholders expected of Xi, he made promises to strengthen the country's potential to develop a strategic deterrence capability. In his words, "China's international influence, credibility and ability to shape the world has grown considerably", but China must be prepared for "strong winds, high waves and even dangerous storms".

The absence of supporters of market reforms and private businesses in the new Politburo and its Standing Committee, such as the incumbent (until next March) Prime Minister Li Keqiang, Vice-Premier Liu He and central bank governor Yi Gang, do not promise good tidings for the Chinese economy either.

Significant reshuffling of governing bodies at party conventions is a common practice. But by getting rid of Li Keqiang and others, Xi surrounded himself by loyal supporters sharing his own views only. This composition suggests that loyalty to Xi overrides ability and experience.

Xi's priorities—security and self-sufficiency—will "hamper China's productivity growth", "his determination to stay in power makes a course correction unlikely," Capital Economics reported.

No competitors

Despite holding the three highest leadership positions in the previous ten years (General Secretary of the CPC, Chairman of the CPC Central Military Commission and President), Xi Jinping has had to govern the country with input from other political factions in the politburo and the government.

Factionalism, or the balance of power and positions between competing factions, has been a hallmark of Chinese politics ever since the Asian giant entered the era of reforms under Deng Xiaoping.

But Xi Jinping, once in charge, was systematically eliminating rivals and dissenters. His main weapon has been the fight against corruption. Over the past ten years, at least 4.4 million people have been prosecuted for bribery.

Contrary to popular belief among Western analysts, Xi may not have been re-elected for a third term at the 20th Party Congress. Opponents could make him step down if they had convinced enough members of the Standing Committee that he had lost the support of the regular CCP members.

Apparently, it is no coincidence that a number of major officials and party figures were arrested just weeks before the congress.

In September-October, conditional death sentences and long terms of imprisonment were indicted to such monsters of Chinese politics as former Deputy Minister of Public Security Sun Lijunyu and Minister of Justice Fu Zhenghua, CEO of Chinese telecommunications giant China Unicom, two provincial vice-governors, the chief prosecutor of Shanghai, the deputy chairman of the Tibet Autonomous Region's People's Government and others.

There was also the risk of interference by party elders, who traditionally wield considerable influence over domestic Chinese politics. Zhao Ziyang, for example, was prematurely removed as the secretary general of CPC in 1989 precisely because of pressure from retired elites.

Therefore, as an additional insurance, Xi threatened the pensioners with investigations into their past work activities. They were forbidden to criticise the Central Committee’s policies, "disseminate politically negative speech, participate in illegal social organisations and use their past authority and influence to benefit themselves and others".

Next March, the National People's Congress is due to confirm Xi Jinping as the president of the country for the third time, with his closest and most loyal supporter, Li Qiang, now head of the Shanghai Communist Party, replacing the current prime minister Li Keqiang.

According to analysts, this means President Xi will gain greater control over all branches of China, including the economy, which has traditionally been the prerogative of the prime minister, who heads the State Council.

Given that the youngest member of the new Standing Committee is now 60 years old and there is no potential successor to the incumbent secretary general, Xi has no plans to retire any time soon.

Change of direction

Five years ago, Chinese leadership acknowledged profound and complex changes in the international arena, but underlined that China had bright prospects. Now, they pay more attention to potential dangers and worst-case scenarios.

Moreover, Xi stated that "external attempts to suppress and contain China can intensify at any time" and even repeated several times in his report about foreign or external interference in China's affairs. He referred four times to Taiwan, once to sanctions on Hong Kong and once to Chinese foreign policy. There were no such statements in the previous report released at the 19th Party Congress.

Unlike five years ago, the current report called in harsh terms the US policy being "an attempt to blackmail, contain, block and exert maximum pressure on China", which is aimed, according to Beijing, at preventing China's rise.

While acknowledging the difficult foreign policy situation, Xi’s keynote address was focused little on specific response initiatives. In particular, China's response to the escalating competition with Washington is that improvement in bilateral relations depends on Washington correcting its own behaviour, rather than on any change on Beijing's part.

Remarkably, China's flagship Belt and Road Initiative, which has funded $1 trillion worth of infrastructure projects around the world since its launch in 2013, does not appear in the foreign policy section of the address as before. With China’s finding it increasingly difficult to get recipient countries to pay their debts, Beijing has become more cautious about foreign lending. Domestically, discussions are underway on a shortened version of the Belt and Road, which will focus on risk reduction and compensation.

There are new ideas as well. These include the Global Development Initiative (GDI) and the Global Security Initiative (GSI).

GDI includes projects for developing countries on poverty alleviation, food security and clean energy. GSI can be interpreted as an attempt to contrast the Chinese concept of global security with the American one.

The focus on national security in the military, economic and ideological areas clearly visible in Xi’s keynote speech suggests that China has no intention for a serious softening of relations with the US and its military allies in the near future, reports the independent international organisation The International Crisis Group.

It turns out that the panic in world stock markets the day after the CPC congress was neither accidental nor short-lived. International businesses have concluded that China was moving in the direction opposite to economic liberalisation. It is now more focused on overcoming certain ideological and geopolitical challenges than on reforms and openness—policies that have propelled China into global economic leadership.