China’s Xi urges infrastructure spending as Covid lockdowns hit

President Xi Jinping told a meeting of senior economic officials on Tuesday that “every effort” should be made to boost construction to boost domestic demand and promote growth.

He said the country’s infrastructure was still “incompatible” with development and national security needs, according to the official Xinhua news agency. Xi called for more projects in transportation, energy and water conservation, as well as new facilities for supercomputing, cloud computing and artificial intelligence.

He did not say how much China plans to spend on the new infrastructure push. According to the latest government statistics, investments in infrastructure have already increased by 8.5% in the first quarter of 2022 compared to the previous year.

Comments from Xi — who rarely leaves detailed economic plans, leaving that to its Premier Li Keqiang – indicate that Beijing is increasingly worried the deterioration of the country’s growth prospects, and is falling back on a policy that it had minimized in recent years to ease the pressure on the finances of local authorities and promote growth through consumption.

But the Covid lockdowns have brought the world’s second-largest economy “close to breaking point”, Societe Generale analysts wrote earlier this week. However, the tough restrictions in Shanghai and other major Chinese cities are just the latest blow. China was already feeling the impact of a housing slump and a crackdown on private enterprise. Unemployment hit a 21-month high in March.

A number of investment banks have lowered their Chinese growth forecasts over the past month. And the International Monetary Fund said last week it expected growth of 4.4% this year, down from a previous forecast of 4.8%, citing risks from Beijing’s strict zero Covid policy. . This is well below the official Chinese forecast of around 5.5%.

“The [Tuesday’s] The meeting suggests to us that Chinese policymakers are increasingly aware of the strong headwinds to growth from Covid restrictions and the continued slowdown in real estate, and [are] thus becoming more determined to step up policy easing measures,” Goldman Sachs analysts wrote on Wednesday.

Citi analysts, meanwhile, estimate that Chinese infrastructure investment is expected to grow 8% in 2022, significantly more than the 0.4% increase seen in 2021.

“The infrastructure push is real,” they wrote in a note on Wednesday. “The turning point for real political actions may have arrived, and the recovery will probably be more obvious from the end of the second quarter.”

That’s not the only move Chinese policymakers made this week to calm nerves and spur growth. On Monday, the People’s Bank of China reduced the amount of foreign currency banks must hold as reserves to 8% from 9%. The move would effectively increase the supply of dollars in the market, and analysts widely believe the move is aimed at curbing a rapid decline in the yuan.

China’s currency has weakened rapidly in recent days, plunging to its lowest level since November 2020, as rising Covid-19 cases in Beijing raised fears the Chinese capital could join Shanghai and other major cities in lockdown.
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Chinese stocks also tumbled in a bear market earlier this week, with the Shanghai Composite Index falling 21% so far this year, making it the second worst performing market in the world after Russia. according to data from Refinitiv Eikon.

The market rout comes as China remains determined to maintain its strict Covid restrictions despite the high economic price tag. Shanghai’s financial and manufacturing hub has been in lockdown for about a month, forcing businesses to close and worsening global supply chain disruption.

Beijing began mass testing for its 21 million people on Monday to contain a “fast and furious” outbreak, the city government spokesman said.

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