China grapples with challenges of slowing economy, outbreaks

Amid these concerns, coupled with upcoming party summit, Xi skips G20, COP26

China’s government is grappling with twin challenges of weaker-than-expected economic growth and fresh COVID-19 outbreaks, just as the country’s leadership prepares for a key Communist Party conclave next week.

After months of a strong recovery, China’s factory activity in October slowed, the second straight monthly contraction, as the economy reels from a power crisis, the fallout from troubles plaguing a highly leveraged real sector, and increasing costs of raw materials.

Meanwhile, the country, which has followed a stringent “zero Covid” strategy and continued to maintain strict curbs on international travel while the rest of the world opens up, is now reeling from the biggest outbreak in months. Close to 400 cases have been reported in the last two weeks — a small number compared with the rest of the world, but the spread of the outbreak in multiple provinces has led to stringent lockdowns, further squeezing the economy.

The twin challenges confront the Communist Party ahead of a key leadership meeting next week. The Communist Party’s Central Committee will gather in Beijing — which has also reported new COVID-19 cases — on November 8 for an annual gathering called a plenum.

The sixth plenum assumes particular significance as one of the last major meetings before next October’s once-in-five-year leadership congress, when General Secretary and President Xi Jinping is expected to begin his third five-year term.

The plenum will serve as a platform for Mr. Xi, who scrapped the previously in place ten-year term limit, to ensure support before the congress and ensure the appointment of his acolytes. Many senior officials, including second-ranked Premier Li Keqiang, are expected to retire next year.

The holding of the plenum next week, coupled with likely concerns over COVID-19, prompted Mr. Xi to skip the G20 in Rome and the COP-26 climate summit in the United Kingdom, which is being attended by Prime Minister Narendra Modi, U.S. President Joe Biden and other world leaders. Mr. Xi has not left China since a visit to Myanmar in mid-January 2020, a few days before he ordered the lockdown in Wuhan where the COVID-19 outbreak first began.

While the Communist Party will bank on its now tried-and-tested approach of stringent lockdowns and mass testing to stamp out the current outbreak, the economic costs of China’s “zero-COVID” approach are adding to economic pressures.

Power crisis

China’s official National Bureau of Statistics said on Sunday the contraction in manufacturing activity in October was on account of a power shortage affecting large parts of China and rising raw material prices. Supply constraints in China’s coal mines coupled with surging coal prices have led to blackouts and forced rationing of power supply in industrial belts.

A commentary in the official Xinhua news agency that was widely circulated in the official Chinese press last week highlighted ten pressing challenges facing the Chinese economy, which grew 4.9% in the third quarter of this year, down from 7.9% in the second quarter. The commentary said the government “would wean the economy off its dependence on the property sector and debt”, and it highlighted power cuts and the real estate crisis as short-term challenges and the need to ensure “common prosperity” as a longer term challenge, the Hong Kong-based South China Morning Post reported.

‘Common prosperity’

Mr. Xi faces a balancing act of pressing ahead with his avowed plans to restructure the Chinese economy through what he is calling a push for “common prosperity”, including moves to curb the growing sway of major private sector firms especially in the tech sector and to reduce debt in the real estate sector. Among the measures his administration has taken in the past year includes anti-monopoly investigations into Alibaba, curbs on the highly lucrative private education sector, and warnings to real estate firms such as the Evergrande group that they cannot expect bailouts even as they face defaults. The moves have wiped out close to $1 trillion in market value of major Chinese private sector firms.

At the same time, Mr. Xi needs to keep the economy ticking ahead of next year’s congress and to control the COVID-19 spread, which the Party’s official media in the past year has trumpeted as a major triumph of the China model compared to the West. The Party media has also been hitting out at calls for more open investigations into COVID-19’s origins and has even suggested the coronavirus outbreak came from the U.S., all to protect the Party’s image and push back against criticism from overseas.

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