CHINAMacroReporter

April 18, 2020
The Pandemic's Impact on Trade
‘There are some people who would say that there was already a retreat from globalization underway.’ ‘The tools of globalization - enormous reductions in the cost of transportation and communication - remain.’ ‘But the marginal utility actually of further advances is declining – that would be one way to put it.’
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April 11, 2020
The Pandemic May Increase China's Economic Strength vis-à-vis the U.S.
‘Well, I think people around the world are rightly suspicious of the Chinese as they are probably equally suspicious of the Americans.'
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April 30, 2018
'Big lessons from the faulty analysis that spiked the Shanghai stock market'
ProTips from Andrew Polk, Trivium China On April 24, equity analysts interpreted a phrase used in a Politburo meeting readout to signal a new round of economic stimulus. And, the Shanghai stock market, one of the world's worst performers, spiked 2%. On April 25, having much earlier advised and protected clients, Andrew Polk of Trivium China published an analysis in Trivium's daily (and free) Later, Andrew and I talked about how he reached his conclusions. His explanation is a masterclass in how experience, discipline, and some tedious slogging, combined with a sound analytical framework, lead to good China analysis.
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April 18, 2018
New super-agency, National Supervision Commission—and China's massive government restructuring
'With government restructuring, the biggest thing is the creation of an entirely new branch of government: the National Supervisory Commission. Its entire job is to overlook every single public official in China. It is an institutionalization and deepening of the corruption crackdown that we've seen over the past few years.'In all, Andrew highlighted four major actions from the Two Sessions: 1.Chinese government restructuring 2.The policy roadmap 3.Personnel 4.The legislative agenda + the constitutional amendments
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April 16, 2018
The Chinese Government’s 9 Economic Policy Priorities in 2018 (and beyond)
[China Econ Observer] 1.Supply-side Structural Reform 2.Innovation 3.The “three critical battles” 4.Deepening reforms 5.Rural revitalization 6.The regional development strategy 7.Increasing consumption and improving investment 8.Opening up 9.People’s wellbeing
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April 10, 2018
U.S.-China trade dispute: Will China Weaponize the RMB and U.S. Treasury bonds?
U.S.-China trade war: collateral damageConsider the soy bean. 'China is threatened retaliatory tariffs on U.S. soybeans. The U.S. is one of the largest producers of soybeans. If China's not going to buy them, we're going to have an excess capacity.'' So, last week, we saw a soybean selloff.''But there was a complete dislocation in whole soybean supply chains. Downstream products, like soybean oil, didn't move at all in the same way.'
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April 5, 2018
Behind the U.S.-China trade dispute: 'The West's China gamble has failed.'
What's the root cause of the current friction between the U.S. and China? The West's disappointment that China did follow the western model but its own, argues Ed Tse, CEO of Gao Feng Advisory Company (a member of the China Analyst Network). [Ed's solution] look to the similarities between China and the West, especially in the tech sector, and be alert to China's evolution toward better IPR, market access, and other contentious issues, not just the remaining shortcomings. Below is a video of my discussion with Ed and excerpts from both the interview and his South China Morning Post op-ed, 'Chinese innovation with US characteristics? Maybe China and the West aren’t that far apart, in business at least.' Ed presents insights that differ greatly from the China Echo Chamber in the U.S. Let me know what you think.
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March 8, 2018
How Trump's tariffs impact China's trade/currency relations with Japan & Korea
[China markets update with TRACK's Bob Savage] 'The currency markets are embroiled in trying to figure out whether the Trump tariffs on steel and aluminum are good or bad for the U.S. economy and the U.S. stock market.'
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March 6, 2018
'E-commerce' is rapidly evolving into 'New Retail.' Jack Ma, Alibaba
Ed Tse, founder of the Gao Feng consultancy and the leading expert on Chinese innovation, introduced me to New Retail in a recent conversation. You will find his explanation of New Retail below, along with a couple of videos showing New Retail in action - as amazing today as Minority Report seemed years ago. Perhaps even more amazing is the China business strategy, the 'Third Way,' that made things like New Retail possible. Ed explains the Third Way in Part Two of our discussion that I will be posting soon. Chinese do do things their own way, as the Third Way again demonstrates. For now, have a look at the future today. And, stay tuned for Part Two for Ed's explanation of the Third Way that made New Retail possible.
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March 1, 2018
'Trump's tariffs just first shot—the big China action is Section 301'
Leland points out that President Trump's really big trade move against China yet to come, that is, Section 301 penalties. If you aren't up to speed on 301, you will be after you read and watch Leland's comments. As Leland says, with Section 301, 'regardless of how Section 232 steel and aluminum tariffs end up in the next few days - you're seeing the beginning, not the end, of Trump's aggressiveness on trade.' 'And, I don't think people have prepared themselves yet for the fact that 301 is coming.'
