Newsletter 106 - March 12, 2022
Welcome to the 106th edition of Trade War.
Covid outbreaks are testing Hong Kong and China. Annual lianghui or “two meetings” close in Beijing with growth over reform the clear mandate. And “Common Prosperity“ gets short shrift at the legislative sessions.
Chinese tech companies listed in U.S. fall precipitously. Beijing unlikely to bail out sanctions-squeezed Moscow. Xi frets over food security. And U.S. consumer companies in China are getting nervous.
Hong Kong & China Covid cases surge
“I know everyone stopped caring about Covid at 6 AM Moscow time on Feb 24th, but right now Hong Kong and China's *cumulative* case numbers look like this. Both have recorded more confirmed cases since Mar 1 than in all prior months combined,” says one tweet. Check out the dramatic rise in cases, as seen in the graphs below.
Outbreaks to test China
China is experiencing its worst surge of Covid cases since the pandemic first hit two years ago, reports the New York Times’ Keith Bradsher.
The outbreaks, mainly of the highly contagious omicron variant, have appeared in 17 of China’s 31 provinces, including Shanghai. “Cinemas, theaters and museums have closed in downtown Shanghai, and tickets have been refunded. The vast city’s school system announced late Friday that it would switch to online learning,” writes Bradsher.
Several cities in the northeast including car manufacturing hub Changchun have been put under lockdown by local officials. “Across China, more than 100 neighborhoods have been labeled medium-risk or high-risk Covid zones, with frequent mandatory testing and partial or complete lockdowns.”
Key challenge: imbalanced medical care
A key obstacle to abandoning China’s zero-Covid policy is its imbalanced healthcare system, reports Bloomberg News.
China is plagued by a deeply unequal distribution of medical resources with limited access to care for the hundreds of millions of people who live in the countryside. For every 1,000 rural people there are fewer than two doctors and nurses together. In Beijing and Shanghai, by contrast, there are more than five doctors alone, for every 1,000 people, reports the financial news service.
“Preventing the healthcare system from collapse is a complicated undertaking even in developed countries,” Jin Dongyan, a virologist at the University of Hong Kong told Bloomberg.
“If you multiply Covid’s infectivity rate and a large population, you’ll get a big absolute number for severe disease and death in a country of 1.4 billion people,” Chinese epidemiologist Liang Wannian said on state broadcaster CCTV in December. “That means it’s a major public health, social as well as political problem and must be put under control.”
“Statistical modeling by Peking University shows China could have a “colossal outbreak” with as many as 630,000 or so people infected in a single day if the country removes most of its restrictions as the U.S. did,” reports Bloomberg.
GDP growth a “political imperative”
China’s annual legislative “two meetings” or lianghui closed in Beijing with growth being emphasized over reforms, reports Bloomberg News’ Tom Hancock.
At this fall’s quinquennial Party Congress, Xi Jinping plans to stay on for an unprecedented third term, making economic and social stability crucial.
“Beijing views maintaining robust economic growth as no longer just an economic issue, but more importantly a political imperative,” Alpine Macro wrote in a note.
“A key reason for the slowdown in the economy last year was Beijing’s attempts to implement difficult structural reforms, which it sees as crucial for long-term growth,” writes Hancock.
Those included efforts to rein in the indebted real estate sector, an expansion of property tax trials, a crackdown on internet and education companies, and curbs on polluting industries.
“Yet those reforms hardly got a mention in the government’s work report delivered by [premier Li Keqiang]. There was only one reference to “prosperity for all” in the English version of Li’s speech and no mention of a property tax,” reports Bloomberg.
“The paucity of references to “Common Prosperity”” during the sessions also likely reflects the new emphasis on growth over reform as the Chinese economy faces headwinds, writes Bloomberg Opinion’s Matthew Brooker, in a separate commentary.
Tax cuts and infrastructure investment - the latter of which saw near zero growth in 2021 - will likely be used to spur GDP expansion. HSBC economists have predicted that spending on infrastructure will grow about five percent this year.
Common Prosperity on the outs - or not?
The lack of clarity around the concept “Common Prosperity” may also explain why it got short shrift at the annual legislative sessions, writes Gavekal Dragonomics China research director Andrew Batson, in his blog.
