CHINAMacroReporter

Xi's China: 'less reliable, less predictable, and less efficient'

‘China’s predictability is being eroded by the frequent, erratic policy shifts that have taken place in recent months, such as the unexpected disruptions to power supplies that took place in 2021, and the sudden mass lockdowns that were imposed in an attempt to contain COVID.'
by

Malcolm Riddell

|

CHINADebate

October 31, 2022
Xi's China: 'less reliable, less predictable, and less efficient'
Joerg Wuttke, president EU Chamber of Commerce in China

The 20th Party Congress is over.

  • Let the study begin.

‘Xi Jinping said that studying, publicizing and implementing the guiding principles of the Party's 20th National Congress is and will continue to be a top political task for the whole Party and the entire country.’

  • This, reports Quishi, from Mr. Xi’s address to the first group study session of the Political Bureau of the 20th CPC Central Committee.

And that goes for the rest of us too, at least the studying part.

  • That’s because the impact of what Mr. Xi said and did at the Congress radiates far beyond China.

His immediate impact was on markets:

  • The announcement of Mr. Xi’s loyalist Politburo Standing Committee - coming a week after his stay-the-course opening speech - tanked Chinese stocks.

His longer-term impact is summed up by Joerg Wuttke, president of the EU Chamber of Commerce in China and straight shooter:

  • ‘In his speech to the Party Congress, the President mentioned Karl Marx fifteen times.
  • ‘The word «market» appeared only three times.’

‘We have to state clearly today:’

  • ‘Ideology is once again taking precedence over the interests of the economy in China.’

All this is happening in an environment that foreign business views as deteriorating. This is described in great detail in the ‘EU Chamber Position Paper for 2022/23’ – which shows Mr. Wuttke’s influence – this way:

  • ‘China is increasingly being seen as less predictable, less reliable, and less efficient.’

‘China finds itself at a critical juncture:’

  • ‘The decision of whether to take action to reach its full economic potential is entirely in its own hands.’

That decision, as expected, is now firmly in Mr. Xi’s hands.

  • And his decision is becoming clear.

Mr. Xi is exiting the Party Congress with even greater power, no discernible opposition, and a new five-year term (with more likely to follow).

  • He is positioned to realize his vision, not just for China's economy, but for its politics, society, and international relations.

For my part, I think Mr. Xi's vision will weaken the economy, encourage new factions to oppose him, foment civil unrest (as much as is possible in a police state), and continue to alienate the advanced democracies.

  • I'm focusing today on Mr. Xi's consolidation of power and what that means for China's economy in the current environment, especially for foreign business and investment.
  • But over his new five-year term, I predict the other issues will come to the fore in turn.

This makes it difficult to be optimistic about China.

  • But that's the silver lining for China hawks: Whatever weakens China is good.

How true that is remains to be seen.

  • And we will no doubt find out.

1 | ‘Xi Jinping provokes a spectacular sell-off in China’s markets’

There is no shortage of excellent analyses (with many more to come) about how General Secretary Xi Jinping third term will impact China’s and the world’s economies.

  • But nothing beats the ‘reaction video’-like response of institutional investors.

Here are two headlines sum up the reaction.

During the 2021 $1.5+ trillion tech ‘crackdown’ selloff,  The Wall Street Journal’s Editorial Board published ‘Wall Street Gets a Chinese Education’:

  • ‘The big surprise from the slump in Chinese company stocks is that people are claiming to be surprised.’
  • ‘President Xi Jinping has made plain for years that he intends to bring ever greater swathes of China’s private economy under the state’s control.

‘Guess what, Wall Street:’

  • ‘He meant it.’

Looks as if Wall Street got the message.

  • Investors are now listening to what Mr. Xi says.
  • And they are watching what he does.

‘Mr Xi’s third term as leader was no surprise’ writes The Economist.

  • ‘But he disappointed investors with his picks for the party’s new Politburo and its powerful seven-member Standing Committee.’
  • ‘Investors had hoped these bodies would include market-friendly officials, recognised for their ability as well as their loyalty.’
  • ‘The upper echelons of China’s communist party now lack policymakers whose expertise and experience might provide a check on Mr Xi’s economic instincts.’

Investors saw this as soon as the lineups were announced.

  • And they sold.

