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"Economy, stupid!" - Our latest thoughts on China

(7 December 2022)


Chinese officials and the government’s advisors are expressing a growing willingness to talk up the economy.


On Wednesday, the Chinese government further eased quarantine and testing requirements, and said in a statement after the Communist Party’s politburo meeting that it aims to stabilize growth, employment and prices going into 2023. The meeting also committed to deepening reforms and attracting new foreign investment, while also saying it will take measures to “boost market confidence”. The statement had just two lines about Covid control, suggesting the government is planning to move ahead with its easing policies – albeit without shouting too loud about this.


It is clear that the government is trying to re-connect with the private sector. The officials have been making tactical adjustments to present a friendlier face to the business community over the past week.


A delegation of representatives of the local business community from Zhejiang, home to some of China’s biggest companies such as Alibaba Group, departed on Sunday for a six-day trip led by local government officials to France and Germany. In a separate trip on Tuesday, officials from Jiangsu organized a group of more than 200 businesspeople on a charter flight heading to Europe to hunt for trade deals.

Earlier this month, officials from many provinces including Guangdong and Anhui also started to have conversations with entrepreneurs to regain their confidence in the country’s future. In Guizhou, provincial governor Li Bingjun said in a meeting with local business leaders on Friday that the government is willing to “do everything possible to help companies solve practical problems”.

We believe that all these measures, including the relaxation of Covid control, shows the new leadership is attempting to shore up slowing economic growth. We understand that senior leaders, including people recently promoted recently by President Xi Jinping, urged the officials to issue concrete measures to boost economic confidence.


We understand that Chinese officials are preparing an offline meeting next week with leaders from major international economic institutions including World Bank and International Monetary Fund to discuss China’s development and global debt issues. It will be the first in-person-meeting since the pandemic. China wants to use the meeting to show the world that China wants to continue to work with the global economy.


Officials are also preparing for the annual economic meeting, with many suggested to set an economic growth target for next year of around 5%, which is an ambitious target to meet but would allow the officials to shift their attention from ideological issues or Covid control back to economic growth. Under Xi, the party tried for many years to encourage officials to move their focus away from emphasizing growth, but now Beijing is coming back to the stage where they see economic growth a key element of provide legitimacy to the party.


For the months ahead, Chinese leaders are considering steps toward reopening, principally by treating Covid-19 as a “Class B” infectious disease following change in the WHO’s designation. China has been treating it as a Class A disease, which requires for stricter public-health measures. The government has maintained close contact with the WHO, focusing on the alert levels that the Geneva-based body has assigned for the Covid-19 pandemic. There is a possibility that the WHO will formally announce the end of the pandemic next January and China could further relax its control at that time, conveniently after the Chinese New Year. China will relax its border control with Hong Kong first before it opens to elsewhere. Still, opening its border to foreigners is not a priority for the Chinese government.


On the protests, people that we spoke to say the rare protests against coronavirus lockdown in some Chinese cities and school campuses helped the senior leaders to speed up the relaxation. Still, the protests were not a major issue that pushed China’s change. The street, to Beijing, can be easily managed.


Some advisors took advantage of the protests, which were never seen as significant by Chinese leaders, to press for an acceleration of easing Covid rules. They suggested to the senior leaders after the protests that this is a good time to kick start a long-awaited change of Covid policies as the protests showed the public were tired with lockdowns. We doubt if President Xi has the full picture of the protests, or if he’s fully aware of the hawkish ones in Shanghai.


The positive take is that the new lineup of the Standing Committee of the Politburo has a good understanding of President Xi and knows how to massage the message that is reported to him. Deng Xiaoping used to de-code Mao Zedong’s instructions based on different scenarios, and the new Standing Committee members that enjoy greater trust by Xi could possibly have a better communication channel with the top leader. This is still too early to call and need to be tested.


We understand the major driving factor that pushed President Xi to speed up the relaxation of the control is the lockdown at Foxconn Technology Group’s iPhone plant in China and the consequence of it.


The government banned all but essential movements in the 150-square mile park for 7 days to counteract the “severe and complicated” spread of Covid in early November. Many workers fled the factory with the fear of the virus. After the turmoil, Apple has accelerated plans in recent weeks to shift some production outside China, with steps that would likely bring along scores of the suppliers within the complicated network behind the company’s phone, tablets, and other electronics. Apple is telling suppliers to plan more actively for assembling Apple products elsewhere in Asia, particularly India and Vietnam, and reduce dependence on Taiwanese assemblers led by Foxconn.


Having gathered reports from the local government and other channels, Chinese leaders were worried that such disruption of economic activities would jeopardize international businesses’ confidence towards China’s status as the world’s factory floor for electronics and other goods. They are also concerned that more factories would move out of China in the long run if the lockdown policy continues.


To the party, the major concern goes back to the famous James Carville quote in 1992: “It's the economy, stupid.”

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