“I think this reflects some of the incoherence that has been part of this slogan from the beginning. The rhetoric of common prosperity has simultaneously featured a call for revolutionary change and a denial that any fundamental change to China’s system is needed,” writes Batson.
“These contradictions make it hard to propose specific policies that would actually achieve the objectives of common prosperity, and even to articulate concrete objectives in the first place. That’s why I think common prosperity is more of a political campaign of gestures and symbolism than a technocratic economic agenda.”
Still, Batson doesn’t expect the political slogan to vanish: “the government is still pledged to deliver a plan for common prosperity, a process that will force it to articulate a somewhat more coherent agenda.”
Probably most tellingly, China’s top leader is still using the term and likely will include it in his speeches at this year’s Party Congress, predicts Batson. “As long as we consistently follow the road of socialism with Chinese characteristics, we will be able to continue to realize the people’s aspirations for a better life and continue to advance the common prosperity of all people,” Xi said during a lianghui meeting.
Notably, “Common Prosperity” isn’t the only term that was downplayed. “For those on Xi Jinping slogan watch, another term that got a lot of propaganda play in 2021 but that has now gone more is (sic) low-key is "dual circulation,"“ tweets Batson. “Xi is still using the slogan but it's not widely referenced in the annual planning documents.”
Andrew Batson @andrewbatsonWhat happened to common prosperity? https://t.co/4FzZpAmrkd
Policy instruments of Common Prosperity
Listen to this interesting podcast that breaks down just how Beijing is approaching “Common Prosperity,” with Bert Hofman, director of the East Asian Institute at National University of Singapore, MERICS executive director Mikko Huotari and communications and publications director Claudia Wessling.
Nasdaq China Index bloodbath
Chinese tech companies listed on Nasdaq are experiencing a “bloodbath,” points out China technology investor and analyst Rui Ma in a tweet thread.
“These drops are regulatory changes + macro (lower economic outlook which you can attribute to covid etc, this affects everyone a lot) + valuation adjustments (I’d put Kuaishou [and] PDD etc in this bucket) + political risk and of course individual company performance,” Ma writes.
“It differs for each company but the biggest drops of the biggest companies started [with] regulatory uncertainty that [affects their] fundamental biz outlook at least in [the] near term.”
What happens if Covid explodes across China? “Since business results don’t seem to be [the] primary driver of stock price anymore . . . who knows what [the] impact is,” she writes.
And collapses another 8 percent
“OUCH! The Nasdaq China Index is collapsing another 8% to the lowest level since 2016,” tweets German journalist Holger Zschaaepitz.
China support for Russia faces limits
China is unlikely to bail out sanctions-squeezed Russia, reports VOA News’ Ralph Jennings. That’s in large part because of the limits to what Beijing can provide.
Even if China buys more Russian oil, for example, "it can't offset the amount that it used to sell into Western Europe and the rest of the world," points out Liang Kuo-yuan, president of the Taipei-based Yuanta-Polaris Research Institute economics think tank.
Meanwhile, China’s ability to help Russia get around Western-imposed financial restrictions has been exaggerated by some analysts: SWIFT, the global provider of financial transactions, has some 11,000 institutions and processes $5 trillion to $6 trillion per day; China’s rival CIPS did less than $12 trillion in all of last year, estimates Liang.
And China’s willingness to aid Russia will also be constrained by the fear of alienating Beijing’s more important trading partners.
“Economic support for Russia will reach a limit as China hopes to keep peace with Western countries that are sanctioning Russia in support of Ukraine, said Dexter Roberts, U.S.-based author of The Myth of Chinese Capitalism. Too much help would send the wrong message,” reports VOA.
Still, don’t expect China to lose interest in Russia's commodities. "I do think longer term we're likely to see a continued growing trade relationship and investment relationship between China and Russia," Roberts said. "For Russia it really matters."
Banking exec: Russia bailout “totally unrealistic”
“A Chinese banking exec in Beijing told me it’s “totally unrealistic” to expect China to help Russia evade financial sanctions simply [because] its commercial ties with US/Europe are way bigger. “If China does this, the RMB internationalization will also only go backwards dramatically,” tweets the Wall Street Journal’s Lingling Wei.
