Domestic Problems, Foreign Travels
Banners for the upcoming BRICS
Banners for the upcoming BRICS

Summit in South Africa

It is easy to forget how excited the China watching community, especially within the financial sector. were at the expected economic bounce that was to follow from China’s re-opening to the world after Covid.  China’s re-engagement with the world is only 6 months old yet few economists are optimistic about China’s outlook.  The news seems to get worse by the day, so it is not unrealistic to assume that General Secretary Xi is looking forward to his foreign travels this week.  South Africa will host the 15th head of government meeting of the BRICS group and the country will then host Xi on a formal state visit.  For all the limitations of the BRICS whether in theory or practice, there is no doubt that China remains the leading member of the group and as such will command much respect.  That will suit Xi fine although little will be expected from the summit in terms of concrete measures regarding expansion of the grouping, a bigger role for the BRICS bank or even of greater economic cooperation.  The idea for the group only exists thanks to the marketing and research product of an investment bank, beyond its catchy name the synergies are largely absent.  Also absent will be President Putin who dare not enter South African for fear of arrest due to an outstanding ICC arrest warrant for crimes against humanity.  It could be an uncomfortable summit for the Russians in other ways.  Both India and Russia had missions to land vehicles at the lunar south pole within a week of each other, but Russia’s has already crashed and if India’s does successfully land during the summit as planned it will only reinforce the diminished standing of Russia in the world.  The absence of Putin may embolden India to pressure Russia over its aggression and the knock on effects on global food prices.  Such pressure on Russia will reflect back indirectly onto China as well. As Russia’s leading supporter, many countries, look to China as a moderating force with regard Russian actions but to date China’s efforts have been minimal.


Domestic Pressures

Xi may have little to offer the BRICS grouping but being the global statesman on a foreign field is certainly better than trying to address the domestic economic problems he is facing.  The opacity of the Chinese system means it is impossible to really understand what active role Xi takes on a day-to-day basis.  All would agree that he has become increasingly powerful through the years yet how hands on regarding specific policy is frankly anyone’s guess.  The current approach of his government seems could be best characterized as a policy of inaction or minor tinkering at the edges with the hope that the situation doesn’t get worse too fast.


None of the problems Xi is facing are new but they just refuse to go away and indeed keep increasing in size.  Of course, the basic reason they don’t go away is that Xi has failed to solve any of them previously.  He has presided over a government which has pushed problems off to the future and managed difficult outcomes, nothing that has been done has solved the underlying issues.  Once again property sector woes have come to the fore this week.  Country Garden one of China’s biggest private developers has postponed bond repayments and seen it share price half this month alone.  The Chairwoman Yang Huiyan, once Asia’s richest women has seen her wealth collapse and announced that she had transferred more than half her stock holding in the company into a family charity.  While still retaining voting rights over the shares the move is seen as part of Xi’s “common prosperity” drive which seems focused on getting China’s private sector rich to pick up some of the stress and funding of what was traditionally public sector provision to society.

Capital markets all signaled further weakness ahead with the Chinese yuan falling to 7.3 against the USD.  The stock market regulator proposed increasing trading hours, minor cuts to trading fees and encouraged stock buy backs to try and boost share prices, and the broad expectation if that interest rates will be cut in coming days to try and boost property demand and investment appetite.  Yet this is minor tinkering.  Stocks aren’t falling because the market closes too early, nor can companies afford share buy backs when many companies are cutting wages because business is so bad.  Chinese are not buying houses because interest rates are too high but because there is fear their property will either not be completed because the builder will go bust or that the property will fall in value.  The proposed measures aren’t changing that dynamic.

Unemployment data remains bleak with youth unemployment being a particular concern.  China has pushed millions into university course education as a way of upgrading their workforce yet as these students look for jobs nothing is available.  Anecdotally, prosperous middle-class Shanghai-ers who would happily take months off to travel confident in their ability to return and find a good job dare not leave their employment as there simply are no jobs available.  Everyone seems stuck in a rut.

What leader would not want to escape such problems?  If his policy is one of inaction is that really surprising?  These long seated problems in China have been fermenting for years and there is no simple, or even complicated economic fix available to Xi.  As Xi has dreamed his dream of a great Chinese national rejuvenation he has throttled the economy, especially the dynamic private sector and made ideology and party control the goals.  Xi has no plan at all to reverse his course, but he will want to quell any disorder than the economic will throw up.  The focus on economic growth as the key measure for China’s rise is now too narrow a measure.  Xi wants China to be self-reliant across a number of areas and while that clearly depends on economic growth and innovation he sees party control and ideology as the foundation to achieving such goals.


Biden’s Diplomatic Coup

It isn’t just economics that is testing Xi, there are signs that there is a more basic crisis of governance in this regime.  Only months after being appointed Foreign Minister, Qin Gang, very much a Xi loyalist who saw swift promotion to the top diplomatic role disappeared from public view for a month, only to then be replaced as foreign minister by his predecessor Wang Yi.  No explanations are forthcoming of course, that isn’t the CCP way.  Rumors of a prominent TV presenter mistress who recently gave birth in the US, i.e. the Foreign Minister of China child’s is a US citizen, spread around the internet but nothing was confirmed.  At some point he will resurface under some charge no doubt but did Xi not know what his most loyal followers were doing?  This is in a system which micromanages senior leaders coming and going.  For all his accumulated power and titles this episode is frankly starling.


