Trade War
Newsletter 136 - October 16, 2022
Welcome to the 136th edition of Trade War, timed nicely with the opening of the 20th Party Congress in China.
There's a rash of optimism going around about what the post 20th Party Congress might mean for business. But it's wrong, I argue in my latest commentary.
Xi Jinping’s speech wrap-up: the eternal leader warns of “dangerous storms” coming from abroad; calls for more tech “self reliance;” mentions the importance of “security” 40 times; and says Beijing will ensure income distribution and the accumulation of wealth are well-regulated, while calling for the “spirit of frugality across the entire society."
Xi labelled “anti-U.S. and anti-West” by former Chinese journalist who reported on him when he was an official in Fujian province. Xi faces profound challenges as he moves into his second decade of leadership - if he follows Deng, he may course correct and spare China disaster. If he follows Mao . . . the opposite might happen, argues Claremont McKenna College professor Minxin Pei.
The party’s heavy-handed control is blocking China from rebalancing its shaky economy. And economic challenges are no longer cyclical but are instead “profoundly structural.” (Guess what that means: all those still decently strong growth projections for China in 2023 are going to have to come way down.)
Meanwhile, local governments are buying up large numbers of previously unsold apartments in an attempt to save their flailing property markets. China’s chip industry faces an “industry-wide” decapitation. And Beijing experiences a rare protest, one happening just days before the Party Congress opens, sparking some drastic censorship.
No, post 20th Party Congress China isn’t opening up
“After a very rough couple of years for business in China, some seem to be expecting — or willfully hoping for — a post 20th Party Congress economic policy reset, I write in my latest commentary for The China Project.
“The COVID-zero policy that has slammed the Chinese economy is likely to be lifted sometime in the not-too-distant future, say eager investment banks. The replacement for outgoing premier Lǐ Kèqiáng 李克强 could be an open-minded reformer, according to leadership succession tea leaf readers. And Xí Jìnpíng 习近平 — almost certain to be around for years to come — could be just the powerful and effective leader China needs to overcome its many development challenges, including an unbalanced economy, rising debt, and an aging population.”
“Judging by Xi’s longer-term record, it would be risky to bet he can’t pull it off,” writes Bloomberg’s Tom Hancock, citing the fact China’s economy has more than doubled in size since 2010. And the most optimistic scenario among several from Bloomberg economists sees China growing above 5 percent for the next decade, leading to its “swifter ascent to No. 1.” (I argued last week China might never surpass the U.S. as the world’s largest economy.)
One thing is clear: China won’t see its growth recover at all if it doesn’t end its stringent pandemic measures, including lockdowns for even very small numbers of infections. And despite what some investment banks seem to believe, that looks unlikely to happen for a while yet.
Lagging in vaccinations for the country’s most vulnerable elderly, with a “mind-boggling” policy of not importing effective mRNA vaccines while its own self-produced ones are still far from rollout, China simply isn’t ready. Officials know a too quick lifting of the policy would very likely lead to mass infections and mortality.
Then there’s the theory that China’s next premier may be a proponent of a more open approach to running the country and that somehow he will have an impact, despite Xi’s dominance of power.
“Probably best filed in the category of naïveté: the belief that Wāng Yáng 汪 洋, an official known — a decade ago when he was the head of Guangdong Province — for his support for private enterprise and tolerance of grassroots civil society, may bring a more liberal approach to governance, if he is appointed to China’s No. 2 leadership position, replacing Lǐ Kèqiáng 李克强,” I write.
Wang has proven himself ready to mouth Xi Jinping’s harshest policies, whether on Taiwan, Tibet, or Xinjiang, in recent years. He has described the largely Muslim region as one where people are living with “happiness and security.”
“It’s wishful thinking to label Wang Yang a liberal. Regardless, he’d still be No. 2 to the very non-liberal” Xi Jinping, points out CSIS Trustee Chair in Chinese Business and Economics Scott Kennedy.
