(Bloomberg) — Chinese President Xi Jinping has spent much of the past decade focused on stability. But as he lays the ground for a likely third term as leader, he’s facing more crises than ever, both at home and abroad.
The economy is being dragged down to its weakest growth in more than three decades, barring 2020’s pandemic year. The housing market is in crisis, with mounting defaults. A crackdown on the country’s biggest technology companies has scared off investors. And now Russia’s invasion of Ukraine is forcing China to reassess its support for Vladimir Putin, while managing increasingly fraught ties with the U.S.
Those threats are overshadowing Xi’s successes, like keeping the pandemic largely under control after the initial outbreak in Wuhan and declaring an end to absolute poverty. For a Communist Party highly sensitive to signs of social unrest linked to any economic downturn, the Chinese leader will be pushed to do more to stabilize growth as he makes a bid to stay in power.
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Those policy signs may come during the National People’s Congress, when around 3,000 delegates meet in Beijing from Saturday for China’s annual legislative meetings. It’s the biggest political event before a twice-a-decade party leadership reshuffle slated for the second half of the year.
“Xi will do all that it takes this year to prevent economic or financial crises from derailing his preparations to secure a norm-defying third term as Chinese leader at the 20th Party Congress,” said Neil Thomas, a Chinese politics and foreign policy analyst at Eurasia Group. “But there’s always a tail risk that an external shock could put events beyond Beijing’s control, which is why China has urged a quick and peaceful conclusion to the Ukraine crisis.”
Here’s a look at some of Xi’s biggest challenges:
Housing Slump
The downturn in the crucial property market has been deeper and more enduring than many had expected, causing developers to default, housing prices to slump and home buyers to hold back on purchases.
Housing sales fell in the second half of last year and that decline continued through February, turning the economically vital construction industry into a drag on growth and hurting developers and suppliers of steel, cement, paint and everything else needed to build apartments. It’s also put local governments under strain, since sales of land to developers are a major source of income for regional authorities.
In an effort to turn the situation around, banks are now being pushed to lower interest rates and cut down payments for home buyers to boost sales. At the same time though, officials are sticking to their mantra that “houses are for living in, not for speculation,” suggesting the government doesn’t want to see another surge in home prices.
Economic Slowdown
The housing crisis has contributed to weaker growth, forcing the central bank to change direction by restarting monetary easing. The People’s Bank of China has cut interest rates and promised to open its toolbox wider, the government has pledged tax cuts, and the Politburo has signaled more support is coming.
The dilemma for policy makers is how to boost stimulus without using their old play book of wasteful spending and ratcheting up debt.
Xi’s desire to make sure he gets to the Party Congress without any “major disruption” could push him to pursue the short-term goals of quickly boosting growth and employment, said Trey McArver, co-founder of research firm Trivium China. “He’s going to be willing to err on the side of perhaps making sure that there’s not large economic dislocations or problems in the run up to the Congress, at the expense of maybe having to clean those up in the years to come.”
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How much the government is focusing on short-term goals will become clearer on Saturday, when Premier Li Keqiang delivers what will be his ninth and likely final report outlining the government’s plans for the year. That report usually includes a target for overall GDP growth, as well as industrial policies and spending and tax plans.
Economists said in December the growth target this year would be at least 5%, but with the slowdown since then and promises of stimulus, the leadership may set a more ambitious goal.
Ukraine Crisis
Russia’s invasion of Ukraine has thrown another wild card into China’s efforts to maintain stability, with commodities and oil prices surging. On the diplomatic front, Xi faces international pressure to support sanctions against Russia, a key strategic partner. China’s decision not to sign onto the sanctions puts the focus on Beijing and any financial assistance it could provide Russia.
Considering that more than a third of China’s $3.2 trillion in reserves are in U.S. treasuries, the almost unprecedented decision to freeze Russia’s access to much of its reserves only underlines how vulnerable China would be if faced with a similar situation. The fallout from the Russia-Ukraine war for China could end up being an accelerated effort to decouple financially from the U.S., which would be destabilizing to capital markets and foreign investment.
Inflation
Inflation is another concern for the government, and one that could quickly get worse due to the war in Europe. While consumer-price growth slowed in January and is well below target, the sudden jump in energy prices due to the Russian invasion will likely boost the cost of oil and natural gas imports, especially if there are also disruptions from sanctions to the $5 billion in energy China buys from Russia each month.
“The specter of inflation keeps policy makers in Beijing up at night,” Trivium’s McArver said, noting that Chinese people have historically been very sensitive to the issue of inflation, including before the 1989 Tiananmen Square protests.
Covid Zero
Sporadic outbreaks have been quashed by strict virus control measures, which have curbed both travel and already-weak consumer spending.
China’s policy of extended quarantines at the border means it is increasingly isolated from the rest of the world, and the success against the virus has come at great cost to government budgets. Local authorities often have to pay the cost of repeated rounds of mass testing or isolation, as well as providing support during quarantines and lockdowns such as in Xian recently.
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With the large outbreak in Hong Kong providing an example of what happens if the virus gets out of control, there is likely to be no let up in the ongoing Covid Zero approach this year, meaning the costs will continue to build for the government and economy.
“The party faces potential crises relating to the Covid-19 pandemic,” said Jane Duckett, director of the Scottish Centre for China Research at the University of Glasgow. “Should the omicron, or another variant, spread across China, we might see the same outcome as in Hong Kong including rising deaths and pressure on hospitals.”
Falling Births
China’s population crisis is not a short-term problem, but the gradual relaxation of the one-child policy and recent policies to encourage women to have more children haven’t been enough to stop the precipitous drop in births. If that continues, it means the population will start shrinking even earlier than expected.
Despite the drop in births and the even faster fall in the number of people of working age, the government has so far been unable or unwilling to raise the national retirement age, an unpopular policy idea that it’s been talking about for years. China will also need to increase the amount of money it sets aside for pensions and healthcare for the rapidly growing population of elderly people.
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