Newsletter 112 - April 30, 2022
Welcome to the 112th edition of Trade War.
Xi says China’s GDP must surpass that of the U.S. and private capital must be regulated more. Prominent China business and finance mavens turn critical on Beijing, in bull-to-bear conversion. And banking strategist censored for tough economic reports.
U.S. focuses on strengthening security in Asia but lags in trade and economics. China views Russia as victim of NATO expansion. And Taiwanese less confident that America will send troops to defend them.
China GDP must surpass US, Xi orders
Even as Covid lockdowns test the economy, Xi Jinping has told officials they must ensure China’s GDP outpaces that of the U.S., reports the Wall Street Journal’s Jason Douglas.
“Mr. Xi told senior economic and financial officials that ensuring that the economy is stable and growing is important because it is critical to show that China’s one-party system is a superior alternative to Western liberal democracy, and that the U.S. is declining both politically and economically,” reports Douglas.
Under discussion are plans to speed up large construction projects in manufacturing, technology, energy and the food industry, to help support growth. Issuing coupons to individuals to encourage household spending, is also under consideration.
The U.S. economy grew faster than China’s in the last quarter of 2021, up 5.5 percent year-on-year compared to four percent in China, a fact that U.S. president Biden crowed about, noting “for the first time in 20 years, our economy grew faster than China’s.”
In the first quarter of this year however, China reported 4.8 percent growth, far better than the 1.4 percent contraction in the U.S.
Still economists have raised questions about the reliability of China’s latest growth rate with many doubting that Beijing can meet its full year GDP goal. “With the 5.5 percent target, they’ve set themselves up for some real difficulty,” said Mary Lovely, senior fellow at the Peterson Institute for International Economics. “They are really in a bit of a bind.”
“The desire to have a stronger GDP compared to the U.S. doesn’t help a healthy economy but certainly helps the party to maintain its rule,” said National University of Singapore political scientist Alfred Wu.
And private capital to be tamed
In a speech to a Politburo meeting in Beijing, Xi has called for stronger controls over private capital, even as he stressed its importance to the economy, reports the South China Morning Post’s Orange Wang.
“By its nature, capital pursues profits, and if it is not regulated and restrained, it will bring immeasurable harm to economic and social development,” Xi said. “Attention should be paid to ensure economic development is inclusive and the primary distribution [of income] is fair.”
Investors of different backgrounds including state, private and foreign will be welcomed but must be “educated and guided” to practice China’s core socialist values and “walk the right way”, Xi said.
China’s two dead ends: Zero Covid and Putin
Joerg Wuttke, a 30-year resident of Beijing who heads the EU Chamber of Commerce in China, has warned that misguided policies in China are derailing its economic future.
"The president has maneuvered himself into two dead ends at once: He can’t change his Covid policy, and he can’t change anything about his friendship with Putin," Wuttke said in an interview with The Market.
“For the past two years, the party leadership and government have spun the narrative that China has handled the pandemic much better than the decadent West. Now this narrative is blowing up in their faces,” says Wuttke.
“In closed meetings—especially in ministries that deal with the economy and businesses—I meet very well-informed and open-minded top politicians. They know what Zero Covid means for the economy. It’s just that they can’t use this knowledge to bring about policy change at the moment.”
“Until the 20th Party Congress, which will take place later this year, they will stick to the Zero Covid policy. President Xi wants to be confirmed for a third term, so he cannot change his narrative this close to the finish line,” explains Wuttke.
Meanwhile, efforts to stimulate the economy “are like a band-aid for an amputation,” Wuttke says. “All over China, entrepreneurs look to Shanghai and have to deal with the scenario that the same thing could happen in their city. So, until further notice, they hit the pause button and freeze almost all investment plans.”
“From a Western perspective, there is a connection between Ukraine and Taiwan,” says Wuttke. “The leaders in Beijing don’t realize that Western companies are grappling with the scenario that they would have to leave China—just as they are now leaving Russia—if China tried to forcibly integrate Taiwan . . . The effect is the same as from the Covid policy: Foreign companies are hitting the pause button. New investments are suspended.”
Economy in ‘worst shape in past 30 years’
The head of one of Asia’s biggest private equity investors has criticized China’s Covid control policies as sparking a ““deep economic crisis,” report the Financial Times’ Tabby Kinder and Hudson Lockett.
“We think the Chinese economy at this moment is in the worst shape in the past 30 years,” said Weijian Shan, head of group PAG which manages over $50 billion, in a video of a meeting viewed by the Financial Times.
“The market sentiment towards Chinese stocks is also at the lowest point in the past 30 years. I also think popular discontent in China is at the highest point in the past 30 years,” Shan said.
Xi power consolidation equals bad policy
Deleveraging in the property sector, Beijing’s Covid and Common Prosperity policies, and its stance towards the Russian invasion of Ukraine, are all dragging down the Chinese economy, says Stephen Roach, a senior fellow at Yale University’s Jackson Institute for Global Affairs who was formerly chairman of Morgan Stanley Asia and the firm’s chief economist.
