Hidden turmoil

Uncertainty is rising in China

In both political and economic terms, uncertainty over the future of China has grown. On the political side, the apparent removal of the defence minister, Li Shangfu, who has disappeared from public view and is reportedly being probed for corruption, has demonstrated that all is not well at the highest levels in the Chinese Communist Party, or CCP. And on the economic side, the implications of a slow-moving crisis in real estate, which represents about 30 per cent of China’s gross domestic product, continue to have a ripple effect across the country’s economy and beyond.

In the latest batch of troubling economic news, a report from a US-based investment bank has suggested that net outflows from the Chinese economy in August were $42 billion, which, if correct, would represent the highest such level since late 2016, when the country’s equity and currency markets were in turmoil. Other analysts of China’s currency reserves have suggested that the central bank may be running down its reserves to manage the yuan, given the pressures put on it by capital outflows. The Chinese currency has lost more than 5 per cent of its value against the dollar so far this year, and is one of Asia’s worst-performing currencies in 2023. The central bank has reportedly ordered some brokerage companies in the mainland to cut down on their foreign exchange trade, and companies that need to make large purchases of foreign exchange, of over $50 million, would need clearances from the central bank. The implicit strengthening of capital controls reflects a broader concern about the strength of the economy. The real estate downturn is beginning to be reflected in falling apartment prices, which will have a cascading effect on consumer confidence — given that a large part of Chinese household wealth is tied up in real estate equity.

The price decline is visible, albeit not steep: The average sale price of existing homes in 100 cities across the country, according to a recent research report, went down by about 14 per cent in August compared to two years earlier. On the other hand, retail sales did go up almost 5 per cent year-on-year in August, so the immediate effect of the real estate slide may be more than counteracted by a base effect — last year at this time, after all, China was still under lockdown. There is therefore a general sense of uncertainty about the medium-term prospects of the economy — the uncertainty perhaps being reflected in the pressure on the currency and increased net outflows.

Unfortunately for the Chinese leadership, this economic uncertainty comes also at a time when political manoeuvring in Beijing is more opaque than ever. The disappearance of Mr Li follows the apparent disgrace of China’s foreign minister in July, when he too vanished from sight for weeks before being removed. Around the same time, there was an unexpected reshuffle of the leadership of the army’s rocket force. And immediately preceding Mr Li’s disappearance, the president of the army’s military court was also removed. This may be an anti-corruption campaign — but, in societies like China, anti-corruption is almost always a cover for political battles otherwise hidden from the public eye. The world, which relies in large part on China being a growth engine, will have to deal with instability there for the foreseeable future.