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An aerial view of people lining up for nucleic acid tests during a new round of citywide testing on September 9, 2022 in Tianjin, China.
VCG/VCG via Getty Images
In a press briefing this week, Asian Development Bank Chief Economist Albert Park dropped something of a geopolitical bombshell: China is growing slower than Asia’s developing economies for the first time in more than three decades.
Admittedly, it shouldn’t be all that surprising given how President Xi Jinping’s “zero Covid” gambit is slamming Chinese gross domestic product. Yet the ADB’s forecast that Xi’s economy will grow just 3.3% this year compared to 4.3% for developing Asia will put the darkening road toward 2023 in stark relief.
“Developing Asia continues to recover, but risks loom large,” Park told reporters on September 20. “A significant downturn in the world economy would severely undermine demand for the region’s exports. Stronger-than-expected monetary tightening in advanced economies could lead to financial instability. And growth in [China] faces challenges from recurrent lockdowns and a weak property sector.”
All this means “governments in developing Asia need to remain vigilant against these risks and take the necessary steps to contain inflation without derailing growth,” Park concluded.
Left unsaid, though, is how China’s leaders seem set on undermining Asia’s 2023 just to avoid admitting they should have recalibrated their Covid strategies long ago. Folks can quibble with U.S. President Joe Biden saying that “the pandemic is over.” But China’s government seems locked in September 2020. It hasn’t seemed to notice that today’s more transmissible, less deadly variants won’t be stopped by padlocking 65 million people at a time at home.
Xi’s team, though, wants to appear strong and resolute heading to October 16, when the Communist Party begins a twice-a-decade congress. There, Xi is all but certain to secure a norm-busting third term as leader. After that, it’s hoped, epidemiologists will have a shot at convincing Xi that all zero Covid is containing is growth.
The thing about the ADB’s numbers is they could end up being overly optimistic. Asia’s biggest economy, remember, eked out just 0.4% in the second quarter from a year ago. Banks from Nomura Holdings to Morgan Stanley are penciling sub-3% this year.
To be sure, Xi’s team has been ramping up stimulus—and there are signs it’s working. In August, retail sales rose 5.4% year on year, double July’s 2.7% increase. Industrial production jumped a better-than-expected 4.2% in August. In the first eight months of the year, fixed asset investment rose 5.8%. Yet there are valid reasons to worry that headwinds from Xi’s Covid absolutism overwhelm any stimulus Beijing can muster.
Chinese President Xi Jinping makes a speech as he meets with Tajikistani President Emomali Rahmon (not seen) during the Shanghai Cooperation Organization (SCO) Leaders’ Summit in Samarkand, Uzbekistan on September 15, 2022.
Tajikistani Presidency / Handout/Anadolu Agency via Getty Images
Talk in Beijing is that once secure in scoring another term, Xi’s men will finally begin to ease up on Covid lockdowns. Chinese officials might claim, for example, that the nation’s scientists perfected a new-and-improved vaccination technology. Fair enough, but at what economic cost?
The 3.3% pace the ADB expects for China this year could become the norm. Or, perhaps even lower than that. Thanks in part to Xi’s Covid own-goal, Oxford Economics thinks China could find itself growing an average 3% annually in the next decade after averaging 4.5% in the current one.
Covid isn’t the only self-inflicted wound Xi’s inner circle has imposed on the most-populous nation. The decision in November 2020 to show tech founders like Alibaba Group’s Jack Ma who’s boss continues to have a broadening chilling effort on mainland innovation.
Earlier this year, analysts and investors began calling Chinese internet companies “uninvestable.” Xi’s team spent much of this year proving the point.
The yuan is down nearly 11% this year as capital zooms to more consistent pastures. Beijing’s property crisis, a challenge exacerbated by Covid lockdowns, surely isn’t helping to reassure investors.
It’s complicated, of course. The Federal Reserve’s most aggressive tightening cycle since the mid-1990s is upending Asia by way of a surging dollar. It was the Fed’s 1994-1995 rate hikes that made dollar pegs in Bangkok, Jakarta and Seoul impossible to defend.
The more Fed Chairman Jerome Powell’s team hits the brakes, the more surging yields will undermine global growth and knock China and the rest of developing Asia off balance.
It’s worrisome, too, that Asia-region foreign-currency reserves are rapidly being depleted. Economists at Standard Chartered Bank warn that Asian nations, excluding China, are sitting on the lowest reserve levels relative to GDP since 2008. That leaves the region with fewer buffers if global markets quake anew as 2023 approaches.
Few developments would cheer Asian governments or investors more than a stable and growing China. Yet, as the ADB suggests, the year ahead could be one of disorienting role reversals. None more so than Chinese officials having to harness growth in their neighborhood—not provide it.