“The strong grip that Xi Jinping now has on all aspects of the Chinese discourse, both internal and external, has closed down a lot of the internal debate over the wisdom of policy,” says Roach in an interview with SupChina editor-in-chief Jeremy Goldkorn. “This is really unfortunate. I think, even a one party, authoritarian state needs to have debate and needs to be able to look in the mirror and challenge itself at critical junctures.”
“What worries me is that because of the consolidation of power under Xi Jinping, that active and productive debate is being stifled,” says Roach.
“And so he is digging in his heels with zero COVID, whatever you want to call it, digging in his heels on de-leveraging, digging in his heels and even more so on the Russian partnership, on common prosperity, on regulatory crackdowns, not giving in at a time when there are lots of challenges that I think require a more nimble approach to policymaking.”
Top strategist censored on Chinese social media
The Chinese social media accounts of Bocom International China strategist Hong Hao have been suspended following bearish reports on the Chinese economy, reports Bloomberg News.
“While it’s unclear which of Hong’s posts may have crossed the line, China has in recent weeks censored social media posts related to economically-disruptive lockdowns,” reports Bloomberg.
“The benchmark CSI 300 Index fell to a two-year low last week -- one of the world’s worst-performing equity gauges this year with a 19 percent loss. That hasn’t stopped state-run media from publishing a series of articles projecting confidence in markets.”
Along with his sometimes bearish predictions of Shanghai Composite Index movements, Hong has also criticized Beijing’s crackdown on tech companies as responsible for a crash in Chinese ADRs.
“Social media posts circulated on Friday that he was being penalized for his bearish estimates on China stocks and would be dismissed by the company. Hong marks his 10th anniversary at Bocom on Sunday,” reports the financial news service.
Guns & ammunition over bread & butter trade?
America has a lopsided China strategy focusing on defense and security but neglecting trade, writes the Financial Times’ Demetri Sevastopulo.
“Over the past 15 months, the president has reinforced alliances with Japan, South Korea, New Zealand as well as Australia; worked hard to involve India more in China policy; boosted cooperation with European nations from Britain and France to Germany and ratcheted up support for Taiwan,” writes Sevastopulo.
“Yet while Biden has won praise from allies for the security component of his Indo-Pacific strategy, many have been frustrated at what they see as a gaping hole: the lack of a trade and economic agenda.”
“There has been a real vacuum in American trade policy towards Asia,” says University of Texas, Austin’s Sheena Greitens. “Asia is moving ahead on regional trade integration, with some willingness to include China, while the US has been largely absent.”
In response to these concerns, U.S. president Joe Biden is planning to launch an Indo-Pacific economic framework (IPEF) this summer, which will focus on fair trade—including labour and environmental issues—secure supply chains, infrastructure, clean energy and digital trade.
Meanwhile, China in January signed the Regional Comprehensive Economic Partnership (RCEP), which includes ten members of the Association of Southeast Asian Nations as well as Japan, South Korea, Australia and New Zealand. China has also repeatedly said it wants to enter the Comprehensive Progressive Trans-Pacific Partnership (CPTPP), the successor organization to the now abandoned Trans-Pacific Partnership.
“The risk is that the optics in the region become the US coming to the table with guns and ammunition and China dealing with the bread and butter issues of trade and economics,” says Paul Haenle, director of Beijing-based Carnegie China.
“China really has been unwilling to join the international condemnation of the invasion,” Roberts said to KBZK’s Jane McDonald. “When I listen to messages coming out of Beijing, they seem to be pretty consistent—and it’s that Russia as more of a victim here.”
China perceives Russia as being “pushed against a wall” by NATO. “They see a parallel between the U.S. and its relationship to the Asia Pacific, specifically Taiwan,” Roberts said.
China’s harsh Covid restrictions are leaving migrant workers struggling to find work, as shown in this short video from the South China Morning Post.
Using location data from some two million trucks in China, a study (pdf) estimates that a a month-long, full-scale lockdown of Beijing, Guangzhou, Shanghai and Shenzhen would reduce the real national GDP by 8.6 percent.
“Forty percent of the respondents in a recent survey conducted by an institute affiliated with Taiwan's defense ministry believe the United States would come to Taiwan's defense if China attacked, a drop of 17 percentage points compared to a previous poll done seven months ago,” reports Focus Taiwan.
Tuesday talk: Rethinking China: Shifting Goals & Ambitions
Elizabeth Economy, a senior fellow at the Hoover Institution now serving as a Senior Advisor on China to the Secretary of Commerce, and Lingling Wei, chief China correspondent for the Wall Street Journal, will be speaking on the topic “Rethinking China: Shifting Goals & Ambitions,” via the Mansfield Center at the University of Montana.
This must-not miss event is happening next Tuesday 7 pm MDT - register with this link. (And here is the Washington Post review I did earlier this year of Economy’s fascinating new book The World According to China.)
Montana’s ever-lasting snows
Late April traveling in Montana.