The Zero Coivd campaign and the ‘New Development Concept.’

• These are ‘twin blows to the Chinese economy,’ says The Economist.
• And for both, it asserts, Xi Jinping bears responsibility.

The question then:

• If those two policies are so damaging to the economy, why is Mr. Xi sticking with them? – some insights below.

And heads up for an important report. The EU Chamber of Commerce in China has just published another excellent and timely report:

• Carbon Neutrality: The Role of European Companies in China’s Race to 2060

China is the biggest emitter, and if you are concerned about whether or not it will be able to meet its carbon goals, you may find this report disturbing.

• The obstacles are daunting.

The good news:

• ‘Driven by stringent environmental regulations and consumer demand, and guided by their global corporate carbon neutrality pledges, European businesses are well placed to help China peak carbon emissions before 2030, and push towards carbon neutrality in 2060.’ – If China will only accept the assistance.

1 | Is Xi the problem?

On the Chinese economy, I’ve never been a bear (or a bull, for that matter). When the echo chamber magnifies an apparent weakness into the coming collapse of China, I ask two questions:

1. Is the affected industry or the Chinese government or both capable of working through that immediate weakness?
2. Does the economy overall look to be on a good trajectory?

And the answer has always been yes to both, if often with varying degrees of conviction.

• Yes, China’s economy encounters challenges, but none that seem greater than those that every economy faces in some form or other - and gets through.

Then last week an institutional investor asked me where I saw the bright spots in the Chinese economy – and I realized that, unlike before, I don’t really see any.

• Not that the economy is collapsing, but the number and magnitude of problems appear greater than I have ever seen.

Then he asked, ‘What is the biggest problem in China’s economy?’

• Without thinking, I blurted, ‘Xi Jinping.’

As if on cue, The Economist this week put the illustration above on the cover.

• And the headline: ‘China’s slowdown – the trouble with Xi’s new economic model.’

The lead story, ‘Ideology versus prosperity: How Xi Jinping is damaging China’s economy,’ contends: ‘China’s economy is in danger.’

• ‘The immediate issue is its zero-covid campaign, which has caused a slump and may condemn the economy to a stop-start pattern.
• ‘That is compounding a bigger problem: President Xi Jinping’s ideological struggle to remake state capitalism.’
• ‘Mr. Xi who bears much responsibility for the twin blows to the economy.’

The result:

• ‘If it stays on this path China will grow more slowly and be less predictable, with big consequences for it and the world.’

But, as I went through The Economist’s listing of the woes of China's economy – which repeated those cited by many others – and laid at Mr. Xi’s feet, I began to wonder if I had stumbled into the China bear’s latest echo chamber without realizing it.

• Still, as the cliché ‘even paranoids have enemies’ implies, just because it’s an echo chamber doesn’t mean it’s wrong.

2 | ‘Xi has maneuvered himself into a dead-end’

‘Xi has made clear that his success in containing the virus and avoiding the mass deaths seen in other major countries is the legacy he’s riding on heading to the party’s leadership conclave [and on securing a third term there] later this year,’ says ‘China’s Premier Warns of Calamity. But Will Anyone Listen? in Bloomberg.

• And he seems not inclined to change.

As Joerg Wuttke, president of the EU Chamber of Commerce in China, notes (and we have published before) in his answer to the question: ‘Do you see any indication that the Zero Covid policy, which is behind the lockdowns, is being reconsidered?’

• ‘No, nil’

‘The authorities have made the Chinese population genuinely afraid of the virus.’

• ‘The authorities do not inform that the Omicron variant is milder, they do not inform that other countries have learned to live with the virus - they can’t admit that people in Europe can fly on vacation again and live largely a normal life.’
• ‘The authorities have spent a year bad-mouthing Western mRNA vaccines, with the result that people in China don’t trust the vaccination - and the authorities can’t admit that it would make sense to use mRNA vaccines in addition to the Chinese vaccines.’

‘For the past two years, the party leadership and government have spun the narrative that China has handled the pandemic much better than the decadent West.’

• ‘Now this narrative is blowing up in their faces.’

‘President Xi wants to be confirmed for a third term at the 20th Party Congress in the fall, so he cannot change his narrative this close to the finish line.’

• ‘Until the 20th Party Congress, they will stick to the Zero Covid policy.’

‘In short, President Xi has maneuvered himself into a dead-end:’

• ‘He can’t change his Covid policy.’
• And so he won’t save the Chinese economy.

A more charitable and China-centric view of the Zero COVID policy comes from Jun Zhang of Fudan University in ‘What Justifies China’s Zero-COVID Policy?’:

• ‘This [Xi's] approach is characteristic of Chinese policymaking.’

‘China’s political leaders always have long time horizons and are more willing to incur short-term high costs to advance long-term development goals.’

• ‘Especially in the midst of crises, they find solutions which – though often costly in the short term – enable the country to return to its path.’

This brings us to The Economist’s second issue:

• Just what path will China return to?

