China: Not Rising, but Stalling

Five-star red-flag flapping

In late October, President Xi Jinping won an unprecedented third term in power at the 20^th national congress of the Chinese Communist party (CCP), confirming his status as the most powerful Chinese leader since Mao Zedong (1893-1976). Xi is both general secretary of the CCP and the People’s Republic of China’s seventh president. This was the culmination of a campaign by the CCP that has been described as a “personality cult”.

Yet, within weeks, Xi’s position was rocked by the most widescale mass dissent since the Tiananmen Square demonstrations of 1989. The proximate cause of the demonstrations across numerous Chinese cities was the endless tyranny of the zero-Covid policy. A fire in a block of flats in Urumqi on 25 November had claimed lives because people were prevented from leaving their homes under Covid regulations.

On 26 November in Shanghai, crowds carrying blank sheets of paper – a symbol of opposition to censorship first manifested in Hong Kong – called for Xi to step down. The largest of the protests occurred on 27 November in Wuhan, the epicentre of the coronavirus pandemic. These protests were not just about Covid policy, by people who had been confined to their homes for weeks but were also overtly anti-government. People chanted: “We want freedom”. Of course, it is difficult to know how representative the protesters were of Chinese society as a whole, even if their courage is not in doubt.

What is remarkable for China-watchers is that the protests seemed to work, to the extent that the central government promptly relaxed the rules. For example, people can now isolate at home rather than being sent to centralised facilities. New messaging relaxes Xi’s characterisation of Covid-19 as a “devil virus”. On Tuesday (6 December) gyms reopened without restrictions and internal passports (required to travel from one province to another) were waived. China’s external borders remain largely closed, with very few visas being issued to foreign visitors but that could change soon.

The death at the age of 96, of Jiang Zemin – the leader who put China on the path to economic-powerhouse status – amplified the sense that China has reached a historic crossroads. Jiang crushed political dissent, but he presided over a period of relative cultural openness. Remember that the Tiananmen Square protests in the spring of 1989 coincided with the period of mourning for Hu Yaobang, a former leader who had promised reform. The public mood is more volatile than commentators realised.

Masked dragon

There are two specific reasons why Xi’s zero-Covid policy has been unsuccessful. One is that the Chinese vaccine, Sinovac, is of questionable efficacy. That is partly due to the under-involvement of the elderly in the original clinical trials. The other reason is that vaccine uptake amongst the over-60s is low. An estimated one third of China’s over-60s have not yet had their third booster shot compared with about 96 percent in the UK. An estimated 8.4 million over the age of 80 have not received a single shot. This may be because there has been an absence of clear communication and education on the part of the medical profession.

Traditional Chinese medicine is deeply entrenched, especially in rural communities, and this has probably increased vaccine hesitancy. Pharmaceutical scandals have further stoked scepticism. In October 2018, Changsheng Biotechnology was fined for falsifying trial data relating to its rabies vaccine and for manufacturing vaccines for diphtheria and tetanus which caused infections in children. One problem is that vaccine development and manufacture in China is highly fragmented, with more than 200 players in this space, making regulation difficult.

Chinese football fans watching the World Cup on TV have been perplexed to see that no one in the Qatari stadia is obliged to wear a face mask. In China, people have been summarily imprisoned for taking their face masks off in public places. It is interesting that opposition to the zero-Covid policy has been aired on social media such as WeChat and Weibo – which means that some people in the state apparatus are allowing a message of dissent to get through China’s normally impermeable censorship regime.

The irony is that this week’s relaxation of the zero-Covid policy comes just as infection rates are increasing. Guangzhou alone reported 7,000 new cases of Covid-19 on 30 November. If the zero-Covid policy does not work – does China have an exit strategy? One might be for the Chinese government to buy the Pfizer-BioNTech mRNA technology – but that might be considered a humiliation. Also, it would be costly. Reportedly, the Chinese were in negotiations with Moderna, but they collapsed because China insisted on ownership of the intellectual property – ie the “recipe” of how to manufacture the vaccine.

China has not prepared its population or health-care system for much higher levels of Covid transmission. If infection and fatality rates explode, then China’s hospitals would not be able to cope – and tight restrictions might then be reimposed.

