Stock Market Sell-Off Greets China's New Top Leadership

Chinese stock markets experienced one of the worst routs in years on Monday, as investors reacted to the news that Chinese President Xi Jinping had not only won a third five-year term in office but had stacked the most senior levels of the government exclusively with individuals loyal to him and his ideology.

The Hang Seng Index, which tracks shares on the Hong Kong Stock Exchange, ended the day down 6.4%, its lowest level since 2009. Other stock indices on the mainland were also down sharply, as international investors pulled $2.5 billion worth of capital out of the country, the largest single-day outflow on record.

Experts attributed the rush for the exits to the confirmation that China will remain on the course Xi has charted for the country. This includes a ‘zero-COVID’ policy that has led to massive lockdowns and economic disruption, as well as continued government involvement in the banking industry and the broader economy, which has left the country with a mounting debt crisis.

Also on Monday, China announced that its economy had grown at a 3.9% annualized rate in the third quarter of 2022. It was slightly higher than expected but still well short of the rate necessary for China to meet the government’s prediction that the economy would grow by 5.5% for the full year.

The announcement of the economic growth rate had been scheduled for last week but was abruptly postponed, possibly in order to avoid news reports about it distracting attention from the meeting of Communist Party leaders.

Politburo shake up

That Xi would break precedent and take a third term in office was no surprise, but his accession was accompanied by an unexpected shake-up of the membership of the seven-member Central Committee of the Politburo. Xi replaced four members of the body, which makes all significant policy decisions, with men seen as loyal to him.

‘What probably shocked a fair number of people was the clean sweep in the standing committee of the Politburo,’ Ian Johnson, a senior fellow for China studies at the Council on Foreign Relations, told VOA. ‘He got all these people in who are basically cronies of his, and people who are identified as more pro-market did not get seats and were shunted aside.’

Among those elevated to the committee was Li Qiang, the Shanghai Party secretary, who played a major role in a controversial months-long COVID-19 lockdown of that city earlier this year. Also ascending was Ding Xuexiang, Xi’s private secretary and head of the Central Committee’s powerful General Office.

Among those who did not return for another term on the committee was Hu Chunhua, considered one of the more economically liberal thinkers in Chinese leadership, and once seen as a potential successor to Xi. Hu’s departure made it abundantly clear that there would be little pushback against Xi’s economic policy on the newly constituted committee.

‘With political ties taking increasing precedence over technocratic experience, the quality of policy implementation could decline,’ Julian Evans-Pritchard, senior China economist at Capital Economics, wrote on Monday in a note to the firm’s clients. ‘And the dismantling of remaining checks and balances will make it harder for the Party to shift course if Xi Jinping’s policy agenda falters.’

Focus on security

In his remarks to the assembled members of the Communist Party at the beginning of the days-long gathering, Xi broke little ground in terms of announcing new initiatives or changing existing ones.

He praised the country’s response to the pandemic and indicated no intention of shifting away from that policy. He touted China’s extraordinary economic growth over the preceding 10 years, during which the size of the economy more than doubled.

Residents wear masks wait at a bus stop in the Central Business District in Beijing, Oct. 24, 2022. China’s economic growth picked up in the latest quarter but still was among the weakest in decades as the ruling Communist Party tries to reverse a slump.

While Xi promised continued economic reforms and ‘opening up’ to the rest of the world, he also stressed that state-owned enterprises would continue to play a major role in the economy and that development in the private sector would be ‘guided’ by the Communist Party.

A major focus of his remarks was on national security. He painted a picture of a Chinese nation beset by threats from both within and without, promising to ‘resolutely safeguard the security of China’s state power, systems and ideology, and build up security capacity in key areas.’

Business community disappointed

‘We were hoping for signals about the need to reset relations with the U.S. Instead, it appears that uncertainty will continue and may worsen,’ Doug Barry, a vice president with the U.S.-China Business Council, told VOA in an email exchange. ‘The next inflection point may come if presidents Biden and Xi meet in Bali next month, which would be an ideal time to announce some confidence-building measures with neither person accused of being soft on the other.’

However, Barry said, positions in both Washington and Beijing appear to be hardening, lowering the odds of compromise being found in the near term.

‘The good news is that trade between the countries remains good, though both imports and exports are off from last year’s totals, probably because of COVID and China’s slowing economy,’ Barry said. ‘Now with China’s leadership in place, we will soon get a better sense of what the future looks like.’

Market realization

Johnson said that the violent reaction by the stock market on Monday may have been a result of a somewhat belated recognition that there is little prospect of China changing course and becoming more market-friendly in the foreseeable future.

For the past 30 years, he said, there was a broad assumption among investors that even though China was an authoritarian state, ‘It was run by people who understood how things work internationally, and they would come up with relatively investor-friendly policies.’

Now, though, that assumption has ‘evaporated,’ Johnson said.

‘Beijing still talks about reform and trying to kind of open up to the outside world and all this kind of thing,’ he said. ‘But there’s no evidence of that.’