No more Mr. Nice "Peace and Development": 20th Party Congress confirms China's direction on Taiwan, market reforms & its return to "physical" isolationism -- China Boss update 10.28.22
Update
What happened.
Chris Buckley reported in the New York Times last week that the slogans “peace and development” have been removed from the messaging at the 20th Party Congress. “Their exclusion, and Mr. Xi’s somber warning of ‘dangerous storms’ on the horizon,” indicate Xi believes “international hazards have worsened,” Buckley wrote.
Buckley, NYT:
For two decades, successive Chinese leaders have declared at the congress that the country was in a “period of important strategic opportunity,” implying that China faced no imminent risk of major conflict and could focus more on economic growth.
For even longer, leaders have said that “peace and development remain the themes of the era,” suggesting that whatever may be going wrong in the world, the grand trends were on China’s side.
But the two slogans, so unvarying that they rarely drew attention, were not in Mr. Xi’s report to the congress, which began last Sunday and ended Saturday. Not in his 104-minute speech summarizing the report. Nor in the 72-page Chinese full version given to officials and journalists.
The Council of Foreign Relations’ Zongyuan Zoe Liu echoed those concerns in her analysis of the topics addressed in Xi’s speech, which she says were filled with issues related to national security not economic reforms.
Liu, Council of Foreign Relations
The content of Xi’s speech to the party congress suggests that he is determined to lessen China’s economic vulnerability to global disruptions. Xi emphasized strengthening the development of basic research and indigenous innovation to drive the Chinese economy and protect national security. He referenced China’s “self-reliance in technology” five times, the need for “strengthening supply-chain reliability, resilience, and security” three times, and China’s “national security” twenty-six times. None of these narratives appeared as strongly in his report to the nineteenth party congress in 2017. In addition, this year, Xi called for a “diversified and stable international economic system” and reiterated his ambition for China to exert more influence in setting international rules and standards.
Taken together, Xi’s words and his choice of appointees indicate that China’s economic prospects increasingly depend more on politics than supply and demand dynamics. But the supremacy of politics over market mechanisms is undermining China’s four-decade process of reform and opening up. This will likely exacerbate tensions in China’s relations with the West and ultimately lower China’s long-term growth potential.
Why it matters.
Taiwan
While there wasn’t much at the congress to placate investors, Chinese nationalists were likely thrilled to see the words “‘opposing and containing Taiwan independence’” inserted into the Chinese Communist Party’s constitution. The South China Morning Post’s Jack Lau noted that the requirement is occurring “for the first time” in the country’s history, whereas the old language “only called for pursuing ‘national reunification.”
Lau, SCMP:
While it has long been Beijing’s goal to take control of the self-governed island it sees as breakaway territory, by force if necessary, the constitutional revision solidifies the policy as the bedrock to President Xi Jinping’s goal of rejuvenating the Chinese nation.
Emphasis added.
The Party also approved an amendment that fully endorsed "Xi's core position” in the constitution, although it did not raise his status to that of Mao’s by formally adopting “Xi Jinping Thought” as some had predicted, the AFP said.
Market reforms and diplomacy
Economist Diana Choyleva's party congress takeaway was that Xi’s choice of political appointees and rhetoric are a giant step toward what she calls"the great decoupling."
Choyleva, Financial Times:
Markets have taken the outcome of the Congress badly. Investors must now reposition for a China where Xi Jinping’s credo reigns supreme. They must also brace for the expected backlash from the US, in the form of more sanctions and increased scrutiny of supply chains and investment ties that were once encouraged, a mere decade ago.
In other words, the great decoupling, which I first identified as a major investment theme three years ago, is now in full swing.
In another FT opinion piece, Yuan Yang warned that “China’s limitless presidency” means worsening ties abroad. “Basing party discipline on obedience to Xi makes the task of Chinese diplomacy even harder” because hyper nationalistic messages “designed, ultimately, for domestic consumption” but directed at international audiences can’t help ease tensions.
Yang, FT:
Nationalists at home may welcome EU foreign policy chief Josep Borrell’s labelling of China as an increasingly “tough” competitor. But it will not help Chinese companies get approval for acquisitions in Europe. The near-collapse of China’s “16+1” alliances in central and eastern Europe is another example of the consequences of this approach.
Physical isolationism
Japanese companies are now looking for ways to “go ‘zero-China’” in their supply chains “amid that country's growing conflict with the U.S.,” Nikkei Asia reported. “Companies will have to choose whether to continue doing business in China in the event of a Taiwan contingency,” and “[m]anagement must always consider business continuity,” news staff said.
Nikkei Asia:
If 80% of Japan's imports from China -- about 1.4 trillion yen ($9.4 billion) worth, including raw materials and parts -- were disrupted for two months, Japan would not be able to produce a wide range of products, including home appliances, cars, resins, clothing and food products. About 53 trillion yen ($360 billion) worth of production would disappear, according to estimates by professor Yasuyuki Todo and his colleagues at Waseda University, who used the Fugaku supercomputer for their calculations. That would amount to a loss of about 10% of Japan's gross domestic product.
Attorney Dan Harris, founder of Harris Bricken Sliwoski, which advises American companies on doing business overseas, thinks that’s the new trend:
Harris, China Law Blog:
For years I’ve been saying that China was trending more towards North Korea than Germany or Japan. I would base this “prediction” on China’s increasing belligerence towards other countries, its increasing government control over its economy, its increasing control over its own citizens, and Xi Jinping’s increasing megalomania. China’s just completed Party Congress has borne all of these things out.
. . . THE buzzword for the next 5-10 years will be “zero-China.” . . . . “Zero-China” is mostly being used to describe companies seeking to re-jigger their supply chains to completely exclude China, but I think it will eventually come to mean any effort to be rid of China.
Oxford University professor Rana Mitter also sees “increasing signs that [China] is turning inwards” and “replacing the outside world with cyber ‘reality.’” Mitter wrote in the Guardian that while “it might seem that the opening speech last Sunday by Xi Jinping at the 20th party congress was giving a very different message,” his words cannot belie that the government under his leadership has pursued policies that obviously contradict it.
Mitter, The Guardian:
China is now the only major country with a zero-Covid strategy. The decision is not entirely political: part of the problem is that China continues to have a huge proportion of unvaccinated older people and its patchily effective domestic vaccines do not prevent infection or transmission very well. But the zero-Covid policy is very much associated with Xi personally and his speech made it clear that there is no prospect of it changing in the short term at least.
. . . The economic policy that Xi has put forward contains a similar sort of contradiction. The central idea of the “dual circulation” policy is that China should increase its trade surplus with the wider world, while simultaneously becoming more dependent on its domestic economy to drive consumption. Many economists think that this will be a hard balance to manage. But, in a sense, the strategy should not be seen as an exercise in economics but in politics. It mirrors precisely the idea of being highly connected to the world while closed to it physically.
Mitter believes China will stay “connected to the outside world” only through the use of technology, like social media and video apps, and that “the vision of the world created within the country” will, ultimately, be “very partial.”
Watch on YouTube.
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Have a great weekend.