China's economy is bound to recover in 2023, but foreign capital has begun to doubt the CCP's ability to manage the economy.

(Schematic, Reuters)

China's economy is bound to recover in 2023, but foreign capital has begun to doubt the CCP's ability to manage the economy.

Xi Jinping is often described as China's most powerful leader since Mao Zedong.

Like the great helmsman Mao Zedong, he put politics first and attached great importance to ideology.

Since coming to power 10 years ago, it has been trying to strengthen the CCP's control over Chinese society in all aspects, even if some policies are not good for the economy.

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Xi Jinping's political actions pre-COVID-19 focused on causing minimal harm to the Chinese economy.

Although many manufacturers have moved some of their production capacity in order to avoid Trump's tariffs in the United States, overall, the attraction of the Chinese market is still strong.

In 2019, China's foreign direct investment (FDI) amount grew to 941.5 billion yuan, with an annual growth rate of 5.8%. It is also the world's second largest foreign direct investment country, second only to the United States.

But soon after, Xi Jinping's zero-clearing policy ruined the calculations of foreign businessmen.

While China's foreign direct investment volumes remain at record highs in 2020 and 2021, New York-based Rhodium Group said in a December report that "this is driven by the country's unique overall economic conditions." Inflation caused by short-term investments".

After comparing other data, Rhodium found that from 2020 to 2021, the number of new greenfield projects and foreign mergers and acquisitions will drop sharply, "in line with the trend of China's real economy."

After Season 2 in 2022, the situation is even more dire.

A highly contagious variant of Omicron broke through China's defenses, causing the government to impose strict lockdowns on major cities, especially Shanghai.

According to November data, China's economy remains under pressure.

Retail sales decreased by 5.9% compared to the same period last year (2021), the unemployment rate reached a six-month high of 5.7%, and the growth rate of fixed asset investment dropped from 5.8% to 5.3% from January to October 2022.

Abandoning zero clearing leads to medical collapse

Recently, China has finally given up on clearing, but it also faces a series of problems.

The CCP has always used non-medical interventions to curb the infection, resulting in the country not having enough capacity to deal with the current wave of infections.

Moreover, since the outbreak of the epidemic three years ago, the efficacy of China's domestic vaccines has been questionable, and there is no natural immunity. Now the entire medical system has been overwhelmed.

The surge of COVID-19 patients is bound to affect short-term economic growth.

The Chinese Center for Disease Control and Prevention estimates that from December 1 to 20, COVID-19 infected about 18% of the country's population, a total of 250 million people.

The New York Times quoted a hospital in Shanghai as predicting that roughly half of the city's 25 million residents would eventually be infected, and reminding hospital colleagues of a "tragic battle."

According to Zhejiang provincial government data, the province had approximately 1 million new confirmed cases every day at the end of December.

There are so many infections in China that factories cannot fulfill production orders.

HLS, an Asia-based shipping company, estimated that half to three-quarters of its manufacturing workforce could not work due to the virus, it wrote in a note to clients in January.

In addition, China's three largest ports-Shanghai Port, Shenzhen Port, and Qingdao Port are in the throes of supply chains caused by the epidemic.

The sudden change of policy from zero to coexistence has caused a short-term shock to the Chinese economy, but many analysts believe that such a rapid opening up can shorten the duration of the shock.

They believe that the biggest outbreak is around the Lunar New Year holiday, when China's economic momentum is inherently weak.

Citigroup China Chief Economist Yu Xiangrong stated in a report published in December that "rapid policy changes are aimed at promoting a comprehensive economic recovery in the future" and that the impact of the COVID-19 epidemic on China's economy in 2023 "may be greater than before. estimated to be smaller."

Economists polled by Bloomberg believe that although China's economic growth will fall to 3% in 2022, it will rebound to 4.9% in 2023.

Gone are the days of growing up

On the other hand, although China's epidemic prevention restrictions have obviously been greatly relaxed, the business prosperity of the past three years has faded.

It must be difficult for Beijing to regain the confidence of most foreign investors.