Note: Interesting chart from Bloomberg’s ‘Xi’s $6 Trillion Rout Shows China Markets Serve the Party First’:

The article’s subtitle: ‘Attracting capital seen less important than Xi’s ideology.’

  • An understatement – but one that could be applied to the economy as a whole.

2 | ‘Now China is taking a completely new path.’

Joerg Wuttke is president of the EU Chamber of Commerce in China, arguably the most influential foreign business leader in China, and an astute China watcher with more than 30-years’ experience on-the-ground.

  • But unlike so many foreign business and financial people, Mr. Wuttke gives his take on any issue straight-from-the-shoulder.

Here are key points from his interview on the 20th Party Congress.Q: ‘Mr. Wuttke, what are your most important findings from the 20th Party Congress?’Mr. Wuttke: ‘The most important fact is the President’s absolute, unrestricted power.’

  • ‘Xi Jinping has managed to de facto lock out the entire Party faction of the Youth League. This was not to be expected on this scale.’

‘A fundamental change has taken place in the Party:’

  • ‘People no longer get into top positions on the basis of meritocratic qualities, but through their loyalty to the President.’

‘The entire new Politburo is filled with men who have shown high loyalty to the President.’

  • ‘He has practically tailored the Politburo to himself and filled it with loyalists.’

‘This, of course, makes Xi’s job easier:’

  • ‘He now has a toolbox he can handle well, and he no longer has to deal with internal Party dissenters.’
  • ‘At the same time, the echo chamber around him is getting even denser than it already was before. That is a big problem.’

Q: ‘But you would say that the political model that has driven China over the last three to four decades is dead?’Mr. Wuttke: ‘Yes. That was brought home to us symbolically with the forced departure of ex-president Hu Jintao.’

  • ‘For me, it was the symbolic end of the old era.’
  • ‘This also means that the old model, which was based on consensus between the different Party factions, is dead.’

‘Now the President has set his direction, and he no longer tolerates dissent.’

  • ‘The removal of Hu is symbolic of the fact that Xi has done away with the old politics and that de facto only he is in charge now.’

‘No senior Party official budged; no one supported Hu Jintao.’

  • ‘Everyone sat there with a petrified expression.’

Q: ‘Is there anyone left in the Politburo who can be said to have a pro-business background and is not primarily a loyalist to the President?’Mr. Wuttke: ‘No. The reformers have been totally cut off.’

  • ‘Veterans, like Li Keqiang or Wang Yang - people with a more pro-business and pro-reform background - have left the Politburo.’
  • ‘They have certainly dissented with the President from time to time, but in the end, they simply belonged to the wrong circle.’

‘We have been used to economic growth, reform and opening up for almost forty years. China was the world’s economic engine.’

  • ‘Now the country is taking a completely new path.’

‘We have to get away from the idea that China’s policy is still basically tailored to economic growth.’

  • ‘Many observers have thought until today that although the Party calls itself Communist, it is basically pursuing a form of Manchester Capitalism.’
  • ‘That is over.’

‘In his speech to the Party Congress, the President mentioned Karl Marx fifteen times.’

  • ‘The word «market» appeared only three times.’

'The Party leader has presented his programme; you really have to pay close attention to his words now.’

  • ‘Xi means what he says, and he does what he says.’
  • ‘He has always done that, but for a long time it was not noticed in the Western world.’

‘We have to state clearly today:’

  • ‘Ideology is once again taking precedence over the interests of the economy in China.'

3 | EU Chamber Position Paper for 2022/23

Mr. Xi begins at a time foreign business views China's environment as deteriorating.Each year I look forward to the ‘EU Chamber Position Paper.’

  • Not only is it comprehensive, it is – thanks to Mr. Wuttke’s hand – an honest assessment of China’s economy and the environment for companies during business there.

This year – the year of the 2oth Party Congress - the ‘EU Chamber Position Paper for 2022/23’ is an important baseline to judge Mr. Xi’s words and actions going forward.

  • Here is one part of the 430-page report – all the report is well worth reading.

‘China’s standing as an investment destination is being eroded’

  • ‘While China once shaped globalisation, the country is now being seen as less predictable, less reliable and less efficient.
  • ‘This is leading to a loss of business confidence, opening the doors for other emerging markets to fill the vacuum that has been created and aggressively pursue foreign investment that may otherwise have been China-bound.

