Trade War
Newsletter 110 - April 16, 2022
Welcome to the 110th edition of Trade War.
Pandemic restrictions test faith in party while people turn to zijiu or “self-salvation.” China’s top cities locked down while premier Li Keqiang issues third warning on economy. Beijing pumping aid to business while households suffer and fears of recession rise.
Russian invasion of Ukraine to hurt China’s rail to Europe. CNOOC, fearing sanctions, to divest from U.S. Canada, and Britain operations. And cost of China’s support for Russia grows.
Zijiu “self-salvation” replacing trust in Party
As the pain from pandemic restrictions including lockdowns rise, Chinese are losing faith in the party’s policies and instead turning to zijiu (self-salvation), or relying on each other, reports the Economist.
“For much of the pandemic the Chinese public has joined officials in hailing the zero-covid strategy as a success. Over the past two years China has had a lower mortality rate from the virus and stronger economic growth than any other big country,” reports the British business magazine.
“During a recent speech celebrating China’s hosting of the Winter Olympics in February, President Xi Jinping claimed that some foreign athletes said China deserved “a gold medal for responding to the pandemic.” Earlier Mr Xi said the country’s anti-covid efforts “demonstrate the advantages” of the Communist Party’s leadership.”
Meanwhile a recent editorial in the official People’s Daily, told Shanghai’s residents to “grit their teeth” and follow party policies. “In fighting the pandemic, trust is more important than gold,” it said.
“All the policies this month have been incomprehensible,” one Shanghai resident told the Economist. “They say one thing but implement another. We don’t trust these policies any more.”
Instead Chinese are relying on each other. “They use the term zijiu (self-salvation), as they fill the gaps left by an overwhelmed party apparatus,” reports the Economist.
China premier issues 3rd growth warning
Premier Li Keqiang has warned for the third time in less than a week that China’s economy is facing significant challenges, reports Bloomberg News.
Officials must “add a sense of urgency” in implementing policies including tax and fee cuts, the use of special bonds to support growth and incentives to companies to preserve jobs, Li said in a seminar.
According to Nomura economists, 373 million Chinese - more than the combined populations of the U.S. and Canada - are under some form of lockdown, with some 40 percent of GDP affected. And if the lockdowns last into May, the Chinese economy may end up contracting in the second quarter, Nomura predicted.
“Global markets may still underestimate the impact because much attention remains focused on the Russian-Ukraine conflict and U.S. Federal Reserve rate hikes,” Lu Ting, Nomura’s chief China economist, and colleagues wrote in a note.
On Friday, Beijing announced it will reduce reserve requirements for banks for the first time this year, releasing about 530 billion yuan ($83.25 billion) into the economy, reported Reuters.
Most top cities locked down
All but 13 of China’s top 100 cities are already in some kind of lockdown, reports Gavekal Dragonomic’s Ernan Cui.
“Such restrictions now cover most major cities, and the high political priority of containing Covid means they will not be quickly relaxed,” writes Cui. “The risk-averse attitude of both central and local government officials, suggest that the economic impact of the various lockdowns will not ease in a matter of days or even weeks.”
“Early economic indicators for March are already showing the impact of lockdowns in Shenzhen and other cities that preceded Shanghai’s,” according to Cui.
“Daily property sales in 30 major cities fell 47% YoY in March, deepening from the 30% decline in January-February. Tourism over the Qingming holiday [Chinese] in early April was down 26% from 2021, and passenger traffic volumes declined [Chinese} 63%.”
Cargo ships idle off coast
477 bulk cargo ships carrying metal ore and grain are waiting outside China’s congested ports, report Bloomberg News’ Ann Koh and Kevin Varley.
“Queues of vessels carrying raw materials have jumped after Shanghai initiated a city-wide lockdown at the end of last month to combat Covid-19,” Koh and Varley write.
Port congestion has spread to other ports beyond Shanghai including Ningbo-Zhoushan, Rizhao, Dongjiakou, and Qingdao, as ship-owners “desperately divert ships to other ports in the country to avoid the trucker shortage and warehouse closures in Shanghai.”
$52 billion aid to business while households struggle
China’s consumers are largely being left behind in Beijing’s business-centric support program, reports Bloomberg News’ Tom Hancock.
China has funneled some $52 billion in Covid relief to businesses mainly through cutting value-added and corporate income taxes, while largely ignoring households. While that approach aims to convince firms to preserve jobs and help support workers’ incomes, it is not clear it is working.
While China has not yet released its latest employment figures, a purchasing managers index for employment for March shrank and online searches for “unemployment” have gone up in recent weeks, according to search engine Baidu Inc, reports Bloomberg.
“I haven’t received my salary, I can’t pay rent and pay my credit card,” wrote Shanghai resident Li Zixi on Weibo. “I don’t have any income, how about sending some unemployment benefit?” wrote Changchun’s jeemoon_wendy.
“Some prominent state-linked economists are now calling for direct handouts, as seen in the U.S. and developing countries like Brazil. That would require a shift in thinking from China’s government, which has argued that supporting business is the best way to preserve jobs while handouts could lead to welfare dependency,” writes Hancock.
Covid curbs to spark recession?
Stringent Covid restrictions could spark an economic recession in China, writes Reuters Breaking Views’ Yawen Chen.
“China’s stubborn battle to eradicate Omicron is raising the risk of a serious economic crisis. Nearly one-third of the population is under some sort of lockdown, with shops shut and factories struggling,” writes Chen.
A look at key indicators shows the spreading pain: domestic sales of passenger cars were down ten percent in March while freight traffic fell about 25 percent during the first week of April.
“For private businesses, uncertainty as to when lockdowns will end, and whether they will resume soon after, will deter investment and job creation,” writes Chen.
