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

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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.

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