China’s fragility feeds the naysayers in Davos

This time, Xi, who hasn’t left China since the coronavirus pandemic erupted two and a half years ago, didn’t even dial in for a Zoom call.

For the cohorts of corporate titans and policymakers who traveled to Davos to read the runes on whether the next recession was about to hit, his absence was ominous. The conversation has shifted dramatically from cautious assessments of China’s strength to borderline panic over its fragility.

Xi’s dogged “zero COVID” strategy has caused serious unease among Western companies. That Economist Intelligence Unit estimates that the lockdown will shave Shanghai’s economic output by 6 percent annually, plunging China’s leading port city into recession and causing Beijing to fall short of its overall gross domestic product target.

Such numbers trigger earthquakes worldwide.

It fell to philanthropist George Soros – the ultimate Davos stalwart – to sum up the extent of what he called “Xi’s worst mistake”.

“The lockdowns have had disastrous results,” he said. “They have sent the Chinese economy into free fall. It started in March and will continue to gain momentum until Xi reverses course – which he will never do because he cannot admit any mistake. Added to this is the real estate crisis, the damage will be so great that it will hit the global economy. With supply chains disrupted, global inflation could turn into a global depression.”

In another sign of deteriorating sentiment, David Rubenstein, co-founder of private equity group Carlyle Group, told POLITICO in Davos that “India has become more attractive [to buy assets] more recently than China.”

China admittedly has reasons beyond the coronavirus to keep its head down this year. Beijing knows full well that it is no longer the trend of the month due to the Russian invasion of Ukraine. Indeed, this year Davos exuded an unusual “war and peace” vibe with a keynote speech by Ukrainian President Volodymyr Zelenskyy. Thanks to China’s logically tormented position of “pro-Russian neutrality,” which found little support from the crowd, Xi is hardly the most welcome guest anymore.

Perhaps playing on its one strength in the current mood, Beijing’s official delegation was led by the most apolitical figure imaginable: veteran climate chief Xie Zhenhua. The message is clear: let’s put the coronavirus and security disputes aside for now and focus on the one issue on which the West is still genuinely interested in working with China.

For Soros, however, Russian President Vladimir Putin and Xi Jinping were now united by stubbornly clinging to their mistakes. “They rule by intimidation and as a result make startling mistakes. Putin expected to be welcomed to Ukraine as a liberator; Xi Jinping adheres to a zero-Covid policy that is impossible to sustain.”

Emergency stations in China

Gloomy economic signals are coming from China. Just as the CEOs and ministers rattled their glasses at the Alps, China’s Prime Minister Li Keqiang was in emergency mode. Fears in the West are shifting from anger at the subsidy-driven overproduction of everything from plastic toys to steel to a more fundamental concern that supply chains are disrupted and the world’s factory is off the grid.

On Wednesday, China’s State Council, led by Li, organized an “unprecedented” conference call with 100,000 participants from across the country at all levels of the bureaucracy.

There is a single focus: to stabilize the economy. At the meeting, Li stressed the need for stability in “market units, employment and people’s livelihood” and the need to keep the economy afloat wherever possible. State media reported.

“Since March and especially April. Some economic indices are particularly deteriorating. In a way, and to a certain degree, the difficulty [we are facing] is bigger than that during the heavy hit during the 2020 pandemic,” Li said a day after the State Council rolled out a 33-point plan to get the economy back on track.

Stephen A. Orlins, President of the New York-based National Committee on US-China Relations, observed: “The Chinese economy is in serious trouble. No one has a crystal ball, but if the zero-tolerance COVID policy stays in place and COVID continues to surface, the Chinese economy could contract in 2022. For a country that has experienced more than 40 years of growth, this comes as a shock. ”

Li’s statement on the economy is unusual. For much of his presidency, Xi has seized most of the economic power traditionally vested in the prime minister and instituted nationalist policies focused on reining in big tech and other innovative sectors. However, as the crisis hit, he took a step back and put Li in the spotlight as a fixer as the Communist Party prepares for the five-year congress, where Xi is expected to take the helm for the third time.

The biggest pessimists

Foreign companies are unsure how to do without a market that used to be their irreplaceable engine of profits.

“While our surveys indicate broad pessimism among CEOs in the US, China and Europe regions, CEOs of western multinationals in China are recorded as the most pessimistic about current business conditions,” said David Hoffman, senior vice president of Das Conference Board, an international economic research institute funded by donations from large corporations.

“Unexpected, sporadic and widespread COVID-19 lockdowns in numerous Chinese cities, most prolific in Shanghai, and the logistical, personnel and production chaos that this so-called zero-COVID policy has wreaked on the commercial sphere are clearly taking their toll demanded by the business sentiment in China region,” said Hoffmann.

Whether the future looks brighter or bleaker depends on who you ask. For Hoffman, the CEO survey shows that there is a general long-term optimism, with “only 17 percent of the Chinese group saying they are diversifying away from Chinese suppliers,” suggesting that “there is more coupling than decoupling.”

Siva Yam, president of the US-Chinese Chamber of Commerce based in Chicago, also noted a different sentiment across sectors.

“They see negative sentiment due to supply chain disruptions. For big companies…you won’t see a lot of new investment because China isn’t that competitive and you have increasing regulations. For SMEs that have a niche product to sell to China, they remain bullish… [because] they are not so badly affected [new] regulations,” he said.

But Jeremy Farrar, director of the Wellcome Trust, a foundation, has been skeptical about China’s prospects given the pandemic’s management in general.

Calling China “a great unknown,” Farrar told POLITICO, “I don’t think a zero-COVID policy is sustainable and eventually China will go through a major epidemic.” And the people in China have a very different level of immunity than the rest of the world.”

“So that’s a big concern.”

Speaking at a panel co-sponsored by POLITICO, Stéphane Bancel, CEO of vaccine maker Moderna, added: “Like Jeremy, I am very concerned about China. As the virus becomes more contagious I believe it is less controllable with techniques that were wonderful in 2020 to prevent many deaths.”

Xi’s absence and zero-COVID strategy are all the more galling given his uncompromising commitment to globalization in his 2017 Davos script.

“Like it or not,” the Chinese leader said at the time, “the world economy is the great ocean you cannot escape. Any attempt to disrupt the flow of capital, technology, products, industries and people between economies and divert ocean waters back into isolated lakes and streams is simply not possible.”

High-flying feelings perhaps, but China itself is now the one trying to be the island that juts out of this great ocean.

Sarah Wheaton, Matt Kaminski and Jamil Anderlini contributed coverage.

China’s fragility feeds the naysayers in Davos

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