Trade War

Newsletter 148 - January 22, 2023

Welcome to the 148th edition of Trade War.

And Happy Year of the Rabbit. 兔年大吉！

The permabull China watchers and analysts who have been anxiously waiting for proof that Xi Jinping at heart is a pragmatic leader now finally feel vindicated, and are out in force making that argument.

No matter how much I wish they were right, I’m not buying it. As I have long said, I see Xi as a true believer - not in Marxism-Leninism, not in socialism, but instead in his rock-solid conviction that the party must always maintain strong control, not just over the political realm, but also over society, education, media, and without question, the economy.

So while we may now see signals that Xi and other top leaders have decided its time to loosen up controls over private businesses, I’m quite certain it will only be temporary.

I get why a lot of smart people, including friends of mine, are now making the pragmatic Xi argument. Because from one perspective, it’s very logical. Of course Xi and other party leaders will back down on exerting heavy-handed control when they realize it is damaging economic growth. And of course they have now decided its time for a serious, sustained course correction - after all, they are intelligent and experienced leaders (and that’s what we would do if we were in their situation..)

And then there is the not unsubstantial influence of hope: it must be true because we all want it to be true. Wouldn’t it be better for China, the Chinese people, and the world, if Xi and other Chinese leaders have decided that excessive party control was a mistake? Of course it would. So now that we have some positive signs, let’s assume the hopeful outcome. I understand that mindset and have been guilty of it in the past.

But if you listen to the leadership, take their words at face value, including their clearly stated goals for where they want to take China and the party’s role in that, the unavoidable conclusion is that the loosening of control now will be temporary, and the longer term direction will be further tightening.

There is a curse that comes with watching China over many years, which I have been doing since the 1980s (it’s similar to the occupational hazard that comes with teaching modern Chinese history and politics, as I do at the University of Montana.) You can’t help but start to see some of the same attitudes, same beliefs, same policy choices mirrored across generations of Chinese leaders. And one constant has been the primacy of the party over all, a party that must regularly assert its dominance, even when doing so comes with real costs.

That tendency is obvious in the party’s treatment of civil society, squashing rights movements by workers, environmentalists, feminists, and most recently, the youth who protested against Covid restrictions. And its clearly seen in the party’s handling of economic forces including private businesses and entrepreneurs, who must regularly be reminded that their success always comes second to the party’s imperatives.

On to the news ~

More people return home for Lunar New Year than last year, but it’s still far below the numbers seen in 2019. And China extends its new charm offensive with vice premier Liu He making nice at Davos.

Fourth quarter GDP numbers beat expectations but doubts arise about statistics reliability. China unlikely to experience a U.S.-style consumer recovery driven by “revenge spending.” And debt-laden provinces face default risks.

The country’s population starts shrinking for the first time since 1961. Beijing announces new plan to add robots to factories. And Apple’s supply chain diversification goals face the challenge of uprooting deep operations in China.