Meanwhile, even with their already strong presence in Russia, China’s tech companies won’t easily capitalize on the decision by Western rivals to halt sales, reports the Wall Street Journal.
“Chinese companies, like any other, don’t want to face unpaid invoices, major logistical challenges or be exposed even indirectly to sanctions or sanctioned entities or individuals, and that list is growing all the time,” said Duncan Clark, chairman of the investment-advisory firm BDA China.
Jonathan Cheng @JChengWSJRussian banks that have been cut off from global payments networks are turning to China’s state-owned UnionPay system as the country tries to sidestep boycotts by Western businesses for its invasion of Ukraine. https://t.co/LvphifcbbB
Xi frets over food security
During the legislative sessions, Xi gave a speech on the importance of ensuring national food security, a longtime priority of China’s top leader and one no doubt he views with renewed importance, as sanctions roil Russia’s economy.
“Food security is among a country's most fundamental interests,” Xi said. “Of all things, eating matters most, and food is the most basic necessity of the people. Through enormous efforts, China is capable of feeding one fifth of the global population with nine percent of the world's arable land and six percent of the freshwater resources,” reported Xinhua.
“Seven decades ago, the country had an underfed population of 400 million, but today its 1.4 billion people are eating well with a great range of choices. This is a powerful answer to the question "Who will feed China?"“
Here are some useful footnotes to Xi’s speech, from Beijing Channel's Yang Liu.
US consumer companies worry about China
“Surprisingly, those US companies most concerned about China not further opening its market to foreign investment are not in high-tech, but in consumer sectors,” writes CSIS’ Scott Kennedy in a tweet thread, referencing the American Chamber of Commerce in China’s 24th annual Business Climate survey.
“Consumer-facing companies also have been the least profitable US investors in China, far below their tech, resource and services cousins,” writes Kennedy. "[That’s] most likely due to strengthening private Chinese competitors [and the] difficulties of most consumer sectors in China during Covid.”
“China remains a top global priority for many members but most are not planning significant investments in 2022,” and revenue and profitability have not yet returned to pre-pandemic levels, the Amcham report notes.
“Our member companies continue to be optimistic about their opportunities in China, but multiple challenges – including sustained air travel disruptions, an increasingly uncertain regulatory environment, difficulty attracting and retaining talent, and the strained US-China relationship – have seen the level of optimism decline.”
Here is a truly odd Pizza Hut commercial from 1998 featuring Gorbachev. Check it out.
Beijing’s pro-Moscow stance in the ongoing crisis is more about criticizing the U.S. than actually supporting Russia, write Georgia State University’s Maria Repnikova and Wendy Zhou.
“American officials and commentators have long promoted a narrative of collusion between Beijing and Moscow, and China’s seemingly pro-Russia position on Ukraine has invigorated this argument, calling for a neat division of the world into democracies and autocracies,” write Repnikova and Zhou.
“This risks overstating the bonds between the two countries. China’s pro-Russia rhetoric is more rooted in anti-Western (and particularly anti-American) sentiment than in substantive support for Russia’s military operation or in any unwavering alliance.”
How China manages its relations with Russia at this crucial juncture is a test case for what role it will play in the world, writes Michael Schuman, author and nonresident senior fellow at the Atlantic Council’s Global China Hub, in The Atlantic.
“They repeatedly claim to favor “peaceful coexistence” and an end to a divisive “Cold War mentality.” But by siding with Putin—even passively—in his anachronistic quest to re-create the Soviet empire, Xi appears to be just another dictator on the make. How Beijing manages its relations with Moscow, then, will help define China as a great power,” writes Schuman.
"The world will never be at peace as long as the U.S. exists,” writes [in Chinese] Qiao Xinsheng, a senior researcher at the Kunlun Policy Research Institute.
“To address the Ukrainian crisis, the black hand behind the curtain must first be severed, and that evil empire must pay the price, for only then will Ukraine have hope of rebirth."
For a radically different perspective, check out the videos of Chinese vlogger Wang Jixian who from his base in Odessa, Ukraine “dispatches a daily rebuke” to Beijing’s stance on the war.
Two year book anniversary
This week was the two year anniversary of the launch of my book The Myth of Chinese Capitalism. Always great to see it in good company on bookstore shelves.
It’s in the 40s today as the big melt for spring begins.