Those foreign companies that still regard China as an important investment base usually invest too much fixed cost and cannot make other choices.

This is the case with BASF, Germany's largest automaker and chemical plant. No matter whether the future is prosperous or not, they must bear it with China.

In September 2022, BASF Group began to build its first factory in Zhanjiang Integrated Base. It will invest 10 billion euros in the factory before it is completed in 2030, which is the largest investment project of the group in China so far.

Volkswagen, with 40% of its sales in China and half of its profits, also said in October 2022 that it would invest 2.4 billion euros to establish a self-driving car company with China's Horizon Robotics.

But other large multinationals, most notably Apple, are reducing their reliance on China.

The Wall Street Journal reported in December 2022 that the U.S. tech giant "is asking suppliers to travel to other parts of Asia, such as India and Vietnam, to assemble Apple products."

Of course, after the US-China trade war broke out in 2018, Apple has been moving parts of its supply chain out of China in batches.

But Apple's withdrawal has accelerated after China was caught in a year-long supply chain disruption.

In November last year (2022), a conflict broke out at the Zhengzhou factory of Foxconn, the largest iPhone supplier. Supply chain issues are also coming to a head.

In the end, Apple decided to move more assembly work to India and Vietnam.

Less than 10% of iPhones are currently assembled in India, and analysts believe Apple's ultimate goal is for India to account for 45% of its flagship production capacity.

On the other hand, it is also hoped that the production capacity of notebook computers, smart watches, and AirPod earphones will be transferred to Vietnam.

Even if the Beijing authorities want to prevent foreign capital and talents from leaving, it will inevitably face many difficulties.

After all, Xi Jinping has made it clear that under his leadership, commercial interests will not be China's primary goal, and China will not hesitate to use the economy as a bargaining chip to secure political interests.

Attract foreign companies strategically

At the beginning of the outbreak, the Australian government requested an independent investigation into the source of the virus. Later, the Beijing authorities imposed huge punitive tariffs on Australia. As a result, in the year ending September 30, 2020, sales of Australian wine imported to China plummeted to 21 million Australian dollars, a drop of up to 92%.

Until then, China has been the largest buyer of Australian wine.

Beijing has also severely sanctioned Lithuania after the Lithuanian government forged closer ties with Taiwan, prompting the European Union to call for an expert panel at the World Trade Organization.

The European Commission stated in a press release in December 2022 that "China's discriminatory measures against Lithuania have disrupted intra-EU trade and supply chains and affected the functioning of the EU internal market, including mandatory market adjustment."

In the future, China will become increasingly strategic in attracting foreign companies.

While U.S. companies remain important stakeholders in the Chinese economy, geopolitical relations with Washington are likely to sour in the coming years.

At that time, companies like Intel that have tried to participate in the development of China's semiconductor industry will be forced to withdraw from the Chinese market.

In general, U.S. companies in sensitive industries—those that produce products with clear military uses—will find it increasingly difficult to invest in China.

Wall Street still has expectations for China?

Still, Wall Street has hopes for China.

Financial services companies, which do not produce technology that Beijing could use militarily, will continue to lobby hard to try to prevent any restrictions on foreign investment in the United States.

Those who are bullish on the Chinese economy will note that 2022 will see record IPO financing in mainland China, as well as record numbers of listings on the Shanghai and Shenzhen stock exchanges.

According to data from consulting firm PwC, there are nearly 400 new shares in total, with a record-breaking financing scale of 560 billion yuan (about 80.4 billion U.S. dollars), an increase of 3% over 2021.

Dalio, the founder of Bridgewater Fund, is the most staunchly optimistic about China on Wall Street. He said at the Greenwich Economic Forum (Greenwich Economic Forum) in October: "China's long-term prospects are still bright." Dalio Seems to consider itself close to the Chinese leadership.

(This article is excerpted from the "Taiwan Banker" monthly magazine in February 2023. The author is a foreign distinguished researcher of the Taiwan Financial Research Institute. The author: Matthew Fulco Fu Changshou; the translator is Liao Peixing)

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