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February 22, 2018
A world of debt mortgages our economic future
Irresponsible borrowing by the US, China and India imperils global growth: What is not natural is China’s bad track record on debt: according to the Bank of International Settlements, every measure of debt — consumer, government and corporate — has risen as a share of GDP for the past decade. China went from a low-leverage country in 2007 to having a worse debt position than the US in 2017, despite the fact that the US itself has borrowed heavily.
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February 16, 2018
China's Crisis of Success
Here are five key points, each corresponding to a section below. "The Rise of China: How Economic Reform Is Creating a New Superpower" by Bill Overholt, published in 1993, was called 'nonsense' and 'too optimistic.' How did that work out for the reviewers? Now, almost three decades after "The Rise of China", Bill believes that China's future has become 'much more uncertain.'
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February 12, 2018
2017 China Property Report
One of the highlights in our recent 'In Pursuit of Patterns' series of client notes, showed that the land sales growth had tended to lead the price growth and a significant increase in land sales would lead, with a lag, to the subsequent correction in prices.
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February 9, 2018
The extraordinary power of China's corporate 'mega ecosystems'
Besides Alibaba and Tencent, companies like Ping An Insurance Group, Baidu and JD.com are building out mega ecosystems with incredible speed and intensity. Even some traditional manufacturers are moving in this direction. Zhejiang Geely Holding Group has gone from producing entry-level cars to selling premium models with the help of foreign acquisitions and has been the first Chinese carmaker to move into on-demand mobility services. It has also been experimenting with connected intelligent vehicles, shared ownership programs and flying cars, together assembling a sprawling transportation services ecosystem.
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February 8, 2018
China's trade surplus up, RMB weaker
[China markets update with TRACK's Bob Savage ] 'The RMB did not like the trade data at all, and it weakened immediately - over 1% today.' 'Overnight, the world has moved a little bit away from its U.S.-centric obsession about equity volatility in the United States and around the world to what's going on in China,' says Bob Savage, CEO of TRACK and member of the soon-to-be-launched China Analyst Network.
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February 7, 2018
What we import from China
But he can’t keep saying China is ripping us off and he’s going to stop it unless the US targets the biggest imports. The trade deficit with China is bigger than with the next eight countries combined. NAFTA? The trade deficit in cell phones and computers alone with China is bigger than the trade deficits for all goods with Mexico and Canada combined.
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February 3, 2018
China's RMB oil futures exchange—the 'story of the year'!
‍The Shanghai International Energy Exchange:blowing up more than oil : There's a lot to follow in China. And, I had missed reports about the opening of the Shanghai International Energy Exchange or INE, likely this quarter. But, during my interview with Bob Savage, the well-respected analyst of global markets and CEO of TRACK, he told me the INE could be the 'story of the year.' That's a big - and interesting - claim about something that seems like one more ho-hum Chinese entity. Bob explained that the INE will create the an RMB-denominated oil futures contract. The first such contract in a petrodollar world, where China is largest crude oil importer. If RMB oil contracts - even just for trade with China - catch on, then the whole global oil trading regime will change. And, given the massive size of the global oil trade, a shift from dollars to RMBs will both erode the dollar as a reserve currency, and push the RMB closer its goal of becoming a full reserve currency.
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January 10, 2018
'China goes private'—from financial reform to the Belt Road Initiative
[Malcolm Riddell's conversation with Harvard's Tony Saich] The State & Party's technical prowess is somewhat limited.
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January 10, 2018
What Hiring Activity Says About Firm Valuations in China
How does an obscure factor like hiring practices impact firm valuation? That was the question posed by Deutsche Bank’s quant strategy group in a 2015 whitepaper titled, “Macro and Micro Jobenomics.” The report concluded that online job postings could be used to predict U.S. macroeconomic statistics and equity market returns. This piqued my interest – I wondered whether a similar process could be used for valuing A-share companies in China.
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December 31, 2017
December 2017: Is China Actually Deleveraging? Yes and No.
China Deleveraging Insider tracks the status of China’s financial de-risking initiatives and the state of deleveraging.The most recent data from the PBoC and the CBRC show that bank asset growth hit a fresh all-time low in October. That means China is actually deleveraging – a little. It’s slow and slight, and done with a bit of trickery, but the debt load has shrunk in comparison to the size of the economy.
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December 18, 2017