3 | The ‘New Development Concept’

The Economist pegs the second of the ‘the twin blows to the economy’ as ‘a series of economic initiatives that form what Mr Xi calls his “new development concept.’ ”

• Kevin Rudd, president of the Asia Society, described the ‘concept’ last year in ‘Xi Jinping's Pivot to the State’:

‘Xi Jinping has been advancing a new overarching economic policy framework over the course of this year entitled the “New Development Concept” — a concept which incorporates within it a range of different elements, including:’

• ‘Xi’s 2020 idea of a “dual circulation economy,” which seeks to reduce China’s future dependency on export-driven growth, and instead have Chinese domestic consumer demand become the principal growth driver; thereby leveraging the enormous “gravitational pull” of the Chinese domestic economy on the rest of the global economy;’
• ‘Second, his 2021 prioritization of the idea of “Common Prosperity,” which emphasizes income redistribution away from China’s billionaire class to low- and middle-income earners; and’
• ‘Third, the continued expansion of China’s “industrial policy,” led by a revamped state-owned sector, as China seeks to take the commanding heights of new technology platforms as the drivers of the 21st century global economy, including semi-conductors, artificial intelligence, quantum computing, and new forms of advanced manufacturing.’

‘For many in the international community, as well as China’s own entrepreneurial class, this has been received as a surprising, bewildering, almost scattergun series of announcements — from the micro to the macro.’

• ‘I would argue, however, that there is a common “red thread” to all of the above — particularly when seen through the political lens of Xi Jinping’s office in Zhongnanhai.

4 | The ‘Red Thread’

The ‘red thread’ gives the hint about what Xi Jinping is up to. Another hint comes from one of my favorite headlines from Bloomberg that appeared soon after investors lost over a trillion dollars in China’s tech ‘crackdown.’

• ‘Global investors shocked to have discovered that China is run by Communists.’

We ‘have told themselves a comforting story,’ it says:

• ‘China was no longer truly Communist after late paramount leader Deng Xiaoping embraced markets in the late 1970s and kicked off the country’s spectacular economic rise.’
• ‘The wealth and growth generated by capitalist techniques had converted the government and people.’
• ‘While the ruling party continued to wrap itself in the rhetoric of Communism, its members knew they were paying lip service to a bankrupt ideology, or so the thinking ran.’

In fact, from Deng to Xi, as the Chinese put it:

• 社會主義是個目的，資本主義是個手段, ‘socialism is the goal; capitalism is a tool (or method).’

And in Marxist theory itself, capitalism is a stage on the inevitable and historic path to socialism.

5 | Deng said so himself

Deng himself made this clear many times. In 1984, he said:

• ‘It is crucial for us to adhere to Marxism and socialism.’
• ‘We have said that socialism is the primary stage of communism and that at the advanced stage the principle of from each according to his ability and to each according to his needs will be applied.’
• ‘This calls for highly developed productive forces and an overwhelming abundance of material wealth.’
• ‘Poverty is not socialism, still less communism.’
• ‘We believe that the course we have chosen, which we call building “socialism with Chinese characteristics,” is the right one.’

To attain ‘an overwhelming abundance of material wealth,’ Deng’s ‘socialism with Chinese characteristics’ incorporated elements of capitalism.

• To our eyes – and indeed to many Chinese eyes – this looked more pragmatic than ideological, no matter how theorists tried to shoehorn it into Marxist thought.

But, as I have written before, when Deng Xiaoping introduced capitalist elements into China’s economic model, he was not abandoning the goal of moving China along the Marxist path to socialism.

6 | And Xi said so too

Like Deng, Xi Jinping is a true believer, as his writings and speeches (and now his actions) show. Here's just a snippet:

• ‘China has entered a new stage of development,’ he declared in a speech in January.’
• ‘The goal,’ he said, ‘is to build China into a “modern socialist power.” ’

The ‘New Development Concept’ and many other policies demonstrate that, for Mr. Xi, China has achieved such an 'overwhelming abundance of material wealth' that China’s capitalist stage may have reached its use-by date.

• And the time has come to begin moving China toward to the next stop on the road to socialism - even if it means slower economic growth.

7 | To the left

More from Kevin Rudd:

• ‘What we have seen since 2012 at the beginning of his first term is Xi Jinping progressively moving the center of gravity of Chinese politics further to the left.’
• ‘What we have seen during Xi Jinping’s second term since 2017 is evidence of a parallel move toward the left on the Chinese economy.’

‘This move to the left has been reflected in a number of specific domains:

• ‘The reassertion of Chinese industrial policy led by the state across all branches of technology;’
• ‘The reinvigoration of state-owned enterprises more broadly as a dominant player in the Chinese economy (and now empowered to take extensive equity in Chinese private firms as part of Xi Jinping’s so-called “mixed economy model”); and’
• ‘Xi Jinping’s chiding of China’s private entrepreneurial elite for not being sufficiently patriotic when what the Party requires is a brigade of Chinese corporate leaders walking in partnership with the Chinese state and under the ultimate direction of the Party.’

‘None of these things have happened by accident.’

• ‘They have, by and large, occurred as a result of a change in China’s overall strategic course — through what Xi Jinping himself lauds as “top-level design” (or “dingceng sheji”), an approach which also happens to sit comfortably with Xi Jinping’s personal style.’

8 | The ‘Decider’

If we have learned anything about Mr. Xi over the past year, it is that he favors health and ideology over prosperity.

• Since he is, as President George W. Bush put it, the ‘decider,’ then the outcomes from his preferences will be his.

So if The Economist (and the others in the echo chamber) is right when it says that the Zero Covid campaign and the ‘New Development Concept' are 'twin blows to the economy'...

• ...then my kneejerk response that Mr. Xi is China's biggest problem may not be so far off.

And while the impact of Zero Covid may be relatively short-lived, the impact of Mr. Xi’s return to the socialist path will be felt for a very long time, both in China and the world.

• So the impact will no doubt be felt as long as Mr. Xi leads China.