As Xi boards his plane for South Africa he will have plenty of time to reflect on his domestic problems before he lands but an even greater challenge presented itself only days ago.  The Biden hosted trilateral summit between the US, Japan and South Korea sends a very clear sign to China of how Xi has been responsible for a massive deterioration of China’s geopolitical standing with it most developed trading partners.  China rightly got kudos for its Saudi-Iran brokered deal earlier in the year, but Biden’s summit is truly historic and a major development in Asia’s security framework.  The deal, requiring major political will from all three capitals would not have been done had Xi not fanned domestic nationalist sentiment, militarized the South China Sea, supported Russian aggression, and failed to rein in North Korea.   The cooperation is just the latest in a series of pacts and agreements, such as AUKUS and the QUAD which have all come in response to China aggressive posturing, both militarily and economically in the Asia Pacific region.  But the Japan-South Korea agreements will be seen as the most worrying by China given the geographical proximity of the countries and the existing US military bases within the countries.  The rationale for the tie-up was only highlighted again this week by reports of China building yet another landing strip on a disputed South China Sea island.


The Difficult Decade

What is to be made of this very challenging picture for Xi?  His options are ever more limited as his ideological redlines don’t allow for an easing of his controlocracy he has created.  Neither do the already stretched finances allow for major stimulus.  What must be emphasized is that for all the pressure the leadership faces there is very little chance of any uprising from the general population, who while they are suffering are certainly not revolutionary.  If nothing else, there simply isn’t any opposition group or grass root organization which could replace the CCP in any sphere.  To that end the likelihood of an overthrow of the party is minimal.  The CCP primary objective is to remain in power, and indeed the party sees itself as the only group which can lead China.  Without them it would be chaos and a majority of the public would probably agree with that framing.  It is after all what the school system teaches repeatedly.

Economically China will continue to flounder.  No coming crisis, no Lehman moment, but a tinkering at the fringes of policy and a muddling through.  The economy is like a patient with a broad range of chronic conditions and the goal of treatment is not to cure them but to simply avoid them from becoming acute and causing fatal or near fatal stresses.  That said, there are going to be areas where China can outperform and impress.  Certain new technologies such as electronic vehicles and battery production and research are areas where China has taken a lead on the rest of the world but they by themselves cannot compensate for the problems but up over a decade of debt fueled investment.

It is also a China which will be constrained on how it can deliver it goals under the Belt and Road Initiative.  After having restructured hundreds of billions of dollars of debt over the past few years it will not have the capacity to fund projects as it once did.

Perhaps the biggest unknown is how does Xi’s personal power get impacted by the rolling crisis management across such a broad range of governance.  Does he need to share power?  Will he listen to his able advisors more?  Or has he sealed himself off to such an extent then he no longer listens to those how can provide good guidance?  No one knows.  The workings of the court around the emperor are too opaque to know with any certainty although it would be a bold observer to think that Xi’s reign is in danger.  Authoritarian leaders have shown time and time again throughout history their ability to stay in power and maintain control.  Russia serves as a sobering example, after 18 months of war, tens of thousands of dead soldiers and a severely damaged economy the only challenge to Putin is by even more extreme figures, there is no sign of Russia looking to retreat or reassess the mess it has created.  Xi sits upon a vast surveillance framework and it is far from afraid to use the party apparatus to dispose of rivals and quash any protest.

Four years ago this column spoke about the difficult decade ahead for China.  This is what it looks like and it has years to run yet.

フレイザー・ハウイー(Howie, Fraser)|アナリスト。ケンブリッジ大学で物理を専攻し、北京語言文化大学で中国語を学んだのち、20年以上にわたりアジア株を中心に取引と分析、執筆活動を行う。この間、香港、北京、シンガポールでベアリングス銀行、バンカース・トラスト、モルガン・スタンレー、中国国際金融(CICC)に勤務。2003年から2012年まではフランス系証券会社のCLSAアジア・パシフィック・マーケッツ(シンガポール)で上場派生商品と疑似ストックオプション担当の代表取締役を務めた。「エコノミスト」誌2011年ブック・オブ・ザ・イヤーを受賞し、ブルームバーグのビジネス書トップ10に選ばれた“Red Capitalism : The Fragile Financial Foundations of China's Extraordinary Rise”(赤い資本主義:中国の並外れた成長と脆弱な金融基盤)をはじめ、3冊の共著書がある。「ウォール・ストリート・ジャーナル」、「フォーリン・ポリシー」、「チャイナ・エコノミック・クォータリー」、「日経アジアレビュー」に定期的に寄稿するほか、CNBC、ブルームバーグ、BBCにコメンテーターとして頻繫に登場している。 // Fraser Howie is co-author of three books on the Chinese financial system, Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise (named a Book of the Year 2011 by The Economist magazine and one of the top ten business books of the year by Bloomberg), Privatizing China: Inside China’s Stock Markets and “To Get Rich is Glorious” China’s Stock Market in the ‘80s and ‘90s. He studied Natural Sciences (Physics) at Cambridge University and Chinese at Beijing Language and Culture University and for over twenty years has been trading, analyzing and writing about Asian stock markets. During that time he has worked in Hong Kong Beijing and Singapore. He has worked for Baring Securities, Bankers Trust, Morgan Stanley, CICC and from 2003 to 2012 he worked at CLSA as a Managing Director in the Listed Derivatives and Synthetic Equity department. His work has been published in the Wall Street Journal, Foreign Policy, China Economic Quarterly and the Nikkei Asian Review, and is a regular commentator on CNBC, Bloomberg and the BBC.