Xi's nothing burger charm offensives hide economic crisis -- China Boss update 5.5.23
Update
What happened.
“China has moved swiftly to extinguish a firestorm in Europe caused by Ambassador Lu Shaye, who questioned the independence of ex-Soviet states during an interview with a local broadcaster,” Bloomberg reported. But the “damage was done,” and China stocks slid sharply following the incident, in what analysts say is deep rout caused by “a raft of negative geopolitical noises,” news staff added.
Bloomberg:
The episode in part shows China’s struggle to balance more assertive diplomacy with the need to project soft power, particularly as the nation’s reputation has fallen. A Pew Research Center poll last year found four-fifths of respondents in the US, Japan, South Korea, Australia and Sweden had unfavorable opinions of China.
While China has appeared to recognize the problem, and sought to play nicer of late, outbursts from diplomats still occur fairly regularly. Lu has created controversy in the past, accusing Canada of “white supremacy” during the saga over the detention of a Huawei Technologies Co. executive.
China’s soft power abroad, like its economy at home, is hanging by a thread. Chairman Xi, for political expediency, held too close for too long to his zero-Covid policy, and the last three years of draconian lockdowns have been murder on both.
For a country whose military capacity - albeit growing - still "has limited efficacy" that's a problem. Simply put, even at the best of times, China never had the money to simultaneously fund dirty pockets across the Belt-and-Road, while modernizing its massive military, controlling all dissent, bailing out its local governments and keeping the bulk of its billion-plus population fed and employed with their lights on. And don’t write off the ominous challenge of rising healthcare costs for 254 million people now 60 or older.
But today, the gravitational pull of China’s market is also in fluctuation. Founded on bribery networks and misrepresentation of everything from how much money the average Chinese consumer has to spend to the level of Beijing’s commitment to market liberalization - over two decades of WTO complaints about unfair competition - and, yet, now, here we are, end of first quarter 2023, fig leaves off? - investors are also reeling from geopolitical tensions.
The global economic reckoning will be bad enough. But China bet the farm on its ability to contour, both, foreign and local opinions. That story, those narratives about its “unstoppable” rise were the key to accessing the technology, cash, and human drive needed to meet extraordinary - some might say impossible - expectations, given the circumstances. Until now.
Why it matters.
Bringing investors back may take a new economic miracle
China Boss last week wrote about the wave of factory shutdowns hitting China's manufacturing centers in the Pearl River Delta and the rapidly increasing unemployment among migrants and young people.
But of equal concern is the brutal and ongoing stock market sell-off since officials reported a strong first-quarter of economic growth, which suggests investors have really lost confidence and think Beijing is artificially elevating its quarterly data more than usual or that Xi’s government won’t step in with a much-needed stimulus.
FT:
Stocks included in the benchmark indices of the Shanghai and Shenzhen stock exchanges have together lost almost Rmb3.6tn ($519bn) in market capitalisation since April 18, when China reported annual quarterly growth of 4.5 per cent. The market value of companies included in the Nasdaq Golden Dragon index, which tracks China’s top New York-listed tech groups, has also dropped by more than $31bn.
The sell-off reflects uncertainty on the outlook for China’s economy and apprehension that the economic recovery from years of Beijing’s disruptive zero-Covid policy could falter in the coming months — even though the headline number reported by Beijing, in its first full quarter since authorities ended the zero-Covid approach, exceeded most forecasts.
Worse, nothing takes the wind out of emerging market sails like watching the world’s most advanced economies openly peel away from them.
But how to restore investor confidence - if not to the way it was - then, at least, to mitigate an apocryphal exodus?
One way not to do that is to raid foreign companies.
What to make of the call to Zelensky?
But something that could help is to lean (slightly) in the geopolitical direction those same advanced economies want you to take on Russia's war in Ukraine. Last week, General Secretary Xi called Ukraine President Volodymyr Zelenskyy “more than 400 days into the Russian war against Ukraine,” telling the battle-weary leader that “Beijing would not add ‘fuel to the fire’” and that now was the time to “resolve the crisis politically,” Politico said.
Politico:
For months, Xi had resisted pressure from the West — and pleas from Zelenskyy — for the two of them to have a direct chat. Instead, he held multiple meetings with the diplomatically isolated Putin, including in the Kremlin.
Wednesday’s call, which according to Ukrainian officials lasted an hour, could ease tension between China and the West over Beijing’s precarious position which has been largely in favor of Putin, analysts and diplomats say. But they also caution that this would not change Xi’s fundamental vision of a stronger relationship with Russia to fend off U.S. pressure, calling into question Beijing’s ability to broker peace satisfactory to both sides.
In a piece aptly titled “At last, Xi Jinping calls Volodymyr Zelensky,” the Economist said that “[m]any were . . . surprised by the news that Mr Xi and Mr Zelensky spoke by phone on April 26th,” especially after “weeks” of Chinese officials telling their “foreign counterparts that the time [was] not right to push for peace” since neither Russia, nor Ukraine - ostensibly expecting huge battle gains in the upcoming days - would be “interested.”
Economist:
So what explains China’s change of heart? Russia and Ukraine are no closer to peace talks. Nor has the battlefield shifted much. But the call follows a period of intense diplomacy focused on China’s approach to Ukraine. And it comes just a few days after China’s ambassador to France caused a diplomatic furore when he questioned the sovereignty of ex-Soviet states.
April 26th was also the day on which Financial Times would report Chinese stocks had shed $550bn, but that could just be a coincidence. ;)
Watch on YouTube.
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Have a great weekend.
