ANALYSIS | Xi Jinping became simply untouchable. And investors are scared about the future of China’s economy.

( Business) — As China’s leader Xi Jinping secured a historic third term in power this weekend and packed his core team with people loyal to him, in a sweeping cleanup not seen since the Mao era, investors they were quick to voice their opinions.

Chinese stocks listed in Hong Kong and New York plunged on Monday, and the yuan reached its lowest level against the US dollar in almost 15 years a day later. In offshore markets, the Chinese currency traded at its weakest since data provider Refinitiv began keeping records in 2010.

Xi’s preference for personal loyalty over technocratic competition bodes ill for China’s already bleak economic outlook, analysts said. Replacing experienced economic officials with people with far less experience also signals a more ideological policy that could further hurt private sector growth and worsen Beijing’s ties with the United States, they added.

“The market is clearly disappointed in the new seven-member Politburo Standing Committee that is full of Xi’s allies,” said Lilian Co, who manages the China Panda Strategic Fund at Eric Sturdza Investments.

“Given that Xi’s ideology has not been market-friendly in recent years, a leadership team loyal to Xi does not mean any change in policy direction while he is in power,” he said.

The yuan rallied slightly on Wednesday and stocks also rose modestly, following coordinated statements late Tuesday from the Chinese central bank and several financial regulators that they would maintain the stability of the currency, Chinese markets and financial system. But there were few signs of enthusiasm in the markets.

The new leadership team is missing top officials who have backed market reforms and opening up the economy. Those pushed aside included Premier Li Keqiang, Vice Premier Liu He and central bank governor Yi Gang.

Investors fear that Xi’s tightening grip on power means a continuation of policies such as the zero-Covid strategy and a crackdown on the private sector that have already caused serious damage to the world’s second-largest economy.

Analysts also worry that the removal of reformists from the Communist Party leadership means no one will dare tell Xi he is wrong if his political agenda fails.

“Xi’s breaking with a long tradition of having members from both wings of the party represented on China’s highest political committee lays the groundwork for a leadership style that prioritizes personal loyalties over competition and productive discourse,” said Sonja Opper, a professor at Bocconi University in Italy and an expert on Chinese economics.

“In effect, Xi Jinping sets up an echo chamber around his own ideas,” he said. “The risk is that China’s leadership becomes isolated and loses sight of alternative, possibly better, ways of addressing the many challenges facing the country.”

Frequent Covid lockdowns have hampered consumer spending, disrupted supply chains and caused massive job losses. The country’s once-vibrant private sector is suffocating under Xi’s “common prosperity” campaign. A persistent housing slump and a weakening global economy have compounded the problems.

The World Bank recently cut its China growth forecast to 2.8% in 2022, the first time it projected the Chinese economy would lag behind the rest of Asia since 1990. Beijing’s official target is 5.5% growth. % for this year.

Analysts say that if Xi closes the door on market liberalization, policies could become increasingly driven by ideology, further hurting private industry and worsening tensions between the United States and China.

“Xi’s vision is nothing less than a new economic order infused with ideology,” said Craig Singleton, China senior fellow at the Foundation for Defense of Democracies, a Washington-based think tank.

Extending his term simply blocks China’s current economic orientation, which is “blatantly hostile” to free market forces, he said.

Xi’s announcement last week that China’s definition of national security must be expanded to include at least 16 different areas, including military, territorial, technological, economic, food, energy, resources and supply chains, will further complicate matters. things.

“These economic issues cut across key facets of the US-China relationship, meaning the deterioration in ties will not be limited to traditional dividing points, such as Taiwan or the South China Sea,” Singleton added.

Li Qiang enters, Li Keqiang leaves

Changes in personnel close to Xi have also been notable.

Li Qiang, the Shanghai party chief who presided over the city’s chaotic lockdown for two months, is now the second-ranking party official after Xi. That puts him in line to succeed Premier Li Keqiang when he steps down in March. He will be faced with the task of managing the nearly US$18 trillion economy.

Li, 63, would be the first prime minister since the Mao era who has not previously served in the State Council — China’s cabinet — as a vice premier, analysts said.

“Li doesn’t have any central government experience,” said Julian Evans-Pritchard, senior China economist at Capital Economics. “And his record at the local level is not perfect: he screwed up Shanghai’s initial response to the wave of [la variante] omicron earlier this year.”

His appointment over more qualified candidates is a clear example that “official promotion has become less meritocratic under Xi,” with loyalty and personal ties increasingly taking precedence over bureaucratic credentials, he added.

Liu He exits, He Lifeng enters

Just as noteworthy are those that were set aside.

Liu He, who led negotiations with the United States during the trade war in 2018 and 2019, lost his seat on the party’s 205-member Central Committee.

“[Su] departure means the loss of one of China’s few foreign-educated, reform-minded economists in a senior leadership position,” Evans-Pritchard also said.

Liu was seen by many as “a bridge between East and West, and someone who understood the value of the market and the private sector,” Singleton said.

The man appointed to replace Liu as vice premier for economic affairs is He Lifeng, head of the National Development and Reform Commission and a new face in the 24-member Politburo. The NDRC is China’s chief economic planner, responsible for drafting the country’s economic plans and overseeing major state investment projects.

“Although He Lifeng is an academically trained economist, like Liu He, his track record suggests that he is likely to favor a more statist approach to economic management,” Evans-Pritchard said.

Is Xi Jinping Exacerbating China’s Problems?

It remains to be seen who will occupy the top economic positions until official announcements are made in March. But given the way the leadership shakeup has played out so far, analysts worry that loyal but less competent people will be chosen.

“The quality of policymaking has taken a hit in recent years, as officials have focused more and more on displays of loyalty and less on good governance and economic performance,” Evans-Pritchard said.

“This trend may get even worse now that Xi has surrounded himself with ‘yes’ men,” he added.

Xi’s consolidation of power risks undermining productivity and growth, rather than boosting it as he had hoped.

“As Xi closes the door on market liberalization, American businesses and, in particular, American financial services companies may need to reconsider current and future investments in China, which could only further exacerbate the many challenges serious economic problems facing the country,” Singleton said.