What Xi Should Say Over Dinner With US Ceos

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As President Jens Eskelund told Bloomberg: the chamber has“not yet seen signs of willingness to implement structural reforms needed to address the fundamental challenges facing China and allow foreign and private companies to deliver on their potential for supporting the Chinese economy.”

The ongoing decoupling, de-risking and de-globalization trends pitting Xi's Beijing against Biden's Washington hardly help at a moment when US bond yields are at 17-year highs .

“Capital outflow pressures may persist in light of the unfavorable interest rate differentials,” notes economist Maggie Wei at Goldman Sachs Group Inc.

Morgan Stanley strategist Laura Wang adds that foreign outflows from China's A-share market is in“an unprecedented stage.” Between August 7 to October 19 alone, cumulative outflows topped $22 billion. That is the largest in the history of Stock Connect, which links mainland and Hong Kong bourses.

All this raises the stakes for Xi's dinner with top CEOs. It's an ideal opportunity to reboot Beijing's faltering effort to win back the foreign investment crowd. And to slow the exodus of companies diversifying supply chains away from China to reduce risks.

Goal one is allaying concerns that China's economy is heading into a dismal 2024. Many investors worry the International Monetary Fund is looking through rose-colored glasses when it projects China will grow 4.6% in 2023 amid property sector weakness and subdued external demand for Chinese exports.

China, for example, slipped back into deflation in October. The consumer price index fell 0.2% year on year after a flat reading in September.

What's more,“there are signs that activity has started to slow entering the fourth quarter,” says economist Carlos Casanova at Union Bancaire Privée.“That means that policymakers need to remain on high alert and continue to support the economic recovery .”

To date, he added, the People's Bank of China“has been reluctant to deploy stimulus measures in 2023, against the backdrop of higher US rates and a strong dollar. However, we believe that another 10 basis-point rate cut and an additional 25 basis-point reserve requirement ratio cut will be necessary in December.”

China stocks and the yuan currency are down as foreign investors flee the scene. Image: Twitter

Even more important, Xi must convince executives that big supply-side disruption is coming. Bold steps to repair the property sector, increase productivity, level playing fields for entrepreneurs, recalibrate growth engines from investment to domestic demand and create bigger social safety nets are needed to head off growing“Japanification” comparisons.

Beijing is quick to dismiss talk of a Japan-like funk.“China's current situation is vastly different from what Japan used to be in,” says Liu Shijin, a member of the PBOC's monetary policy committee. Claims that China is falling into a“balance-sheet recession” like Japan in the 1990s are off-base, Liu claims.

China, Liu argues, still has policy scope to pivot to an innovation and consumption-led growth model that enables the government to gain control of its debt trajectory.

Trouble is, the external sector might be less hospitable to Xi's hopes to recalibrate growth engines - reducing the rapid economic growth rates needed to win party-wide support to push through sweeping and disruptive reforms.

As the IMF notes in its latest assessment :“Over the medium term, growth is projected to gradually decline to about 3.5% by 2028 amid headwinds from weak productivity and population aging.” The IMF's economists also warn that financial stability risks are elevated and increasing“as financial institutions have lower capital buffers and growing asset quality risks.”

Geopolitical tensions loom large, too. A September survey by the American Chamber of Commerce in Shanghai cited Sino-US hostility as a major reason why foreign companies are looking for exit ramps from China to other Asian economies. In its own survey, UBS Group cited India, Japan and Vietnam as“top destinations” that are“gaining more attention.”

The good news is that Xi's inner circle seems to be turning away from the“wolf warrior” antics of recent years.

Recent sit-downs, and those to come,“have sent out positive signals and raised the expectations of the international community on the improvement of China-US relations,” Vice President Han Zheng told Bloomberg.

“A stable and sound China-US relationship is the common expectation of all sectors in our two countries and the international community as a whole. We're ready to strengthen communication and dialogue with the US at all levels,” Han said.

Team Biden, too, seems keen to lower the bilateral temperature. Of course, the White House's actions must speak louder than words. Generally, those actions tend to be focused on Chinese containment.

Last month, Biden's trade representatives again narrowed the types of semiconductors that US companies can sell to China. In doing so, it closed loopholes in existing policies with particular emphasis on limiting China's ability to compete in supercomputing and artificial intelligence .

“The upshot is that China's ability to reach the technological frontier in the development of large-scale AI models will be hampered by US export controls,” says Julian Evans-Pritchard, head of China economics at Capital Economics. This could have even bigger implications, he adds, since“we think AI has the potential to be a game-changer for productivity growth over the next couple decades.”

US and China are locked in a race for technological supremacy that will define the course of the 21st century. Image: Facebook