China, January 2023

A good article: Xi Jinpings Plan to Reset China's Economy and Win Back Friends https://www.ft.com/content/e592033b-9e34-4e3d-ae53-17fa34c16009 

My key take-aways from this:

1. With its abandonment of COVID Zero, China is likely on the path to economic recovery in 2023. 
2. By alignigning with Russia in Russia's war with Ukraine, China put itself in a position of disfavor with the EU- its #1 trading partner.
3. China's leadership is now working to make amends with most Western nations. But notably not with the US, as the US has taken a strong position to limit commercial ties with China in certain areas.
4. China's economic growth will likely be near 5% in 2023 - in line with the downward trend of the last decade. (As I see it, this trend is as expected due to China's nearing maturity as an industrialized nation.)

Some excerpts from the article:

The costs of China’s chaotic exit from its zero-Covid strategy are surging. In spite of a virtually static official death toll, a slew of obituaries for elderly public figures from academics to opera singers demonstrate the impact of the virus among its vulnerable population.

Hospitals in several parts of the country are overwhelmed, and a scramble for antiviral drugs and painkillers is creating shortages across Asia. Unofficial projections are putting the number of people that could die in China’s exit wave at about 1mn. 

But behind the havoc, a fundamental reset is taking place in Xi’s foreign and economic policies. According to Chinese officials and government advisers, Beijing is putting together policies aimed at improving diplomatic ties that have soured badly and at boosting a deeply strained economy.

From a diplomatic perspective, China’s main aim is to improve relations with some countries in the west, after a period which has at times left Beijing feeling uncomfortably isolated. The focus is on ties with Europe, which have been badly damaged by China’s support for its partner Russia throughout Moscow’s war against Ukraine.

“Diplomatically, Beijing hopes it will not become a rival to every country in the west and nor does it wish to look isolated at multilateral fora,” says Yu Jie, a China expert at UK think-tank Chatham House. “Russia’s faltering military adventure in Ukraine has significantly reduced Beijing’s return on investment in its bilateral ties with Moscow.”

China now perceives a likelihood that Russia will fail to prevail against Ukraine and emerge from the conflict a “minor power”, much diminished economically and diplomatically on the world stage, according to Chinese officials. In addition, for all the public professions of bilateral amity, in private some Chinese officials express at least a measure of mistrust towards Putin himself. Five senior Chinese officials with knowledge of the issue have told the FT at different times over the past nine months that Moscow did not inform Beijing of its intention to launch a full invasion of Ukraine before Putin ordered the attack.

As it seeks to repair ties with European powers, Beijing is insisting that its European counterparts agree to repeat a “no decoupling” mantra — marking a clear difference with Washington, which is seeking to limit US commercial ties with China in certain areas, particularly with regard to sensitive technologies.

“China has realised that it has antagonised too many countries at the same time, particularly among developed countries which still today are its main trade and economic partners,” says Jean-Pierre Cabestan, a China expert at Hong Kong Baptist University. Olaf Scholz meets Xi in Beijing. The German chancellor made clear during this visit that Berlin sees China as an ‘important economic and commercial partner’ 

“So it is trying very hard to reach out to the EU and key European nations — Germany, France, Italy and Spain — as well as America’s Asian allies, such as Japan and South Korea and US partners such as Vietnam.” 

The EU is China’s biggest trade partner and Beijing runs a huge trade surplus with the bloc. Similarly, several of Europe’s leading companies rank among China’s biggest foreign investors.

China’s desire for a diplomatic reset with Europe appears to be yielding significant results. Visits to Beijing in November by Olaf Scholz, the German chancellor, and Charles Michel, president of the European Council, are set to be followed early this year by French president Emmanuel Macron and Italian prime minister Giorgia Meloni.

While China’s intended diplomatic reset is starting to make waves around the world, its strategy to shore up economic growth at home is regarded as of greater importance in Beijing. 

The untested assumption behind the pro-growth strategy taking shape is that China will emerge from its Covid-induced economic malaise over the next few months. 

Portfolio investors appear ready to embrace the idea that China’s economy is on the verge of a return to health. Hong Kong’s Hang Seng index, a gauge of sentiment towards China’s fortunes, has bounced back strongly from a recent nadir hit in October last year. 

But some analysts remain more hesitant, pointing to China’s chaotic emergence from its lockdowns. “With Covid-zero now in the rear-view mirror, markets expect a gangbuster 2023 recovery. 

That will be right, eventually,” says Derek Scissors, chief economist at Beige Book, a research company. “However, with the ongoing Covid tidal wave, investment sliding to a 10-quarter low, and new orders continuing to get battered, a meaningful Q1 recovery is increasingly unrealistic.”