What are the policy implications for China's economy from the 19th Party Congress?'
Pieter Bottelier—top China economist, former World Bank head in China, and stalwart CHINADebate expert—set the theme today: the crucial albeit unsung importance of elite technocrats in guiding China's Economic Miracle.
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November 27, 2017
Is China's Economic Power a Paper Tiger?
The People’s Republic of China has surely seen faster GDP growth than the United States for most of the past forty years. It's the value of that growth that's questionable. : The Chinese economy is strange in many ways. Not only is it a hybrid between private capital and state control, but very few people directly invest in the mainland — and yet everybody is interested in how the second largest economy in the world is going to develop. That’s because Chinese demand determines the prices of world commodities, and the operations of multinational companies in China impact earnings. When the yuan falls, markets across the world get jittery. China watchers accept the fact that official Chinese data is severely flawed, and often simply fabricated, yet they still use it to analyze the Chinese economy and markets because there are few alternatives. One alternative, however, is the China Beige Book International (CBB), a research service that interviews thousands of companies and hundreds of bankers on the ground in China each quarter. They collect data and perform in-depth interviews with Chinese executives.
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November 22, 2017
Will Chinese Commodities Derail The Global Reflation Trade?
[Leland Miller and Derek Scissors on why investor excitement over Chinese capacity cuts this winter is oversold, and the serious implications for the global reflation trade.] For over a year, commodities bulls have feasted on China. In the aftermath of the recent Communist Party Congress, many investors are now drooling over the prospect the boom will continue, based on Beijing’s promises to supercharge its campaigns against overcapacity and pollution this winter. If such pledges are fulfilled, the thinking goes, substantial chunks of steel, aluminum, and other refining capacity will be taken offline, rebalancing markets and providing rocket fuel to already frothy prices. 2018 could prove to be an even more amped-up version of 2017.
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November 8, 2017
Novel Data on China's Auto Loans - An Inefficient Market
The continued growth of China’s auto sales has relied increasingly on consumer credit, according to the WSJ; but, granular data is hard to come by. So, we created a process to collect, clean, and structure data from online auto loan offerings. Our findings imply that the auto loan market, like many credit markets in China, runs on two parallel tracks, and is woefully inefficient.
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October 19, 2017
'Inside China’s quest to become the global leader in AI'
'The RMB did not like the trade data at all, and it weakened immediately - over 1% today.' 'Overnight, the world has moved a little bit away from its U.S.-centric obsession about equity volatility in the United States and around the world to what's going on in China,' says Bob Savage, CEO of TRACK and member of the soon-to-be-launched China Analyst Network.
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October 11, 2017
Novel Data on China's Mortgage Loans
China’s banks are directed by the state, without irony, to “vigorously promote reasonable home ownership.” Their most recent annual reports repeatedly bury in the notes this line, or some variant of it, as an explanation for the explosion of mortgage lending over the previous 12 months. Granular mortgage data however, is hard to come by – so we created a process to collect, clean, and interpret that information.
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September 12, 2017
China’s property market risks are rising, says data expert
Price trends in China’s housing market are unsustainable, according to Real Estate Foresight chief executive Robert Ciemniak who worries that excessive leverage among homeowners could lead to a crisis. Real Estate Foresight founder and chief executive Robert Ciemniak has made it his business to gather and interpret real time data on China’s residential property market. He gives his thoughts on what’s to come in China’s housing market.
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September 1, 2017
The father of business consulting in China knows why eBay failed there
In the early 1990s, when China was still struggling to shrug off the straightjacket of its planned economy, the man appointed to lead the first business consulting firm allowed in the nation was immediately confronted with the scope of the challenge ahead.
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August 30, 2017
Is china prematurely declaring victory in its reforms?
At the heart of China's economic take-off during the last four decades is a fragile equilibrium between economic reforms and one­ party rule. The communist party has demonstrated pragmatism and adaptability - but just at a time when China seeks to fully enter the knowledge economy and participate in global markets, it has put the brake on further reforms.
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August 29, 2017
China's unsolved liquidity risk
The question we should ask ourselves is, how many of China’s corporate borrowers are paying off existing debt with new debt?
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August 22, 2017
Predicting Chinese stock returns
[The Largest Single—Factor Study of China’s Stock Markets] Outside observers paint China’s stock markets as a casino, where picking stocks requires as much skill as roulette, and investors avoid the country in their portfolio allocations. Patterns exist, however, if you know where to look.
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August 2, 2017
Leland Miller on Pressing China Issues
Leland Miller, the founder of China Beige Book, spoke with The Epoch Times about which investors and companies are interested in China, the latest developments in the currency, U.S.-China relations, overcapacity problems, and the One Belt One Road Initiative. : The Chinese economy is strange in many ways. Not only is it a hybrid between private capital and state control, but very few people directly invest in the mainland — and yet everybody is interested in how the second largest economy in the world is going to develop. That’s because Chinese demand determines the prices of world commodities, and the operations of multinational companies in China impact earnings. When the yuan falls, markets across the world get jittery. China watchers accept the fact that official Chinese data is severely flawed, and often simply fabricated, yet they still use it to analyze the Chinese economy and markets because there are few alternatives. One alternative, however, is the China Beige Book International (CBB), a research service that interviews thousands of companies and hundreds of bankers on the ground in China each quarter. They collect data and perform in-depth interviews with Chinese executives.
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July 19, 2017
China Cause America's Trade Problems?
[Malcolm Riddell's conversation with Yukon Huang] 'America's trade problems are not the consequence of China's policies.'
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July 19, 2017
Siri: 'Can The iPhone Prove President Trump's Wrong About U.S.-China Trade?'
[Malcolm Riddell's conversation with Yukon Huang] 'America's trade problems are not the consequence of China's policies.' 'How much of that $650 iPhone - which adds to China's trade surplus with the U.S. - actually originates and stays in China? — Only $25.'
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July 2, 2017
China Doesn’t Have A Real Estate Bubble.
Prices spike in a city. The government puts the screws on the market, and prices go down. Investment then switches to a city with lax policies. Housing prices spike; regulations tighten; prices go down. Investors move on. And so on, and so on.
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June 28, 2017
Will 'One Belt, One Road' Tank China's Economy?
'My fear is that Xi will see this initiative as an alternative to economic reform.'— Pieter Bottelier : But, the biggest threat in the near term is that Xi Jinping will see OBOR as an alternative to completing the economic reforms promised - but not delivered - in 2013's Third Plenum.
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June 21, 2017
China's stock markets—are there any patterns?
'I find evidence for dramatic size and momentum effects; that is, small stocks and recent winners are the top performers in China’s stock market. Additionally, I find that high-beta stocks modestly underperform low-beta stocks.'
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June 7, 2017
China's higher rates don't matter, yet
In fact, high yields still haven’t filtered down to borrowers. Using industrial enterprise economic indicators data, I estimated the actual interest rate paid by Chinese borrowers. Over the past six months – as corporate bond yields, SHIBOR, and WMP yields all rose dramatically – the actual interest paid by China’s industrial enterprises fell to an all-time low.
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May 29, 2017
Why A Trump–Kim Jeong Eun Summit Could Work
[Malcolm Riddell's conversation with Bill Overholt] 'If it would be appropriate for me to meet with him [Kim Jong-un], I would absolutely. I would be honored to do it.' — President Trump — May 2017:'What President Trump has done is to signal we are willing to move away from this formula that the North Koreans have to give up everything in their nuclear program before negotiations - only then we'll talk with them. I admire our U.S. negotiators, but that formula is simply absurd.'
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May 17, 2017
A new framework for china's debt problem
In fact, high yields still haven’t filtered down to borrowers. Using industrial enterprise economic indicators data, I estimated the actual interest rate paid by Chinese borrowers. Over the past six months – as corporate bond yields, SHIBOR, and WMP yields all rose dramatically – the actual interest paid by China’s industrial enterprises fell to an all-time low.
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May 3, 2017
An inflection point in china's systemic risk
Additionally, given the incentives of regulated institutions everywhere, it is likely that risks have simply begun to migrate to new and more opaque parts of the balance sheet. As China watchers, we should prepare for yet another game of financial risk whack-a-mole.
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April 26, 2017
Clearing up a few misconceptions on China's capital flight
Last year, I debunked a popular measure of trade misinvoicing as the culprit for China’s capital outflows. Today, let’s scrutinize two other misconceptions bouncing around the China commentator echo chamber.
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March 9, 2017
So many twists and turns to the China Housing markets story
[CHINADebate Presentation] One of the highlights in our recent 'In Pursuit of Patterns' series of client notes, showed that the land sales growth had tended to lead the price growth and a significant increase in land sales would lead, with a lag, to the subsequent correction in prices.—Almost everyone on the outside seems to have missed the biggest bull market in China housing in 2016, culminating in policy tightening cycle kicking in at the end of the year. But what's next?
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February 27, 2017
Is The U.S. Ceding Global Leadership To China?
'China isn't positioned to replace the U.S. as a global leader anytime soon.'—Hard on President Trump's 'American First' inaugural address, Xi Jinping gave a rousing paean to globalism at the World Economic Forum. And, immediately the hot question became: 'Is the U.S. ceding global leadership to China?' Yes and no, says Bill Overholt of the Harvard Asia Center. Yes, the U.S. is ceding global leadership. No, China won’t replace the U.S. What will replace the U.S. is ‘G-Zero’, a world with no single global leader. Not China, not the U.S. So, can his critics lay this outcome at President Trump’s feet?
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February 15, 2017
C-to-C Internet Commerce- From Taobao Shops to Taobao Villages
One is some of the local government-owned SOEs are the sources for overcapacity. The reason is because the local government also wants to ensure there's some degree of employment locally, and perhaps some source of taxation. The Chinese government is now going to need to start the so-called supply-side economics to try to consolidate overcapacity in a number of sectors. It's going to impinge on the interests of many of these local SOEs as well as the local governments who own them.
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February 15, 2017
How SOEs & Local Governments Create Overcapacity
One is some of the local government-owned SOEs are the sources for overcapacity. The reason is because the local government also wants to ensure there's some degree of employment locally, and perhaps some source of taxation. The Chinese government is now going to need to start the so-called supply-side economics to try to consolidate overcapacity in a number of sectors. It's going to impinge on the interests of many of these local SOEs as well as the local governments who own them.
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February 15, 2017
Why SOE Reform is So Tough
'...SOEs need to reform, because on one hand, many of them have achieved a lot for China. On the other hand, they've actually created quite a lot of harm, in particular in the areas of overcapacity but also in the areas of corruption we've talked about.'
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February 2, 2017
AmCham China Chairmen's View From China in D.C. 2017
[AmCham China & CHINADebate U.S.—China Trade/Business Series 2017] Terrific insights from leaders on the ground in China. While in D.C. the Chairmen joined us in a panel discussion and individual interviews about U.S. business in China, U.S.-China relations, trade, and much more. We present their views in a 13 part series. Sheryl WuDunn, business executive, lecturer, best-selling author, and winner of the Pulitzer Prize moderated.
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February 1, 2017
'Chinese Politics In The Xi Jinping Era'
[Malcolm Riddell Interviewed Cheng Li] 'If you ask any taxi driver in Beijing, Shanghai, or Guangzhou, he or she will tell you – with accuracy – which leader belongs to which faction. : 'China is a one–party state, but that does not necessarily mean Chinese leadership is a monolithic group with leaders who have the same ideas, same background, same world views, same politics. No, they're divided.'
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December 7, 2016
First 100 Days: Do Not Provoke China
The First 100 Days interview series features Pacific Council experts addressing the top foreign policy issues facing the incoming Trump administration.: Warns of the potential for new conflicts if Donald Trump follows through with his campaign promises regarding China.
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October 18, 2016
How Alibaba, Xiaomi, & Tencent are Changing the Rules of Business
[An Interview of Ed Tse, the author of 'China's Disruptors: Alibaba, Xiaomi, & Tencent... how innovative 'Disruptor' companies are restructuring China's economy.' ] The real force in Chinese economy is increasingly private companies, not SOEs. / Leading private Chinese companies are innovative and ambitious
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July 14, 2016
How 'Brexit' Will Impact China's Economy
David Dollar gives you fresh insights to better incorporate Brexit's impact into your analyses of China and global economies & markets, including: 1. Why, after the Brexit vote, did the Shanghai Stock Market fall only 1%? 2. How will Brexit affect the value of the RMB and China's currency policy? 3. How will Brexit impact trade with the EU, China’s largest trading partner? 4. Why, in the larger geopolitical perspective, could China be the big winner from Brexit?
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July 2, 2016
China housing: boom, bust, or bubble-or...?
100s of Cities Bubble Up & Down As Policy Makers Press the Levers China hasn’t collapsed. And, the bubble hasn’t burst because there may not be just one big real estate bubble. Instead, there are 100s of sizable cities, each moving in its own cycle, each responding to how its local policymakers stimulate & tighten-stimulate & tighten, and each having performance divergent from that of other cities. Watch here to see how city-level markets bubble up and bubble down...
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'Zero Covid' & the Shanghai lockdown

The impact on China’s economy, global supply chains, & foreign business in China

Joerg Wuttke is the president of the EU Chamber of Commerce in China - the 'official voice of European business in China.'
by

|

CHINADebate

May 1, 2022
'Zero Covid' & the Shanghai lockdown
Joerg Wuttke, president of the EU Chamber of Commerce in China

The questions I get most these days:

  • ‘China has locked down Shanghai and Beijing looks next: Why is Xi Jinping holding fast to his Zero Covid policy in the face of its drastic impact on China’s economy?’ and
  • ‘What will that impact be for China’s economy, global supply chains, and foreign business in China?’

Rather than answer these myself, I now just send ‘China's Leadership Is Prisoner of Its Own Narrative,’ an interview with Joerg Wuttke in The Market, a leading German-language financial website – and a must-read.

  • Because this interview is both comprehensive and authoritative, today’s issue includes only Mr. Wuttke’s key insights from on-the-ground in China.

Joerg Wuttke is the president of the EU Chamber of Commerce in China -the 'official voice of European business in China.'

  • He has lived and worked in China for over 30 years.

Over those decades, he has dealt at the highest levels of the Chinese government and Party as well as the EU and member governments.

  • He is arguably the most influential foreign business leader in China.

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

  • This gives his comments a rare credibility.

His hand is always visible in the many excellent publications produced by the EU Chamber of Commerce in China.

  • You will find this terrific resource here.

Part One | The Politics of ‘Zero Covid’ & Lockdowns

1 | ‘Whack-a-Mole’

Q: ‘Shanghai has been in lockdown for a month. What's your assessment of why China is still relying on lockdowns?’

Mr. Wuttke: ‘The Omicron wave is like a game of whack-a-mole for China.’

  • ‘First Xian was locked down, then Shenzhen, then Shanghai, and so on.’
  • ‘Now we're all wondering what’s next.’

‘Here in China, the authorities always fall back to square one: lockdowns.’

2 | ‘Xi has maneuvered himself into a dead end’

Q: ‘Do you see any indication that the Zero Covid policy, which is behind the lockdowns, is being reconsidered?’

Mr. Wuttke: ‘No, nil.’

‘The authorities have made the Chinese population genuinely afraid of the virus.’

  • ‘The authorities do not inform that the Omicron variant is milder, they do not inform that other countries have learned to live with the virus - they can’t admit that people in Europe can fly on vacation again and live largely a normal life.’
  • ‘The authorities have spent a year bad-mouthing Western mRNA vaccines, with the result that people in China don’t trust the vaccination - and the authorities can’t admit that it would make sense to use mRNA vaccines in addition to the Chinese vaccines.’

‘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.’

‘President Xi wants to be confirmed for a third term at the 20th Party Congress in the fall, so he cannot change his narrative this close to the finish line.’

  • ‘Until the 20th Party Congress, they will stick to the Zero Covid policy.’

‘In short, President Xi has maneuvered himself into a dead-end:’

  • ‘He can’t change his Covid policy.’

3 | ‘Only one metric right now: Zero Covid.’

Q: ‘So given the choice between pandemic control and the economy, the economy gets the short end of the stick?’

Mr. Wuttke: ‘Yes.'

'The political signaling is clear:'

  • 'They don’t care about the economy in the short term.’

‘The mayors, the regional politicians, they all have only one metric right now:

  • ‘Zero Covid.’

‘The system’s focus on Zero Covid leads to many decision-makers being in a kind of self-destruction mode.’

‘Imagine you're a mayor of a medium-sized city and a truck comes with supplies for a local factory with parts from the Shanghai area.’

  • ‘Do you let the truck pass and run the risk that the driver will bring Omicron and you will have local contagions?’

‘You won’t get kicked out of your job if the economy in your area is doing poorly on average.’

  • ‘But you will lose your job if you have Covid in your city.’

‘Time and again you get confirmation from above:’

  • ‘If you have Covid in your city, you have a problem.’

4 | ‘Deaf ears’

Q: ‘Do officials understand the impact of Zero Covid?’

Mr. Wuttke: ‘I try to tell my contacts in the government that they could take an example from Singapore, where the government deals very pragmatically with the virus and society has learned to live with it.’

  • ‘Officially, this totally falls on deaf ears.’

‘But 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.’

‘In current politics, business people's messages hardly get through anymore.’

  • ‘Politicians’ fear is too great.’

Part Two | Impact of Zero Covid on China’s Economy

1 | ‘Growth will be below 4%; we don’t know how low.’

Q: ‘Officially, the government expects 5.5% GDP growth this year. Is that still realistic?’

Mr. Wuttke: ‘No.’

  • ‘2022 growth will be below 4%; we don’t know how low.’

‘The current lockdown is even more extreme than in early 2020.'

  • 'And the economy is crashing almost as hard.’

‘All signs indicate that the politicians do not want to solve the problem, but only to limit it.’

  • ‘I don’t see any vaccination campaign, no information campaign, no imports of mRNA vaccines, and I don’t see the population being told that society can live with it.’
  • ‘So I have to assume that Zero Covid will result in locking down this city and then that city on a monthly basis, at least until the Party Congress gives President Xi a third term.’

Q: ‘Did the downturn accelerate in April?’

Mr. Wuttke: ‘Yes, big time.’

‘GDP growth of 4.8% in the first quarter was probably already slightly managed upward.’

  • ‘But the real shocker will come with the data for April.’

‘Remember, 2021 was a banner year for China's economy, especially in the manufacturing sector.’

  • ‘January started at a high level, February and March were still okay.’
  • ‘But from March 28th, with Covid in Shanghai, everything collapsed.’

2 | Stimulus: ‘A band-aid for an amputation.’

Q: ‘To soften the blow, the government is trying to stimulate. Is it working?’

Mr. Wuttke: ‘The stimulus measures are like a band-aid for an amputation.’

‘The People's Bank of China pumps some liquidity into the system, money flows into infrastructure projects and state-owned enterprises receive support.’

  • ‘But that doesn’t get private companies and foreign corporations to invest again.

‘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.’
  • ‘There’s no fiscal policy that can compensate for this restraint.’
  • ‘Investment ambitions will not come back until there is confidence that the Covid policy will change.’

Part Three | The Impact of Zero Covid on Supply Chains

1 | ‘Everyone is desperately trying to fill their warehouses.’

Q: ‘Is the Shanghai lockdown the main problem?’

Mr. Wuttke: ‘The problem goes far beyond Shanghai.’

  • ‘Supply chains within China are so tightly knit that lockdown measures in one place have ripple effects on other regions.’

‘Nationwide, freight volumes in April are down 15% year-on-year.’

  • ‘Freight traffic volumes in the Shanghai metropolitan area plunged by 81% year-on-year in the first three weeks of April.’
  • ‘Jiangsu province recorded a drop of 30%.’
  • ‘In Guangdong province, China’s economic powerhouse, freight volumes have plunged by 17%, even though there is no lockdown.’
  • ‘There are currently no trains running between Nanjing and Shanghai; the authorities in Nanjing are so riddled with fear that they won’t allow any traffic.’

‘I hear of car manufacturers that produce in Jiangsu province and are not directly affected by the lockdown.’

  • ‘But they can’t get parts from their hundreds of subcontractors, either because the subcontractors can’t produce or because shipments can’t get through the lockdown areas.’

‘Everyone is desperately trying to fill their warehouses.’

  • ‘The finely-tuned just-in-time processes are no longer working.’

‘These effects will only be seen in the economic data over the next few months.’

2 | ‘Ships are clogging up the waters off Shanghai.’

Q: ‘Will this mean continued production stoppages, clogged ports and strained supply chains?’

Mr. Wuttke: ‘Definitely.’

‘Shanghai has the largest port in the world.’

  • ‘It’s not in lockdown. It’s running quite well.’

‘But there are not enough trucks to clear the containers.’

  • ‘There is an acute shortage of drivers - they all leave because they are tired of being tested over and over again.’

‘Now ships are clogging up the waters off Shanghai.’

  • ‘Average waiting times for container ships there have tripled.’

‘Some are being diverted to Ningbo or Shenzhen.’

  • ‘But those ports can’t replace the big port in Shanghai.’

Part Four | Impact on Europe & Foreign Companies in China

1 | ‘Further shortages in the global supply chains.’

Q: ‘How is the impact being felt in Europe?’

Mr. Wuttke: ‘In Europe, you haven’t even begun to see the effects of these problems.’

  • ‘The ships coming into Europe today left Shanghai before the lockdown.’

‘Only in May and June will we see where the electronic equipment, the machine parts, the pharmaceutical precursors, and components are missing.’

  • ‘That will then lead to further shortages in the global supply chains.’

2 | ‘Foreign companies looking to other Asian countries for their sourcing.’

Q: ‘How are foreign companies in China reacting?’

Mr. Wuttke: ‘China is losing its credibility as the best sourcing location in the world.’

  • ‘China has lost its nimbus as a base for sourcing and manufacturing, at least for now.’

‘With the current situation in China comes a huge loss of confidence, which will eventually lead to changes in supply chains.’

  • ‘Foreign companies are not packing up and moving out of China, but they are considering moving parts of their investments to other countries.’

‘And I am now hearing from more and more foreign companies that they are trying to move their supply chains to other countries.’

  • ‘For the first time, I see a number of companies looking to other Asian countries for their sourcing.’

‘That means their sourcing will be more expensive, because you can’t simply replace the extremely efficient Chinese cluster in many areas.’

  • ‘But a more expensive sourcing is better than nothing.’

‘Also China maintains an extremely rigid travel policy.’

  • ‘As a CEO or as a purchasing manager, you can’t just fly quickly to Shanghai or to Guangzhou.’
  • ‘But today you can easily get to Jakarta, Kuala Lumpur or Manila.’

Part Five | ‘Prisoners of Their Own Narrative’

Q: ‘Do you see any prospects at all for market-friendly reforms in China?’

Mr. Wuttke: ‘My experience in China is that when things get really bad, the technocrats come in.’

  • ‘And they do make some reforms that are right.’

‘Perhaps there will be a rethink when the domestic economy hits rock bottom.’

  • ‘Perhaps they will realize in Beijing that they need foreign companies after all.’
  • ‘Perhaps they will then open the doors wider again.’
  • ‘But today, of course, we are not there yet.’

‘For now, China is not getting out of the corner the president has maneuvered the country into.’

  • ‘They are prisoners of their own narrative.’