Welcome to the 98th edition of Trade War and our first of 2022.
Global companies feel disruptions as Covid-19 spreads in China. Beijing pushes for self-reliance in food, energy, raw materials and industrial parts, as tensions grow with the U.S. and other countries. And China announces targets to grow domestic consumption even as its job situation worsens.
Chinese economist gets censored after advocating government spend more to combat challenges of aging. And a new lengthy report for the Atlantic Council by this newsletter’s author digs deep into the domestic challenges facing China that hold back economic growth.
‘Mother of all supply chain’ stumbles
As Covid-19 flares across China, multinational companies business operations are being hurt, report the Wall Street Journal’s Stella Yifan Xie, Yang Jie, and Dan Strumpf.
“Major manufacturers are shutting factories, ports are clogging up and workers are in short supply as officials impose city lockdowns and mass testing on a scale unseen in nearly two years,” writes the business paper. Companies affected include Samsung, Toyota, Volkswagen, Micron, Foxconn, and suppliers Nike and Adidas.
Since late last year, key Chinese cities involved in global production and logistics have been hit by Covid-19 including central China’s Xi’an, the northern port of Tianjin, the technology hub of Shenzhen, and Ningbo-Zhoushan, the world’s third-busiest container port which sits not far from Shanghai. (Beijing has now been hit by the Omicron variant, the New York Times reported on January 15th.)
“The risk posed by the Omicron variant is that we could take a huge step back in terms of supply-chain bottlenecks,” said Frederic Neumann, co-head of Asian Economics Research at HSBC. “This time, the situation could be even more challenging than last year given China’s increasingly significant role in global supply.”
The risk is that “over the coming months we’ll experience the ‘mother of all supply chain’ stumbles: an Omicron-driven stall in factory Asia,” warned Neumann.
China touts self reliance and security
Facing growing tensions with the U.S. and other countries, China’s leaders are putting a new emphasis on ensuring the security of everything from food and energy to raw materials and industrial parts, reports the Wall Street Journal’s Lingling Wei.
“Beijing is trying to fortify the Chinese economy against a prolonged period of tension with the U.S. and other countries, stockpiling some essentials and planning on more domestic production as it accelerates efforts to make China less dependent on the world,” writes Wei.
The push is part of a new economic strategy announced in 2020 by Xi Jinping which emphasizes strengthening domestic suppliers and relying more on Chinese consumers - what has been called “dual circulation with internal circulation as the main body.”
“The Chinese people’s rice bowl must be firmly held in their own hands at all times, and the rice bowl must mainly contain Chinese grain,” Xi said at a top-level meeting on agriculture in late December, reported China’s state media.
This won’t be easy for a country that has benefitted hugely from its links with the world, and which have only grown stronger throughout the pandemic. While exports have been powered by global demand for Chinese-made protective gear and stay-at-home electronic devices, household consumption, Beijing’s desired economic driver, has flagged.
“Beijing’s hoped-for source of growth, has remained weak as Mr. Xi’s economic overhaul—centered on empowering the party-state, as opposed to market forces and individuals—dampened business and consumer confidence. Uncertainty over pandemic restrictions also has made consumers hesitant to spend.”
The ‘ballast stone’ of domestic consumption
China has announced a plan to reach 50 trillion yuan ($7.85 trillion) in retail sales by 2025, report the South China Morning Post’s Wendy Wu and Orange Wang.
“Beijing intends for consumption to play the role of a “ballast stone” to counter external headwinds,” according to a document released by multiple Chinese agencies at the end of 2021.
“The international political and economic situation is complex and changeable, the uncertainty and instability has obviously increased, and the impact of the Covid-19 epidemic situation is extensive and profound,” said the document jointly released by the National Development and Reform Commission, the Ministry of Commerce and the People’s Bank of China.
“It is urgent for us to improve the quality and capacity of consumption, to unleash the potential of domestic consumption, and to build a strong domestic market,” that document continued. The plan also states that China will continue to lure foreign investment through the country’s “extra massive” market potential.
Retail sales reached almost 40 trillion yuan in 2020 but missed a target of 48 trillion yuan last year, the Hong Kong-based paper reports. In November, retail sales were up 3.9 percent, year on year, slower than the 4.9 percent recorded in October.
China jobs worse than reported
Even as China has carried out a multiyear effort to improve its unemployment measure, many still question the official figures, reports Bloomberg News’ Malcolm Scott.
“An uncanny stability in the relatively recent data series (a low of 4.8% and a high of 6.2% since 2016) suggests more work is needed for an accurate picture [of unemployment],” writes Scott.
Key amongst the challenges: measuring the vast population of migrants, with some 180 million workers who officially live in rural China even while working in cities.
“Before the pandemic, the number of such workers increased by 2-3 million each year, according to official data. No longer. And migrants who leave the cities aren’t included in China’s urban unemployment survey,” writes Scott.
Evidence too is growing that unemployment is considerably more serious than official data shows, reports another Bloomberg article.
“From weak consumer spending to strict Covid control measures to the government’s regulatory crackdown on the edutech and property industries, the labor market is under considerable strain, economists say,” reports the financial news service.
