Chinese President Xi Jinping (Image: Pang Xinglei/Xinhua via AP)

The bizarre sight of China’s President Xi calling for Western central banks to hold off on monetary policy tightening illustrates how the Chinese economy, and perhaps Xi’s position itself, is a lot weaker than commonly assumed.

Xi has only one ambition in 2022 and that is to be reelected by the Party Congress late this year to a third term as head of China’s Community Party and its government. Even though it is considered a shoo-in, there’s 10 difficult months from now until the vote.

The Chinese economy is stuttering not because of global demand, but because of the policies of Xi and his regime, across multiple fronts.

Xi’s “common prosperity” agenda is a return to more traditional Chinese Communist Party state control in key sectors like big tech and education and the harsh application of laws to regulate private enterprise and public morality (though not for the billionaire princeling class running China) — all while it deals with the consequences of stimulating a property boom to avoid a slowdown back in 2015 and 2016.

That property boom is imploding because the rising debt burden it was creating was becoming too much of a threat to Xi’s government. Evergrande, China’s second biggest developer with more than US$300 billion in mostly domestic debt (external debt is an estimated US$28 billion), was allowed to drift and then head towards collapse late last year before being pulled back and a de-facto takeover ordered because of the threat to the financial system.

Xi’s government has been working to free up more cash in the Chinese financial system by lowering bank reserve asset ratios and interest rates, with the aim of injecting over US$500 billion into the economy by the end of February. That’s not for funding new loans or increasing investment, but helping to repay short term loans and prevent the property sector inflicting more damage on the financial system.

Chinese real estate investment in December plunged 13.9% from a year earlier, compared with November’s 4.3% decline, data from the National Bureau of Statistics showed. New construction starts as measured by floor area also contracted in 2021, 11.4% — worse than the 1.2% decline recorded in 2020, and it’s accelerating.

Home sales by volume rose 5.3% over the course of 2021 — but that’s compared with a 9.3% gain in the January-November period. Home price growth has also been declining since May last year, and prices actually fell in November and December. As we know from the Australian experience, falling house prices can have significant impacts on consumer sentiment and demand. The Reserve Bank of Australia estimates property accounts for around 60% of household assets in China.

Problems in China’s energy sector at least have stabilised — but only after the government landed 700,000 tonnes of previously banned Australian thermal coal. Domestic coal production also surged to hit record monthly totals in November and December and for the year as a whole.

But now COVID-19 is back to haunt Xi and his strict control and elimination approach to the virus as more than 200 million Chinese plan to move across the country for the Lunar New Year (February 1) and associated 40 days of holidays. That includes the flagship Beijing Winter Olympics starting February 4. Xi has locked himself into a zero-COVID policy, which is already being tested by the Omicron variant.

The one area of continuing success for the Chinese economy is exports — China hit a new record for exports in 2021 and for 15 months in a row up to last month (so much for the “supply chain crisis”).

But Xi currently has little else going for him: domestic demand in China is weak — retail sales have hardly moved since mid-year, and growth in imports slowed noticeably at the end of 2021. That’s why he needs Western consumers to go on spending furiously — and Western central banks to hold off on anything that might discourage them.