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China Paralyzed As Feud Erupts Between Xi And Li Over Covid Response

Tyler Durden's Photo
by Tyler Durden
Friday, May 27, 2022 - 03:00 AM

For the past several months there had been rumors that a quiet feud had erupted within Beijing's top echelons, the result of disagreement within the communist party whether Xi Jinping's "zero covid" policy was the proper solution for the country of 1.4 billion and which two and a half years ago unleashed the coronavirus plague on the world. Well, now it's official because as Bloomberg reported this morning, China finds itself gripped by "discord" at the very top level, with president Xi and premier Li on opposite sides of the the "zero covid" ring.

As Bloomberg notes, shortly after Premier Li Keqiang held the previously discussed "rare" video call with thousands of Chinese officials across the nation to warn of an even worse economic crisis than two years ago, and calling on them to better balance Covid controls and economic growth, those same government officials charged with implementing policy at the ground level found themselves stumped and unsure whether they should still listen to: supreme leader Xi - who continues to emphasize the need for officials to push for zero Covid-19 cases - or Li, who continuously urges them to bolster the economy and hit preordained growth targets.

This apparent dilemma has led to paralysis within a nation normally hailed for speedy implementation of orders from above, Bloomberg reports, citing eight unnamed senior local government officials.

While analysts saw Li’s impromptu meeting as an attempt to strengthen consensus on the urgency to revive the economy, four senior officials said it did little to change their view that controlling the Covid outbreak still took priority: "One said that from a personal career perspective, a cadre’s hard work means nothing if they fail to contain an outbreak, while the upside for kicking off economic projects was limited."

For a glaring example of just how deep the schism within China's core runs, one should look at who did not attend Li’s mammoth meeting - which brought together cadres right down to the county level, featuring officials from nearly all government departments including propaganda, environment, and utilities, according to notices on county-level government websites - the top-ranking Communist Party official for many cities was absent because they had to focus on ensuring Covid control, said a BBG source, adding that it signaled that pandemic work still trumped the economy. Attendance for party heads wasn’t mandatory.

Which is bad news for Li who is tasked with restoring the economy... without actually being allowed to do anything:

“He is being put in the impossible position of trying to rescue the economy without being able to adjust the one policy -- zero-Covid -- that is causing the most economic damage,” McArver said, referring to Li.

For Li, who will depart the post of China's second in command next March, the stakes couldn't be higher: the Chinese Communist Party prepares to hold a twice-a-decade leadership conclave later this year, where Xi is expected to win a landmark third term, yet where rumor also has it some of his challengers are sharpening their knives if covid is still uncontained and if the economy remains a complete mess. The top party ranks will also be reshuffled, clearing the way for other cadres to move up the ladder if they can avoid any missteps, particularly in handling Covid outbreaks.  

The paralysis is reflected in market sentiment. On Wednesday, the benchmark CSI 300 Index remained flat after sliding as much as 1.1% while shares in Hong Kong declined as investors have lost hope that - besides constant jawboning - China will be unable to implement a major stimulus.

Which is a problem because as Li warned on Wednesday, when he delivered his starkest warnings about the economy’s weak performance, Beijing is facing another economic crisis with “difficulties in some aspects, to a certain extent, are greater than when the epidemic hit us severely in 2020.” He said China must avoid a contraction in the second quarter, adding that the nation would pay a huge price with a long road to recovery if the economy can’t keep expanding at a certain rate.

It is unclear if Xi had heard the message.

Meanwhile, as reported earlier this month, the latest official data also showed a contraction in industrial output for the first time since 2020 and a jump in the surveyed jobless rate to 6.1% in April, close to a record. High-frequency data for May showed the economy remained in a deep slump, according to Bloomberg’s aggregate index of eight indicators.

Xi hasn’t directly addressed the depths of China’s economic struggle in recent weeks, though his more generic comments have received prominent treatment in state-run newspapers. “China’s resolve to open up at a high standard will not change and the door of China will open still wider to the world,” Xi said at a recent trade council anniversary meeting, in a typical comment.

Li, by contrast, has emerged as a more candid figure. At the same trade council event in Beijing earlier this month Joerg Wuttke, president of the European Union Chamber of Commerce in China, said the premier “woke up” when some delegates shared their frustrations over China’s Covid policy.

“Li came over afterward and asked us how we were doing and how was business,” Wuttke said, adding that he was surprised by the move. “It was a very positive gesture. His actual crossing the street, showing up and saying ‘let’s chat’ was impressive.”

Meanwhile, as it scrambles to address these two contradictory mandates, China prepares to unleash the latest bubble: according to Bloomberg, bank managers at several state-owned lenders have been told they will be held accountable for failing to meet loan issuance targets. They have struggled to implement orders to introduce more liquidity, as companies that meet requirements are reluctant to borrow given the uncertain outlook of economy, according to banking business heads and executives.

In other words, with little actual loan demand, China has no other option than to flood markets with said loans, which will then promptly find their way into speculative activity - such as equities and housing, both of which will soon be on the receiving end of trillions more in liquidity. In fact, as we noted last night, it appears that China's housing bubble is already making a comeback.

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