Economic Gloom

Some commentators inside and outside China have come to believe that social control is more important to Xi than economic prosperity. Persistent lockdowns have taken their toll on growth. Retail sales have fallen along with footfall, and many restaurants have gone out of business over the past three years. The IMF thinks that the Chinese economy will have grown by just 3.2 percent this year. Oxford Economics thinks that China will grow by 4.2 percent in 2023 − though by one percent less if the zero-Covid policy is reinstated. China has consistently grown much more rapidly than that since the death of Mao Zedong in 1976.

Almost one in five young Chinese aged under 24 are unemployed. That rate is likely to worsen as another 11.6 million students graduate in 2023. And high youth unemployment is correlated with social unrest. The economist George Magnus of the Oxford University China Centre said last week that the recent protests “might mark an awakening of young people’s political consciousness, seeing the Communist party for what it is…because economic aspirations are not as good as they used to be”. Xi’s ‘Chinese dream’ is apparently not shared by the young who cannot afford to buy a home, with the result that many are staying single, with the number of marriages in swift decline. The house price to income multiple is higher in China than in the US or UK.

The relative laggardness of the Chinese economy partly explains why the oil price has fallen from peak levels of late. This morning, a barrel of Brent crude costs $76.59 – down from $120 in early March in response to Russia’s invasion of Ukraine. China accounted for 16 percent of global oil consumption last year. Prices in other commodities will also fall if the world’s second-largest economy continues to underperform. China accounts for 10 percent of global gas and 54 percent of global coal consumption.

Xi doesn’t leave the country often these days, but, significantly, on Wednesday (7 December), he began a three-day trip to Saudi Arabia. He is expected to sign trade agreements worth around $30bn with the Saudis. Saudi Arabia and China are on the same page in terms of net-zero carbon. The Saudis want to perpetuate the export of hydrocarbons for as long as possible – even though they are sagacious enough to understand that oil consumption is in long-term decline. The Chinese want to secure oil supplies for as long as possible, even though they pay lip service to the need to arrest the advance of global warming.

China’s economic growth rate was already slowing before the coronavirus pandemic emerged in Wuhan exactly three years ago. One reason is that the historic drivers of growth such as state-funded housing and infrastructure projects have run out of steam. After a certain point, there are diminishing marginal returns on every dollar of infrastructure investment. Another reason was that the state under Xi began to restrict job-creating innovation: consider how entrepreneurs like Jack Ma, now in exile in Tokyo, were chased out. In Japan, spectacular growth from around 1960 to 1990 was followed by a prolonged period of stagnation and deflation. The fear is that something similar could happen in China.

That is why Xi has laid so much emphasis on China’s Belt and Road Initiative. By rolling out massive infrastructure projects for ‘friendly’ countries, Xi’s China wants to boost its own economy and at the same time to reduce some of its beneficiaries to the status of junior partners. China’s foreign loans to client countries now amount to an estimated six percent of global GDP – much more than those of the World Bank. Details of China’s loans to Kenya became public during that country’s presidential election of 9 August this year. The interest rates China demanded were higher than IMF-World Bank rates. Also, the contracts stipulated that all hardware purchased by Kenya must be sourced from China alone.

Sri Lanka has had to sign a humiliating agreement with China, having become hopelessly indebted to its imperious partner. The country was obliged to grant China a 99-year lease on the strategically vital port of Hambantota. This gives China ultimate control of one of the world’s most important shipping lanes. Laos has had to hand over control of its national electricity grid to China. Tajikistan was obliged to grant China exclusive mining rights to nearly 500 square miles of territory in the Pamir mountains. Pakistan has received $21.9bn of Chinese loans since 2018. The country was inveigled to grant exclusive rights to the Chinese to run the port of Gwadar, where China plans to build a naval base.

What Religious Demographics Tell Us

A lot of discussion was generated in Britain last week by the revelation that for the first time − possibly since the Dark Ages – the majority of the population of England and Wales do not identify as Christian, according to 2021 census data. The data from the census in Scotland have not been released yet for reasons that remain unexplained; but it is expected that something similar has occurred there. The Church of Scotland has been as much in decline in recent decades as the Church of England. Many commentators have concluded that Christianity is in relentless decline in Britain and indeed across the West – even in the US, where banknotes pronounce “In God We Trust”.

But in China, something quite the opposite is happening. Much attention has been paid to the tensions between the Chinese state and the Vatican but underlying that is the trend that Catholicism has been expanding in China over the last 30 years or more.