4 | 'less predictable, less reliable and less efficient'

The Paper continues:1 | ‘China’s predictability is being eroded by the frequent, erratic policy shifts that have taken place in recent months, such as the unexpected disruptions to power supplies that took place in 2021, and the sudden mass lockdowns that were imposed in an attempt to contain COVID.'

  • ‘The surprise crackdowns on the technology and education sectors have also made it clear to business that certainty can no longer be taken for granted and have left many wondering which industry will be targeted next.'

2 | ‘China’s reliability is increasingly being questioned. The inability to carry out independent third-party audits of China operations means the country is no longer viewed as a stable sourcing destination.'

  • ‘External factors such as new globally-binding regulatory measures, including the United States' (US') Uygur Forced Labor Prevention Act and the EU’s forthcoming Corporate Sustainability Reporting Directive, have added additional layers of complexity.'

3 | ‘China’s efficiency is being undermined as companies decouple parts of their China operations from global operations, both to hedge against potential global shocks and to remain compliant in both China and their home markets.'

  • ‘At the same time, structural advantages that the country had previously capitalised on to great effect, such as its ‘demographic dividend’, are rapidly fading, leading to a loss of productivity.'

‘There are five key factors undermining the predictability, reliability and efficiency of China’s market:’

  1. ‘State-owned enterprise (SOE) reforms have stalled, and policymaking has become more ad hoc.’
  2. ‘COVID policy is inflexible and inconsistently implemented.’
  3. ‘Diversity is dwindling and opportunities for knowledge-exchange are scarce.’
  4. ‘Business is becoming increasingly politicised.’
  5. ‘Supply chain strategies are shifting.’

You can find details about these five factors in the Paper.

5 | I'm not optimistic

Mr. Xi is exiting the Party Congress with even greater power, no discernible opposition, and a new five-year term (with more likely to follow).

  • He is positioned to realize his vision, not just for China's economy, but for its politics, society, and international relations.

For my part, I think Mr. Xi's vision will weaken the economy, encourage new factions to oppose him, foment civil unrest (as much as is possible in a police state), and continue to alienate the advanced democracies.

  • I've focused today on Mr. Xi's consolidation of power and what that means for China's economy in the current environment, especially for foreign business and investment.
  • But over his new five-year term, I predict the other issues will come to the fore in turn.

This makes it difficult to be optimistic about China.

  • But that's the silver lining for China hawks: Whatever weakens China is good.

How true that is remains to be seen.

  • And we will no doubt find out.

