Dear stockbrokers, dear stockbrokers,
the story of China’s reopening is currently the strongest narrative for the markets. For now at least, it’s eclipsing any analysis by the Fed or the prospect of a recession and also falling energy prices, at least as far as investor behavior is concerned. The keyword, of course, is „narrative“.
It’s a powerful narrative, but that doesn’t mean it’s true. If it affects investor behavior, investors need to be careful not to be overwhelmed by bullish sentiment. It may take time, but whenever a narrative deviates from reality, reality wins. This will also be confirmed in this case.
„You can’t lock people up forever“
Yes, China has reopened its borders to the outside world. Tourists, family members and business people flock in and out after being largely locked out for several years. At the same time, China has ended its failed zero-COVID policy.
This policy consisted of extreme lockdowns, massive testing programs (several times a week for most people), transport freezes, and quarantine
These extreme measures could delay the spread of the virus in certain areas for a while, but ultimately the virus will go where it will go.
However, these measures caused enormous economic costs and were socially unsustainable. You can’t lock people up forever. This was demonstrated in November when riots broke out across China against the program.
China is now letting the virus roam through society while attempting to revive its economy.
But despite Wall Street cheers for reopening, China’s new policy will fail. There are several reasons for this.
The dark side of this change
First of all, due to the strict lockdowns, many Chinese are not immune. Suddenly they are all infected at once.
If the virus spreads in a population of 1.4 billion people, with an assumed infection rate of 30% (probably too low) and a mortality rate of 0.25% (higher for some vulnerable groups), that means 420 million pandemic patients and over 1 million dead. China could actually expect over 450 million infections and maybe even 2 million deaths from COVID.
This will potentially overwhelm the Chinese healthcare system and trigger a new wave of social unrest. One concern is that a new variant could emerge due to the high population density and sheer volume of cases.
In other words, China could have a different and worse experience if the virus mutates and recombines in ways that make it more deadly or more contagious.
The most important thing to understand about the Chinese economy is that with or without the zero-COVID policy, it will fail. The problems go much deeper than that.
China is just a paper kite
The Chinese economy is failing due to excessive debt, the collapse of the real estate sector, the decoupling from the US, the cessation of high-tech imports to China, and a demographic collapse worse than the Black Death.
So don’t be fooled – the new decision to let the virus move through the population will not end China’s economic malaise.
China’s economy may already be in recession, which comes as a shock to the world’s second largest economy (and also the „factory of the world“).
Despite these fundamental weaknesses, the China “reopening rally” narrative may hold for a while longer.
Ultimately, however, the reality of a weak economy and a global recession will prevail. No economic growth is expected from China in 2023.
Now step back and compare China’s current reality to the widespread optimism of the last few decades.
The death of a dream
Since the mid-1990s, liberals and many pro-market conservatives have argued that China’s human rights abuses should be ignored as the Chinese economy moves toward American-style capitalism.
It was felt that the Chinese just „need time“ to catch up, but that sooner rather than later they would be „just like us“. This view was reinforced by the fact that many Chinese elites attended US universities such as Stanford or Harvard, where they sat alongside US colleagues on their way to jobs at McKinsey or Goldman Sachs.
Upon their return to China, they steered their less educated peers toward the neo-Keynesian perspective held by their Western peers. I’ve always thought that view was nonsense.
It’s true that Chinese students flocked to the best US schools for the latest technical training. It is also true that China has adopted many market mechanisms to grow its economy and build up hard currency reserves. But that’s where the similarity ends.
The Chinese have always been loyal communists, and they merely appropriated Western intellectual tools to beat us at our own game. The „just like us“ theory had been pulled out of a hat and had to be disappointed. That time has now come.
Who is really the boss in China?
Jack Ma, for example, was one of the most successful entrepreneurs in Chinese history. Indeed, Ma embodied the type of Western-oriented capitalist that the liberal elite hoped to become. He founded Alibaba Group, a Chinese e-commerce giant (similar to Amazon), and owns part of Ant Group, which is a financial subsidiary of Alibaba.
Ant operates a payment system called Alipay, which is one of the largest payment apps in the world with over 1 billion users. About two years ago, Ant Group was poised for a $37 billion IPO in what would have been the largest IPO in the world at the time.
Instead, Ma was placed under house arrest by Communist Party officials, the IPO was canceled, and Ma was forced to relinquish his control of Ant. Ant is expected to pay a $1 billion fine for various regulatory violations.
This is not just another case of corporate misconduct. In fact, there’s no evidence that Alibaba and Ant did anything wrong at all.
Instead, the Chinese Communist Party (CCP) is flexing its muscles and showing the entrepreneurs who’s really in charge. The fact that this behavior has an economic cost is also irrelevant.
Nothing is more important in the minds of Communist Party officials than Party supremacy and the elimination of ideological, financial or technological competition.
China doesn’t mind if some Chinese companies reach multi-billion dollar valuations or use Western business techniques to massively scale up.
However, it bothers them when private capital begins to rival the CCP for power and influence. Once that happens, the gavel falls and the CCP takes power.
In China, communist ideology always comes first. And the fantasies of China opening up to become more like the US are dead.
Unfortunately, with increasing censorship and other forms of social control emerging in the US, we are becoming more and more like China.
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Editor, Global Investor Daily