'Xi Thought' and its impact on the corporate West

The Wall Street Journal has reported that ''Chinese President Xi Jinping is zeroing in on the ties that China’s state banks and other financial stalwarts have developed with big private-sector players, expanding his push to curb capitalist forces in the economy.''

This investigation is part of Xi's campaign that started late last year as the WSJ describes as being ''a regulatory assault on private technology giants.'' Now, Xi is diving deeper into the financial institutions which falls on the heels of the near default of the property giant, Evergrande Group.

''The financial-sector scrutiny comes as Beijing is also trying to address the economy’s dependence on debt-fueled construction sprees, which is prompting turmoil in China’s property sector. By expanding his economic campaign, Mr. Xi risks unleashing dynamics that could severely cut into growth in coming months,'' WSJ wrote. 

''Mr. Xi’s goal, some officials said, is to make sure the party exerts full control over the economic lifeblood of the country, preventing the financial sector’s capture by big private businesses and other power players that threaten the state’s influence,'' the WSJ explained. 

Market implications

This is a negative theme for markets that rely on the Middle Kingdom and its economic powerhouse.  For instance, In 2020, China's contribution to world gross domestic product was about 18.34%. Back in July of this year, for 2021, the Global Times stated that the economy will power ahead at more than 8%. However, this was before China's property market and energy crisis and an escalation of The Chinese Communist Party's furthering of a clampdown on big private sector players.  

Rating agency Fitch has downgraded its forecast for China’s economic growth because of concerns about a slowdown in the country’s colossal housing market and fears about struggling property giant Evergrande. Still, Fitch Ratings said it expected growth to come in at 8.1% this year, compared with a previous 8.4% estimate, saying the “main factor weighing on the outlook is the slowdown in the property sector”.

Meanwhile, there is more pessimism at the big banks. Goldman Sachs became one of the latest banking giants to cut its growth forecast for China, as the country struggles with energy shortages. It now expects the world's second-largest economy to expand by 7.8% this year, down from its previous prediction of 8.2%.

However, a far more pessimistic outlook comes from Citi Bank which has trimmed its China growth forecast for next year to 4.9% from 5.5%, citing expected spillover from the woes of embattled property giant Evergrande and predicted policymakers would deliver more interest rate reductions.

"The balancing between moral hazard risks and contagion risks points towards a managed restructuring," Citi's Xiangrong Yu wrote in a note to clients at the end of September. 

"The pressure on growth will likely trigger some restrained policy easing, including a 25bp interest rate cut in 2022E," he said, adding he now also expected an anticipated 50 bps reduction of the reserve ratio requirements to be advanced to October

Going deeper, the Evergrande saga could be the end of China's growth model which will impact the whole world economy. Xi is hell-bent on centralising power and he has been increasingly touting the goal of "common prosperity," a key aspect of which is fighting wealth inequality - otherwise known as 'Xi-Thought'.

The problem for the world is that it has come too dependent on a fast-growing China and its debt-fueled real-estate sector. China is moving much more communist. China's crackdown on its corporate sector is part of a wider decoupling with the west, especially the US which means American companies will have to find new manufacturing partners which will impact the bottom line of the corporate West.