More

CHINAMacroReporter

August 24, 2023
Xi Jinping: 'The East is Rising' | Yes. Rising against China
All our careful analyses of PLA capabilities, the parsing of Mr. Xi’s and Mr. Biden’s statements, the predictions as to the year of the invasion, everything – all out the window. This is one you won’t see coming – but one you have to have prepared for.
keep reading
July 23, 2023
‘The U.S. Has Tactics, But No China Strategy’ | Bill Zarit
‘The U.S. needs national review of outward investment to China, but it has to be narrow and targeted and done in conjunction with our allies and partners.’
keep reading
July 10, 2023
‘Is Xi Coup-proof?’ (after the march on Moscow, I have to ask)
What about the guys without guns? So if Mr. Xi doesn’t face a rogue army or a military coup… How about a coup by Party elites?
keep reading
August 1, 2021
'Why China Is Cracking Down on Its Technology Giants'
‘Why, you may ask, is China crushing some of its most innovative unicorns? We’re in a new era led by President Xi Jinping, and politics are in command.’
keep reading
August 1, 2021
'The most significant philosophical shift since Deng'
‘Carnage in China's financial markets signals the beginning of a new era as the government puts socialism before shareholders and regulatory changes rip apart the old playbook. According to some analysts, it is the most significant philosophical shift since former leader Deng Xiaoping set development as the ultimate priority 40 years ago.’
keep reading
July 25, 2021
How China's Middle-Class China is Transforming China and the World
‘Among the many forces shaping China's domestic transformation and its role on the world stage, none may prove more significant than the rapid emergence and explosive growth of the Chinese middle-class.’
keep reading
July 22, 2021
Part 2 | The DiDi VIE (as an example)
‘The prospectus has a diagram, above, of the corporate structure, which looks almost normal. But everything below the double arrow — the actual ride-hailing business, etc. — is slightly askew.’
keep reading
July 22, 2021
Part 1 | 'Owning Chinese Companies Is Complicated'
‘ “Variable interest entities”(VIEs): The problem with this is that it sort of sounds like you’re kidding. But this is a standard method for mainland Chinese internet companies to go public, and the market has come to accept it.’
keep reading
July 22, 2021
Part 3 | Revising the Rules
‘The Chinese government could declare “all these VIE contracts are actually a disguised form of foreign ownership, which is not allowed by the rules, so they are all void and your Didi and Alibaba shares are worthless.” ’
keep reading
July 22, 2021
China: Signals Blinking Red & Oops, We Missed the Risks
I had intended to make this issue all about ‘Variable Interest Entities’ (VIEs) and the emerging risks to about $1.8 trillion dollars’ worth of Chinese shares listed on U.S. exchanges – that is, 4% of the capitalization of the U.S. stock markets.
keep reading
July 22, 2021
'Crackdown on US listings: Will China close $1.6tn VIE loophole?'
‘If Chinese authorities start to question “Variable interest entities”(VIEs), amid the crackdown that has already battered ride-hailing company Didi Global -- another VIE user -- the resulting loss of investor trust could send shock waves through global financial markets.’
keep reading
July 18, 2021
Why the U.S. Lacks Leverage over China
During the celebration of the Chinese Communist Party’s Centennial celebration, Mr. Xi stood in the same place on the balcony facing Tiananmen Square where Mao Zedong stood when he announced the founding of the PRC; Mr. Xi wore a gray Mao suit, among a sea of blue western suits; and he centered himself right above the portrait of Mao, who is similarly attired.
keep reading
July 18, 2021
'I will aim for Mao's Status.'
‘There on the gate was Xi Jinping, Chinese president and party general secretary, in a gray Mao suit. Just below his feet was the portrait of Mao Zedong, also dressed in a gray Mao suit.’
keep reading
July 18, 2021
'US warns companies of risk of doing business in Hong Kong'
“In the face of Beijing’s decisions over the past year that have stifled the democratic aspirations of people in Hong Kong, we are taking action,” said Antony Blinken, US secretary of state. “Today we send a clear message that the US resolutely stands with Hong Kongers.”
keep reading
July 18, 2021
'Biden’s Warning on Hong Kong'
‘The pretense of Chinese and Hong Kong authorities is that their crackdown on the rule of law and dissent will have no effect on Hong Kong’s viability as an international center for trade and finance.’
keep reading
July 18, 2021
'China Plans to Exempt H.K. IPOs From Cybersecurity Reviews'
‘China plans to exempt companies going public in Hong Kong from first seeking the approval of the country’s cybersecurity regulator, removing one hurdle for businesses that list in the Asian financial hub instead of the U.S.’
keep reading
July 18, 2021
Hong Kong and the Limits of Decoupling
‘The United States’ inability to make China regret—much less reverse—its transgressions in Hong Kong suggests that financial separation, sanctions, and economic barriers are less reliable tools than many in Washington believe.’
keep reading
July 15, 2021
Part 1 | 'Joe Biden is determined that China should not displace America'
‘Biden’s emerging China strategy, while still protean, sounds of a kind with Mr Doshi’s prescription for “blunting and building”.’
keep reading
July 15, 2021
The Biden Doctrine and Its Discontents
President Biden has framed China as a threat both to the U.S. and the liberal world order.
keep reading
July 15, 2021
Part 2 | Joe Biden is determined that China should not displace America
‘Mr Biden’s aides invariably start any discussion of China strategy with the need to restore American greatness after decades of decline.’