According to Chine McDonald, director of Theos, a think-tank which analyses religious trends, in spite of the efforts of the CCP to suppress religion generally, the number of Chinese Protestants has grown by an average of 10 percent per annum since 1979. Nobody knows for sure, but Purdue University’s Center on Religion and the Global East, estimates that there are between 93 million and 115 million Protestants in China, and 10-12 million Catholics. Other Christian organisations put the number of Christians in China even higher. So about nine percent of China’s 1.426 billion people are Christians.

So what? Well, people with a religious affiliation are not permitted to become members of the CCP, which is the ruling body of the Chinese state. The official doctrine is one of state atheism. Therefore, a significant number of Chinese people hold beliefs which are inimical to the ruling elite.

Chinese rulers have historically been highly suspicious of “cults” – as they tend to term all institutional religions. That is because numerous Chinese emperors and dynasties have been destabilised by “cults”. Witness the CCP’s persecution of the Falun Gong movement since about 1999. If we understood China better we might conclude that the CCP is not as monolithic as it looks.

Language Barriers

Only about 300 students graduate each year from British universities with degrees in China’s dominant language, Mandarin. In fact, the number of students studying Chinese in the UK has been in decline. The number of A-level candidates studying Mandarin has fallen by 60 percent over the last five years from 3,334 in 2019 to 1,349 this summer – and many of those are young people of Chinese heritage who speak Chinese at home.

In contrast, more than 100 million secondary and tertiary-education students in China study English every year. Not to mention the fact that millions of young Chinese watch English-language films and TV and scan the English-dominated internet. TikTok is Chinese-owned and run, but most of its content is in English and most of its users have English as a first or second language.

It should not surprise us then that the Chinese know more about us than we know about them. Indeed, there seems to be a lack of curiosity in this country about Chinese culture, despite the popularity of Chinese food. However, most Chinese takeaways here offer a poor interpretation of one of the world’s great cuisines.

That confers on the Chinese a competitive advantage – and an intelligence advantage too. We seem to know almost nothing about contemporary Chinese writers, filmmakers and artists. The only Chinese artist who has made a major impact in the West is Ai Weiwei who lives in exile in Cambridge. He has expressed doubt that the recent demonstrations in China would have any political consequence – the CCP is just too entrenched in Chinese society, he has said.

It is disappointing that so few Brits want to study Chinese. Language learning is regrettably declining generally in this country (a very negative sign of an inward-looking culture) and there is a common perception that Mandarin is a fiendishly difficult language. In fact, I am told that once one masters the five tones which are critical to conveying meaning (this is a much a musical skill as a linguistic one), Chinese grammar (unlike that of many Indo-European languages) is relatively straightforward. There are no genders (German and Russian have three), and no tenses (French has 17) or plurals (almost straightforward in English but highly divergent in Russian).

As many as 70,000 Hong Kong Chinese have taken up their right to reside in the UK over the last 12 months or so. Reportedly, many of them have chosen to settle in Surbiton in the London borough of Kingston upon Thames. Overwhelmingly, these people are affluent, having sold property in Hong Kong where prices are sky-high, and they are well-educated. They are also people who are out of sympathy with the form of government exercised from Beijing. We should regard them as a resource who can help us to understand China better.

Markets

Investor sentiment regarding China has morphed in recent weeks, with the MSCI China up 30 percent from its recent nadir on 31 October and the renminbi up from its historic low against the dollar. The index is back to its level before the CCP congress in mid-October. The markets have determined that China’s draconian and cruel zero-Covid policy is now history, and that China will resurge. There are also signs that the government will move to support the troubled property sector. Covid restrictions have dampened home sales and the expectation is that these will now resume with gusto.

Moreover, it now seems more likely than not that US-listed Chinese firms will avoid delisting thanks to the deal earlier this year between US and Chinese accounting regulators. That deal represented a concession by China to US demands that the Public Company Accounting Oversight Board be able to inspect the accounts of US-listed Chinese companies, as US legislation now requires.

Furthermore, it is reported that there have been fervid diplomatic exchanges between Washington and Beijing over Russia’s war against Ukraine. That gives hope that World War III might not happen after all – at least not yet. It is now probable that this war will grind on for many more months, but the US and China share common ground in wishing it to end without further escalation – as I shall discuss in the near future

All this is good news. At the beginning of the pandemic, we in the West thought that China had it sorted, and some people even envied the authoritarian instinct of the Chinese state. We now know that confining people at home to forestall infection does more harm than good. We need to learn from the Chinese as much as they have learnt from us.

Listed entities cited in this article which merit analysis:

• Moderna (NASDAQ:MRNA)