“Consumers rushing to hoard food before they get sealed inside their flats are unlikely to spend on other goods. The longer Beijing digs its heels on zero Covid, the closer a recession will get.”
China rail to Europe tested by Russia-Ukraine war
The Russian invasion of Ukraine is bad news for China’s Belt and Road Initiative infrastructure initiatives and especially its rail routes to Europe, reports VOA News’ Saibal Dasgupta.
"It is very likely that Russian isolation will impact China's plans for further developing its BRI rail to Europe, much of which crosses Russian land,” Dexter Roberts, senior fellow at the Atlantic Council's Asia Security Initiative, told VOA.
"That is almost certain to affect their willingness to accept large shipments of goods crossing Russian territory to and from European markets. And if Russia is being sanctioned, it is extremely unlikely it would allow European goods to transit its territory as well," said Roberts, author of The Myth of Chinese Capitalism.
"China's enthusiasm for rail connectivity will have to be seriously curbed for now. Beyond the short term, China must bypass the Russian-Belarusian and maybe Ukrainian geography," said Mohammadbagher Forough, a research fellow at the German Institute of Global and Area Studies in Hamburg, in an article in The Diplomat.
CNOOC to divest US, Canada and UK assets
Concerned about getting caught in Western sanctions, China’s offshore oil and gas producer CNOOC is planning to divest its operations in the U.S., Canada, and Britain, reports Reuters.
“The exit being prepared would take place less than a decade after state-owned CNOOC entered the three countries via a $15 billion acquisition of Canada's Nexen, a deal that transformed the Chinese champion into a leading global producer,” reports Reuters.
The move would follow CNOOC’s delisting of its U.S. shares last October, in response to an earlier executive order by former president Trump banning U.S. investment in companies controlled by the Chineses military. CNOOC plans to list on the Shanghai stock exchange later this month.
"Assets like Gulf of Mexico deepwater are technologically challenging and CNOOC really needed to work with partners to learn, but company executives were not even allowed to visit the U.S. offices. It had been a pain all along these years and the Trump administration's blacklisting of CNOOC made it worse," an industry source told Reuters.
"We cannot predict if the company or its affiliates and partners will be affected by U.S. sanctions in future, if policies change," CNOOC said in its prospectus before the Shanghai offering.
China’s leaders credibility tied to Covid management
I spoke to business daily Dagens industri (Swedish) about the skyrocketing costs of China's virus management:
“China's leaders have staked a large amount of their credibility with the Chinese people on their good management of the pandemic, including by limiting the number of fatalities, and by contrasting it with the huge number of infections and deaths in other countries and particularly the U.S. If they start to lose control of the situation, and Omicron really takes off across China, particularly now when much of the world seems to be starting to manage to live under some degree of normalcy with the pandemic, this could badly damage their support from the Chinese people and they know this.”
“The degree to which people are starting to question Beijing is hard to gauge. If, however, China's officials are unable to overcome what now appears the rapid spread of Covid in cities like Shanghai, and large scale infection starts to appear in many more cities across China, then it is almost certain that large numbers of Chinese will start to doubt the ability of their government.”
And why Beijing still supports Russia
And I also spoke to Dagens industri (Swedish) about why China’s leaders are doubling down on their support for Russia and the high costs of that:
“China's leaders very much believe themselves that the US and Nato hold huge blame for the war in Ukraine, and that the US and Nato forced Russia to act by expanding their reach and threatening the security of Russia. They also believe that the situation Russia faces is roughly analogous to what Beijing is dealing with when it comes to the U.S. military presence in Asia, and in particular the U.S. relationship with Taiwan. As we saw from the recent EU-China virtual summit, this attitude is not only badly damaging China's standing with the US but now increasingly also with the EU.”
Notable/In depth
“China’s rise is far from inevitable; in fact, a long-term economic slowdown is unfolding,” writes Daniel H. Rosen, founding partner of Rhodium Group, in Foreign Affairs.
“A great deal of global economic sentiment hinges on the widespread belief that, like diamonds, Chinese growth is forever. Once confidence in that narrative slips, the implications will be significant.”
The zero-covid policy, a stumbling economy, and China’s stance on Ukraine make up a trio of problems challenging the Chinese Communist Party, reports the Economist.
“You may think they are unconnected, but China’s response to each has a common root: swagger and hubris in public, an obsession with control in private, and dubious results. Rather than being the product of statecraft with the Yellow Emperor’s time horizon, China’s actions reflect an authoritarian system under Xi Jinping that struggles to calibrate policy or admit when it is wrong.”
Chinese have populated hashtags created by Beijing to criticize the U.S., instead using them to attack their own government’s mishandling of the Covid crisis, writes Wenhao, a reporter for VOA, in a tweet thread.
“It seemed that many netizens had had enough of the Chinese government's attempts to escape criticism by focusing on how bad the West/US is. So they occupied the hashtag "US is the biggest country of human rights deficit,” to express their anger at the state,” he writes.
“For about four to five hours, there was almost nothing but angry comments targeting the Chinese government under this hashtag, which was initially promoted by state media with the intention to accuse the U.S.”
“China’s National Security Education Day [on April 15] urges reporting of foreign organizations & individuals who seize the opportunity to steal military & intelligence secrets… (this is a textbook for primary school students),” writes Bill Birtles, East Asia Correspondent for Australian Broadcasting Corp., in a tweet thread.
Talk with former US ambassador to China
I am looking forward to joining former U.S. Ambassador to China Max Baucus to discuss "US-China Relations in Light of Ukraine" - Tune in on April 28th at 5:30 pm MDT live on the Montana World Affairs Council Facebook webpage.
Montana picture
A recent hike in Missoula's Blue Mountain area.
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