Many of China’s most reformist senior officials tasked with running the economy and finance will be retiring or already have. Economic czar Liú Hè 刘鹤 will likely retire and may be replaced by an official who ran China’s stodgy state planning agency. Central bank governor Yì Gāng 易纲, finance minister Liú Kūn 刘昆, and top banking regulator Guō Shùqīng 郭树清, all known as market-oriented policymakers (Yi and Guo also studied in the U.S. and Great Britain, respectively), are also likely to step down. Other well-known reformers like former PBOC head Zhōu Xiǎochuān 周小川 and finance minister Lóu Jìwěi 楼继伟 have already retired.
“The overall reality is that the economics professionals who will be stepping down will be replaced by others with much less diverse experience, with much less international renown, and with much less collective voice in the making of economic policy,” writes University of California, San Diego China economy scholar Barry Naughton. If “Xi is favoring loyalty over technocratic competence, this would be one of the strongest policy signals out of the congress — and one that would be interpreted negatively for China’s economic outlook over the next five years,” notes Logan Wright of Rhodium Group, a research firm.
And then there is the old, tired argument that deep down Xi is a pragmatist willing to take any path that helps makes China strong and prosperous and puts it on track to achieve its “great rejuvenation;” and that his heavy-handed consolidation of power will allow him to overcome entrenched anti-reform interests before he loosens the reins over the economy and unleashes growth.
Bizarrely, some people actually still believe this. You’d think they would have learned their lesson after watching Xi emerge as one of the most conservative, ideological leaders of China in decades. I certainly learned mine.
“More than a decade ago, when Xi was on the cusp of taking charge as China’s top leader, many journalists, academics, and businesspeople — including me — predicted that he might turn out to be a reformer. After all, he has spent what seemed to be part of his formative political years working in Zhejiang, one of China’s most market-oriented provinces, and he oversaw a thriving private sector and rapid economic growth there. On a reporting trip in Zhejiang in 2012, I asked entrepreneurs what they thought of Xi, and dutifully reported their often-gushing answers,” I write in the commentary.
“When Xi becomes general secretary, he’ll be even more open and will pay even more attention to private enterprise and the people’s livelihood,” Lǔ Guànqiú 鲁冠球, the founder of auto components maker Wanxiang, told me when I visited him at his company headquarters in Hangzhou. “It’s because he was in Zhejiang for five years.” (No doubt Lu and others were hopeful Xi would support private business, knowing that would be good for them and their companies.)
“Xi turned out not to have a solicitous desire to improve the prospects of private entrepreneurs. Instead, Xi has sternly commanded entrepreneurs to “love the Communist Party.” So no, China under Xi isn’t about to throw open the doors to business, and usher in a new era of growth.”
But hope springs eternal.
China facing ‘dangerous storms’ ahead, Xi says
In an address at the opening of the 20th Party Congress, Xi Jinping warned that China faced challenges coming from overseas and stressed the need for “self reliance” in technology, reports Bloomberg News.
Speaking in front of the 2,296 delegates assembled in the Great Hall of the People on Sunday morning in Beijing, Xi said that while China’s global power had increased in recent years the path ahead would be hardly easy.
“China’s international influence, appeal and power to shape the world has significantly increased,” Xi said in his almost two hour long speech. Still, facing an unstable international environment, China must be prepared for “strong winds and high waves and even dangerous storms.”
“Confronted with drastic changes in the international landscape, we have maintained a firm strategic resolve and shown a fighting spirit,” Xi said. “Throughout these endeavors, we have safeguarded China’s dignity and core interests and kept ourselves well-positioned for pursuing development and ensuring security.”
Not surprisingly, Xi also emphasized the need for “self-reliance” in technology, referring to the sector as a “prime driving force” in China’s development.
“It takes on added importance as the US tightens restrictions to curb China’s tech ambitions: The Biden administration earlier this month announced sweeping curbs on how chip companies do business with Chinese firms, roiling tech stocks and threatening a worsening downturn in the chip market,” reports Bloomberg.
The Congress ends on Saturday October 22, with the new leadership - almost certainly including Xi - expected to be revealed the following day. [Here is an unofficial Chinese version of Xi’s speech.]
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