Xi Jinping has consolidated control of China’s ruling Communist Party to a degree unseen since Mao Zedong.
His challenge will now be to show he can just as deftly manage an economy that has weakened considerably this year.
Chinese markets tumbled on Monday after Beijing rolled out a party leadership packed with Xi loyalists, and the government said China’s economy expanded by 3.9% in the third quarter of 2022. While the figure was above economists’ forecasts, that left growth for the first nine months of the year at 3.0%, putting China on pace to miss its official full-year target of 5.5% by a large margin.
Other data released Monday showed sluggishness in domestic demand, slumping exports and home prices that fell at their steepest level in more than seven years in September.
Excluding 2020, when China and the world were reeling from the initial outbreak of Covid-19, this year is almost certain to be the country’s slowest year of growth in a generation.
All that has focused attention on whether Mr. Xi, having cemented his role as China’s leader for another five years at a party conclave concluded this past weekend, will now pivot toward more assertive moves to reignite growth.
Steps he could take include easing the country’s tough zero-Covid rules, which have forced lockdowns and slowed business activity, and more support for the country’s ailing property market, including possible bailouts of distressed developers.
Many economists believe he will take a different approach, giving priority to political objectives—including bigger roles for inefficient state-owned enterprises in the economy and a continued emphasis on strict Covid-control measures—instead of more pragmatic steps to ensure a strong recovery.
Mr. Xi’s move to promote numerous allies and protégés to top leadership positions at the just-completed party congress was interpreted by analysts as a sign that a major course correction isn’t in the offing.
“We do not think there will be big policy changes because most, if not all, existing policy decisions have been agreed with Xi,” said Iris Pang, an economist at ING.
China’s currency traded onshore slumped to its weakest level against the U.S. dollar in 14 years on Monday. Hong Kong’s Hang Seng Index fell to the lowest level since April 2009. In Shanghai, the benchmark stock index fell by 2%, bringing the loss so far this year to 18%.
The biggest question is when Mr. Xi will relent on his zero-Covid policy, which many economists believe is motivated in part by a desire to show the superiority of Communist Party rule over Western approaches to the virus.
Official statistics say about 5,200 people in mainland China have died of Covid, compared with more than 1 million in the U.S. But the government’s strict rules, which include quarantines for people exposed to the virus and tight surveillance, have dampened consumer confidence and hurt spending.
Julian Evans-Pritchard, senior China economist at Capital Economics, said on Monday he believes any meaningful relaxation to the zero-Covid policy won’t come before 2024. Other economists believe it could come sooner, though not as quickly as had been hoped earlier this year.
Liang Wannian, China’s top health expert and a senior government adviser, said during an interview with the country’s state broadcaster CCTV earlier this month that the country has no time to exit from its zero-Covid strategy, citing elevated risks of imported infections and the need to prevent mass deaths. Chinese state media have also defended the need for sticking to existing Covid policies in articles published this month.
Another big question is whether Mr. Xi will take more decisive steps to stop a slow-motion housing-market meltdown that has been unfolding for more than a year. Mr. Xi so far has showed limited interest in reviving the sector, which many economists and Chinese officials feared had turned into a bubble that needed to be contained.
The phrase “housing is for living, not for speculation,” first proposed by Mr. Xi in 2017 and a signal of his commitment to reducing leverage in the sector, appeared again in his 72-page work report to the party congress.
Economists from Société Générale said that while an immediate exit from zero-Covid has become less likely, a small recovery in the housing sector could occur.
In a research note, it cited an improvement in housing completions since August, spurred by government-aid measures, though it also warned that consumers will remain hesitant to buy apartments, leading to a vicious cycle, if more support isn’t rolled out.
Despite China’s challenges, several economists still believe gross domestic product will expand by over 4% next year. That would beat the 2.7% global growth rate projected by the International Monetary Fund, as recession and inflation risks persist in many countries, though it would be below prepandemic growth levels in China.
Chinese growth could be stronger if Mr. Xi moves more quickly to lift Covid controls, triggering a strong rebound in consumer spending, analysts say.
Andy Rothman, an investment strategist at Matthews Asia, said he believes that Mr. Xi will shift to a more pragmatic path now that he is more secure in power, striking a better balance between protecting public health and facilitating economic recovery.
Mr. Rothman interpreted the promotion of Li Qiang, the Shanghai party secretary who oversaw that city’s monthslong Covid lockdown this spring, to a top leadership role as a sign that Mr. Xi could move more quickly than some expect to demonstrate that change in his Covid policy is coming.
Li Qiang could succeed Li Keqiang as China’s premier, The Wall Street Journal previously reported.
“Not changing course would have serious negative consequences on the economy and thus for the party,” said Mr. Rothman.
Any steps to loosen the Covid policy could come at a time when other headwinds are building, however, including a slowdown in demand for Chinese exports as the U.S. and other economies weaken. In September, China’s exports grew by 5.7% from a year earlier, decelerating from a 7.1% gain in August.
Many economists also worry that with so many Xi loyalists added to the Chinese leadership at the latest party congress, including many with limited experience in economic policy-making, Mr. Xi could become more isolated when it comes to managing the economy, with few if any officials willing to challenge him.
“Xi’s power play is negative for markets and China’s long-term trajectory because it removes officials with the inclination and ability to moderate his policies and agitate for needed reforms,” wrote Michael Hirson, head of China research at 22V Research, in a note to clients.
Underscoring the central role that politics is likely to play over the next five years in China’s economic policy-making, the country’s GDP numbers were released without warning on Monday, nearly a week after China’s statistics bureau had—just as abruptly—postponed their publication. Authorities also skipped hosting a news conference on Monday to discuss the data.
Among the priorities Mr. Xi laid out in a speech at the party congress were steps to regulate the “wealth accumulation mechanism”—widely interpreted as a desire to spread wealth more evenly across society—and beef up China’s self-reliance in technology, energy and food supplies.
Those priorities stoked concerns among some analysts that China’s economy could shift toward one more dominated by state players, rather than more dynamic private enterprises. That could reduce efficiency in the economy and lower China’s productivity growth.
Investors should expect the state “to relentlessly increase its weight in the Chinese economy” going forward, said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis.