CHINA
THE GIANT JUGGERNAUT
PART 11
2022 JULY ISSUE
Written by : Andrew Sia
Being the world’s second largest economy and under the paramount leader of Xi Jinping, China is under the spotlight every day. For the last three years the news are all becoming very controversial. And being amplified by its propaganda machine it is causing a lot of ripples.
Talking about the world entering in Cold War again which is not something we would like to see. The world has a lot of challenges to solve and unfortunately they are one after the next. With the coronavirus, we have still to take the correct measure to contain the virus, and with the war in Ukraine started by Russia, we hope that we can see a truce soon.
China has to come to an agreement with the Western world for what they can do to release the tension. By handling the olive branch is something we would all like to see.
What is Happening With the Fintech in China
Since last year’s campaign to rein in the technology sector, first it started with picking Jack Ma from Alibaba as the main target. It crashed Ant Group’s IPO and ended up with Jack Ma giving tens of billions for charity in name of the “common prosperity.” It triggered several Chinese entrepreneurs to stepdown from their executive roles as their companies are coming under greater regulator’s scrutiny. We have seen Richard Liu of JD.com, Zhang Yiming of ByteDance, Su Hua from Kuaishou, Colin Huang from Pinduoduo, and Pony Ma of Tencent taking the second role of the company and stayed away from the eyesight of the public.
As the result of the onslaught, the share prices, especially the tech sector makes up a big part of the off-shore market, dropped a very large part of their prices from their highest point.
The internet-platform companies rely heavily on people’s willingness to spend on discretionary items, and not just the basic necessities.
China’s New Plans to Stimulate National Economy Amid Lockdowns
Applying lockdown to curb the spread of Omicron caused a lot of havocs in China and one of it is unemployment. Many companies are allowed to stop unemployment insurance to the government in return of avoiding mass layoffs. Electricity and internet charges are waived for business. Young graduates will be subsidized to start their own businesses since few jobs are available.
Premier Li Keqiang is more focusing on policies to stabilizing employment as a gesture of support, while the country’s leader, Xi Jinping, is still going after the grandiose projects, such as accelerating investments in infrastructure. These investments have been the mainstay of past efforts in China to fight economic slowdowns, but they have already saddled many local governments with heavy debts.
Some cities, such as Ningbo and Shenzhen, are trying to stimulate consumers’ spending by giving gift certificates for shopping and dining instead of building something that they already have.
Some productions have reopened but often at a very low level of production as the lack of raw materials are still waiting to pick up. By keeping the workers to live, eat and work in the factories without leaving has been the way to contain the spreading of the Omicron. But logistic is still being held up although the control has been eased up.
The Use of Coal in China
It is known that coal is still playing a very big role in fossil fuel in the energy for China. It is accounted for 70%.
China will remain the biggest importer of coal from Russia especially the country faced the shortage of coal in the second half of last year. China’s coal imports have reached €7 billion last year, compared with the European bloc’s €4 billion. China doubled its import from Russia last year.
It will suspend import tariffs on coal import and has also rapidly expanded its state-owned coal mine operation to solve its shortage.
Russia is also China’s second-largest source of imported coal after Indonesia. China fallout with Australia already for 17 months and it is getting its imports from Russia now.
About China’s Downturn This Time
In the past two months China’s largest city Shanghai has been stopped in the state- suspended activities. There has been the lack of a clearer and more credible plan to turn the situation around, other than applying the heavy-handed net-zero Covid policy.
Its April economic figures showed the retail sales fell by 11.1% year-on-year. This was as worse as the number in March 2020 when the initial outbreak of Covid took place. Investment and industrial growth were down by 2.9% compared with 5% growth in March.
We have not seen any official response except the stay-at-home orders affected one-third of its economic output. We assume that Xi Jinping would not want a historical weak economy during the Central Committee’s meeting in fall to decide for his third term.
Even if Shanghai’s outbreak can be brought under control at this time, but the cold weather this year would inflict another round of Omicron. It will have the potential to kill as at the current levels of vaccination coverage and healthcare capacity are inadequate to handle.
One may wonder if China’s overconfidence or hardheaded realism are responsible for its tepid counter-cyclical response, the result is the same. Already Beijing faced a steep downturn of its growth in the first quarter, and the strong headwinds caused from the monetary storm from Europe and the U.S. won’t help too much. Already analysts from Citibank and S&P Global have downgraded full-year’s growth to just above 4%. Even that might prove to be optimistic.
The Tracking Down of the Social Media’s User in China
China has spent a decade-long to push for control over its digital town square to end anonymity online. The strategy is to promote for a more controllable online narrative to push back complains. It is enforcing the policy for a nationalist troll, creating patriotic users for the Chinese social media.
For people who posted the shutdowns in Shanghai have created shortage in supply, especially for food, have been criticized as “selfish”. For people who criticized the government from Hong Kong and Taiwan are labelled as “scammer” and “separatists”. For those who are using virtual private network (VPN) to go online are called “spies” and “foreign agitators”.
Once the above have been reported by the trolls, accounts would be deleted by the platform for the reason of violating “community regulations”, and some are being banned by Weibo, a Twitter-like Chinese social media platform.
The scary part is the displacing social media users’ locations beneath post. This can reveal the Chinese citizens’ locations with their national loyalty even if they are posting from overseas. Very often the critical postings would quickly be backlashed with insults and threats from an army of trolls. The more popular influencers have to be careful.
E-Commerce in China’s Market Opportunity
E-commerce is also considered as a global opportunity and in China, with its sizable market and its growing affluent consumers, is an opportunity for cross-border e-commerce. There are already more than 235 million Chinese customers who are purchasing through the cross-border e-commerce channels and this number is growing.
But the country still has stringent e-commerce compliance regime that can deter many overseas brands and merchants from entering into the Chinese market.
Through JD.com, Shopify and Jing Daily’s release of their Cross-Border E-Commerce White Paper, we will come up with a summarized report and hope that it can be helpful for our readers.
The report will be titled as:
“The Future of Cross-Border E-Commerce in China: A Guide for Global Brands”.
China’s Economy in the First Four Months of the Year
China’s economy expanded modestly at the beginning of the year, but started a sharp downturn in March and April. Its zero-tolerance strategy for the Covid led to strict lockdowns in manufacturing hubs like Jilin province in northeastern part of China and megacities like Shenzhen and Shanghai. The strict shutdowns kept millions at home, shut down production lines in factories, crippled transportation.
It added more pressures on the real-estate downturn and regulatory crackdowns on high-growth sectors like technology and education.
China isn’t just a huge market for the rest of the world’s goods, components and raw materials, but it is also the manufacturing dynamo at the central of the global trade.
Its weakening economy is bad for commodity exporters like Brazil, Chile and Australia that supply China with oil, copper and iron ore.
It is equally bad for manufacturing powerhouses like Germany, Taiwan and South Korea for their market for machinery, cars and semiconductors.
It is also bad for the U.S. for creating high inflation as U.S. is depending on supplies of products from China.
China in 2021 accounted for 18.1% of global GDP products. It is behind the United States’ 23.9% but ahead of European Union’s 27 members’ total 17.8%. Together they made 59.8% of the world’s GDP.
The Institute for Supply Management showed its index of the U.S. activities in April hit its lowest level since July 2020, and the average time to receive production materials increased to 100 days in April, its longest span ever.
Apple said that it is expecting to lose $4 billion to $8 billion in sales during its third quarter fiscal ending in June because of its inability to meet customer demand. Its second quarter’s revenue was $93.7 billion.
If Zero-Covid in China is Axed
We read this from Financial Times’ May 11 report. The researchers at Shanghai’s Fudan University estimated that if the zero-Covid is lifted in China, a “tsunami” of coronavirus infections would unleash and caused 1.6 million deaths that can crippled its healthcare system.
It continued to tell us that a surge of the Omicron variant could result 112 million symptomatic infections, 2.7 million intensive care submissions and almost 1.6 million deaths between May and July.
It is al because a low inoculation of vaccine by elderly and reliance of less effective vaccines
At the peak of the outbreak, demand for intensive care beds would exceed capacity by 15.6 times. Unvaccinated individuals were estimated to account for three quarters of the 1.6 million projected deaths.
China recorded 763,845 Covid-19 cases and 555 deaths from the start of March to May. But these numbers were questionable.
China’s vaccination rate in March were insufficient to prevent a surge of Omicron but mass testing and mask wearing should be points of emphasis for future mitigation policies.
In March, 41 cities were under partial lockdown or full lockdown. Shanghai was under two months draconian restrictions. To vaccinate more older people and the use of western vaccines which are more effective than China’s homegrown Sinovac and Sinopharm. Until now, only 61.5% of over 60s in China have received the third dose.
The first thing that come into my mind is that China will not axe the zero-Covid policy. This could have meant that Xi Jinping has failed with something that he has taken as his personal achievement.
Secondly, the study done by Shanghai’s Fudan University is not credible. It is saying, in three months, between May and July, if China has taken down the guards, there will be 112 million infections caused by the Omicron. Considering that this is 7.8% of the total population of China. There will be 1.6 million deaths and this is showing the fatality rate of 1.4% which again is very incredible.
This piece can be something used for the propaganda machine for CCP praising under Xi Jinping’s leadership, once again the people of China is saved from a catastrophic situation.
We can look at India and use it as an example. Its last week’s average daily new cases was 3,742. Yesterday, June 8, it recorded 7,054 new cases and it is considered as high in the recent months. Consider India’s total population of 1.406 billion against China’s 1.439 billion, the two countries are facing the same challenge. But we have not to mention that the medical system of India is way behind of China’s.
We can’t trust China’s earlier number of 763,845 Covid-19 cases and 555 deaths from the start of March to May, we don’t trust its projection as well for lifting of the zero-Covid policy.
China’s Success Formula – Market Reform Mixed with State Control
China’s model is mixing market reforms with state control and for the past twenty years it contributed a quarter of the rise in global GDP. Now, for the first time, China’s economy is in danger. It has been caused by Xi Jinping’s ideological struggle to bring back state capitalism. The immediate issue is the zero-covid campaign that has caused a slump and its economy is in a bigger danger now.
The two months lockdown of its biggest financial center, Shanghai, and the city is still far from Covid-free. Another big financial center, Hong Kong, which has the international flare, is also far from Covid-free. Although the Hong Kong has relaxed the quarantine, and yet the inconvenience for getting in and out the city is still very complicated. We saw breakouts of Covid in Beijing and Tianjin and Xi Jinping’s net-zero campaign is under a lot of pressure. An estimate of 200 million people have been living under restrictions and this has taken effect on its economy. Xi has a tight grasp of the covid policy for 28 months and to relax it would perhaps open the floodgate for the virus that may kill millions.
Some 100 million people over 60 years old are not triple-jabbed. China also refused to import the more effective western mRNA vaccines. This will not keep the more transmissible Omicron away from China but to continue to lockdown to avoid the outbreaks.
This zero-covid policy is identified with Xi, and any criticism of it is a view of sabotage.
Retail sales in April is down 31% compared with same period last year. Workers are living on factory floors, but industrial output and export volumes remain low. This is the result of the current lockdowns.
We have the second ideological identified as Xi Jinping’s economic reform. To his belief, the CCP should take the lead and address to inequality, monopolies and debts and equity leverage. He introduced a series of implementation, which are punitive and erratic. The new regulations caused the dynamic tech industry, which contribute 8% of GDP. Crackdown on the property sector, which is responsible over a fifth of GDP. And for the latter one, housing sales fell by 47% in April compared with a year earlier.
With Li Keqiang’s pledge for the official growth target of 5.5% for 2022, resulted his meeting with 100,000 officials to active decisively to restore growth and allow the central bank to cut mortgage rate. Currently the challenge is the pile of debts and acres of housing projects that would need to take over.
Talk about grandiose like building a dominant global position in advance batteries, and hope for technology and a new cohort of state investment funds can make decision-making more agile. But not to forget the economy built over the twenty years, with initiatives in the most productive part of the economy was from the private sector. Typical examples were the tech industry, education and training sector, and also its financial market.
With the party’s suspicious of private wealth and power, we have seen the large outflow of capital market. As the result, the Chinese shares trade at a 45% discount to American ones.
Xi Jinping’s ideological economy is going through a painful period.
It is damaged by its diplomacy for long, over ambitious and malice statement don’t help to build the relationship with the world powers. Since Russia’s invasion in Ukraine and China’s taking side with Russia has made China more vulnerable, with the possibility of sanctions and also the Cold War is looming from behind.
Xi is still waiting to come into the third term as the country leader in November, this would also mean that his third term will come to an end in 2027. The next five years would be the longest years for China. Remember that Xi has been playing hardball since 2019 until now.