“Because of the weak labor market, record numbers of young people are preparing to take exams to qualify for post graduate courses or enter the civil service. The numbers sitting those exams in 2021 rose by more than 1.6 million from 2019, economists at Minsheng Securities Co. Ltd. said in a note,” reports Bloomberg.
Meanwhile, civil servants get punished with benefits cuts
Beijing is cutting taxes to stimulate business in the face of the pandemic, while local governments are slashing benefits for China’s millions of civil servants, reports the South China Morning Post's William Zheng.
Across the country, local governments have responded to the reduced tax take by cutting civil servants salaries, bonuses and perks by as much as a third, the Hong Kong-based paper reports.
China had 7.1 million civil servants as of 2015, the latest year statistics are available. While their pay is relatively low, perks are common, including subsidies for housing, transportation, education, telecommunications, and childcare and year-end bonuses.
“While the cuts have prompted a flurry of complaints on social media by civil servants who are struggling to make ends meet, Premier Li Keqiang last week said a round of belt-tightening was necessary to boost the flagging economy,” reports the Post.
“A main driver behind this unprecedented belt-tightening is the worsening condition of local government finances, which have faced a double whammy from the Covid-19 pandemic and falls in revenue as a result of the sluggish housing market,” reports the paper, citing National University of Singapore professor Alfred Wu.
Demographic timebomb challenges China
2021 was a year when China’s leaders woke up to the tremendous challenges that an aging population and low birth rate pose to the future of the Chinese economy, I write in a commentary for the Atlantic Council.
“The country is facing a demographic timebomb, one that will affect the buying power of its people, its productivity, and the future growth of its economy—perhaps even jeopardizing its ability to ever surpass the United States in its gross domestic product (GDP),” writes Roberts. “These worrying population trends could also exacerbate already troubling regional imbalances and social inequality.”
The needs of an aging population combined with shrinking numbers of young people will hurt already cash-strapped local governments which are responsible for providing social welfare benefits, including education, health care, and pensions. Fewer working age people will need to support more non-working relatives.
“Ultimately, demography will test the party’s most important target: creating a rich and powerful country by 2049 to mark the one-hundredth anniversary of the founding of the People’s Republic of China,” writes Roberts. “For both China’s leaders and its people, the trials of an aging, contracting population will define the decades to come.”
Economist censored over fertility policy suggestion
A Chinese economist who suggested Beijing spend billions of dollars to boost fertility rates has been censored, reports the Wall Street Journal’s Liza Lin and Rachel Liang.
Ren Zeping, a popular Chinese economist, had his Weibo account locked after he wrote an article suggesting the People’s Bank of China print $314 billion to provide cash subsidies to Chinese parents to encourage population growth.
“[This may] signal a fresh shift in Chinese authorities’ tolerance for alternative viewpoints, with censorship spreading from longtime taboos such as human rights and ethnic-minority policy to encompass once-safe topics such as demographics and the country’s fertility rate,” reports the business paper.
“In the past, China has tolerated, if not officially adopted, some more creative policy ideas and proposals, including those touching on demographics and gender.”
China’s latest building spree: the Bhutan border
China is speeding up construction of buildings along the disputed 477-km border it shares with the tiny nation of Bhutan, satellite photos show, reports Reuters.
“The settlements would allow China to better control and monitor far-flung areas, and potentially use them to establish security-focused installations,” reports the news service, citing an expert and an Indian defense source. The construction is “entirely for the improvement of the working and living conditions of the local people,” said China's foreign ministry.
“China's village building across the claimed Bhutan border appears to be designed to force Bhutan to yield to Chinese demands in their border negotiations,” said Tibet expert Robert Barnett, who has researched the China-Bhutan border extensively.
Notable/In Depth
Want to read an in-depth dive into the domestic challenges facing China? Check out this report from yours truly, just published by the Atlantic Council.
In the 21 years since an American spy plane and a Chinese fighter jet collided near Hainan Island, with the Chinese pilot dying, the risks of conflict are rising, writes The Economist’s David Rennie.
Look what made it all the way from Beijing to Montana - and I didn’t even ask for them? Gotta get reading!
Necessary economic shakeup or Maoist shakedown? That’s the question debated by Matthews Asia analyst Andy Rothman and J Capital Research’s Anne Stevenson-Yang on The Little Red Podcast.
Here is a Twitter thread with links to all of my 2021 Atlantic Council China commentary, briefs, and final report.
New book alert: Davos Man
DAVOS MAN: How the Billionaires Devoured the World by New York Times’ reporter Peter S. Goodman, is coming out on Tuesday. I’m really looking forward to reading it.
“The word “stakeholder” is a talisman at Davos, and among the predominantly white, male billionaires who flock to the Forum. Throwing “stakeholder” into a sentence is a demonstration that they care about loftier matters than private jets, oceanfront mansions and the other paraphernalia of wealth,” writes Goodman, in an excerpt published in the New York Times.
Yellowstone in the winter
And here are some pictures from a recent winter trip to Yellowstone.