Newsletter 179 - August 27, 2023
Welcome to the 179th edition of Trade War.
First, an announcement: Trade War will take a one-week hiatus for the upcoming U.S. Labor Day holiday with no issue published next Sunday. We will be back on September 10. See you then!
At the BRICS summit six more countries are invited to join. With membership expansion Beijing hopes to counteract American influence. Global funds accused of being “a bunch of aimless flies” as they continue to sell China stocks.
China’s already weak social safety net is being cut, certain to complicate efforts to lift household consumption. And while everything from demographics to trade tensions is hurting the economy, China’s biggest challenge is a lack of confidence amongst its citizens.
China’s efforts to deal with local debt is exacerbating the gap between wealthier coastal provinces and poorer ones in the interior and risks setting off economic contagion. Expect a future clash between central and local governments over what to do with local state firms.
And the author of this newsletter tells Bloomberg Radio why Xi won’t take the steps necessary to reverse China’s economic slide.
Take of the week:
“[China is] not facing a ‘Lehman Moment.’ China is instead experiencing a long, drawn out economic slowdown . . . This has been the story for years” ~ Michael Pettis, Carnegie Endowment
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‘There is a reason why money wants to get out of China’
“I think Xi Jinping needs to do something that he has shown no desire to do which is really loosen up on control. To a degree, he and the other leaders that answer to him, are shooting themselves in the foot with the increasing politicization of the economy,” says the author of this newsletter in an interview on Bloomberg Radio’s “Daybreak Asia.”
“There is a reason why money wants to get out of China. They’re nervous, entrepreneurs feel like their future is uncertain under Xi Jinping and this increasing politicization of the economy. So Xi Jinping needs to make the economy less politicized. He needs to reform some of these old policies that are really negative when it comes to household consumption—that make people save for a rainy day because they are worried about the future.”
Xi: BRICS for ‘true multilateralism’
A no show by Xi Jinping for a speech he had been scheduled to give on Tuesday may have dominated the initial headlines from the BRICS summit in Johannesburg, South Africa but that wasn’t the real news.
Instead, the push to expand the body’s membership, which fits with the Chinese leader’s goal of creating a rival power base to the one long dominated by the U.S., was what really mattered.
At the three-day summit for the BRICS nations, (whose name was somewhat ironically first coined by an American banker,) members Brazil, Russia, India, China, and host nation South Africa invited Saudi Arabia, United Arab Emirates, Egypt, Iran, Ethiopia, and Argentina to join. Over 20 countries have formally applied to join BRICS.
“The inclusion of Saudi Arabia, the world’s largest oil exporter, alongside Russia, Iran, the UAE and Brazil, brings together several of the largest energy producers with the developing world’s biggest consumers, giving the bloc outsized economic clout. With most of the world’s energy trade taking place in dollars, the expansion could also enhance its ability to push more trade to alternative currencies,” reports Bloomberg News.
“The enlargement of the BRICS is driven by the desire to build an alternative to an international system centered on U.S. hegemony,” said Dubai-based Tellimer strategist Hasnain Malik.
“The representation and voice of developing countries in global governance should be increased, and developing countries be supported in realizing better development. It is also important to uphold true multilateralism,” said Xi in a speech he gave at the summit two days after the earlier one he missed.
Here is the full text of that speech.
Putting the G7 in the shade
“For China, a decision on Thursday to expand the BRICS bloc of developing economies by adding six new countries is all about trying to right the perceived wrongs of a global system that favors the U.S.-led west,” writes the Financial Times’ James Kynge.
“The size of the new 11-country grouping puts the G7—which consists of Canada, France, Germany, Italy, Japan, UK, US and EU—into the shade,” adds Kynge.
“Beijing’s focus is on creating a counterweight to the G7,” says Moritz Rudolf, a senior fellow at Yale Law School’s Paul Tsai China Center. “Strengthening the BRICS grouping is a valuable tool in the pursuit for Chinese leadership.”
The meeting participants repeatedly called for a reform of international institutions including the World Bank, IMF, and the UN.
There must be “a greater role for emerging markets and developing countries, including in leadership positions,” the summit’s final declaration said.
Here is the full BRICS Declaration (pdf), compliments of India’s ministry of external affairs.
Global funds a ‘bunch of aimless flies’
Meanwhile, global funds are continuing to sell off China securities, including many of the country’s blue-chip stocks.
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