keep reading
July 15, 2021
'What's Wrong with Biden’s new China doctrine'
‘Mr Biden’s aides invariably start any discussion of China strategy with the need to restore American greatness after decades of decline.’
keep reading
July 8, 2021
Didi: Xi Surprises Us Again
Beijing shocked the financial world when it pulled the rug out from under Didi days after its IPO on the New York Stock Exchange and also announced new regulations reigning in overseas IPOs and Chinese companies already listed.
keep reading
July 4, 2021
The Chinese Point of View
Here are a few of my thoughts on the importance of Wang Jisi’s ‘The Plot Against China.’ Yuen Yuen Ang’s ‘The Evolution of Chinese Corruption’ speaks for itself - but note especially how Mr. Xi's anti-corruption campaign could hurt China's economy. I have now lived long enough that when a friend complains about his or her spouse, I say to myself, ‘There are no doubt two sides to this story.’
keep reading
July 4, 2021
'How Corruption Powers China's Economy'
‘China has managed to sustain four decades of economic growth despite levels of corruption that even Xi has described as “grave” and “shocking.” Why does it seem to have bucked the trend?’
keep reading
July 4, 2021
'How Beijing Sees U.S.-China Relations'
‘In Chinese eyes, the most significant threat to China’s sovereignty and national security has long been U.S. interference in its internal affairs aimed at changing the country’s political system and undermining the CCP.’
keep reading
July 1, 2021
Five Themes that Point to Where the Chinese Communist Party & China are Heading
As the Chinese Communist Party begins its second century, it’s useful to identify enduring patterns that might aid us in understanding China today and the directions it might be heading.
keep reading
July 1, 2021
From Rebel to Ruler: One Hundred Years of the Chinese Communist Party by Tony Saich
‘In our discussions, you've identified five themes that have been more or less consistent throughout the history of the party but have oscillated between different points on a continuum:’
keep reading
July 1, 2021
'From Rebel to Ruler': Tony Saich on Chinese Communism at 100
‘At so many points during its century-long existence, the CCP appeared to be in its death throes, whether as a result of external attack or self-inflicted internal strife.’
keep reading
June 27, 2021
European Chamber in China: 'Business Confidence Survey'
A mere 9% of European companies are considering moving any current or planned investment out of China, the lowest level on record. Instead, companies are strengthening their positions in JVs, onshoring supply chains and increasing spending to secure market share. The ambition not only to stay but also to expand their China footprint is more than justcapital flooding in due to optimism about growth. Companies are taking action to secure their operations in China and mitigate exposure to geopolitical trends in order to have a better chance of navigating a future that looks to be fraught with risk, at least in the near- to medium-term.
keep reading
June 27, 2021
'How China & America Should Compete'
‘China and the West urgently need a new framework for understanding the state of the world and their place in it. Such a framework must recognize, first and foremost, that properly regulated economic competition is not a zero-sum game.’
keep reading
June 27, 2021
'Jimmy Lai & the Death of Free Speech in Hong Kong'
Jimmy Lai’s tabloid, the Apple Daily, with its peculiar blend of scandal, gossip, and serious political reporting, was Hong Kong’s indispensable voice of free speech. Now that voice has been silenced, and Lai is in prison with others who tried to protect the right of Hong Kong’s citizens to speak and write freely, to be ruled by law, and to vote for their own autonomous government. Their politics are diverse Yet they stand together. When freedom is under siege, people cannot afford the narcissism of small differences that is tearing apart liberal politics in countries where people think democracy can be taken for granted.
keep reading
June 27, 2021
'European Companies in China: Between Decoupling and Onshoring'
‘Instead of leaving the market, European companies are exploring ways to separate their China operations from their global ones.’ ‘Following the Covid-19 outbreak, European companies in China spent the first few months of 2020 solemnly appraising their investment strategies.’
keep reading
June 24, 2021
'Apple Daily closed, but press freedom stays in Hong Kong'
‘Freedom of the press is a good thing. The West's freedom of speech must be consistent with national interests and public security.’
keep reading
June 24, 2021
Bitcoin’s growing energy problem: ‘It’s a dirty currency'
“Bitcoin alone consumes as much electricity as a medium-sized European country.”
keep reading
June 24, 2021
'China steps up crackdown on bitcoin mining industry'
‘China’s latest intervention places further pressure on what was once one of the world’s most vibrant markets for trading and mining digital currencies.’ ‘It comes at a time when many governments are scrutinising the industry’s effect on the environment and determining the types of financial oversight that should be applied to cryptocurrencies.’
keep reading
June 24, 2021
'Congress on China: Then and Now'
‘With the Senate voting on June 8, 2021, to adopt the United States Innovation and Competitiveness Act, it is safe to say that this is the most comprehensive action by Congress on China policy EVER.’ ‘The language of the United States Innovation and Competitiveness Act is about a long-term competition with China as opposed to war with an enemy.’
keep reading

Heading

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.