The year's biggest question mark: China

Investors have responded well to bits of optimistic news since late October, but no one can be certain that there is money to be made in China

There is really only one economic story that the world cares about over the next few months: China. How will it reopen? Are there signs of overdue reform, or is President Xi Jinping resetting the economy in a more Marxian direction? Relatedly, is the Communist Party’s crackdown on the tech sector going to end, or is it yet to peak? Either way, is the years-long slump in the Chinese stock markets finally going to end? Will its companies resume buying commodities at a pre-pandemic pace, and from countries like Australia that had been put on a political hitlist? And will its consumers resume tourism and the purchase of luxury goods at pre-pandemic rates, propping up groups like LVMH and countries like Thailand?

First, the optimistic case. This — pushed in part by those already significantly exposed to China — holds that Mr Xi’s pivot to opening the economy after years of repressive lockdowns was in fact not a surprise at all, but the product of long planning and a response to structural issues holding back China’s growth. They argue that Mr Xi’s third term will be the decisive moment where he finally implements all the reforms that optimists have been hoping for since he first took power over a decade ago. What’s the evidence for this view? Well, first, personnel. Mr Xi sent to Shanghai for the local party chief, Li Qiang, last year. Mr Li followed Mr Xi out on stage at the party congress, which anointed the latter as leader till further notice. That China’s president has picked a second-in-command associated with more market- and big business-friendly policies is surely significant?

What else? Well, the Party’s man at that other bastion of dangerous economic rationality, the People’s Bank of China (PBoC), also told the state news agency recently that the organised crackdown on fintech had been “basically completed”. The ban on the import of Australian coal — imposed to demonstrate China’s power over rebellious trading partners — has come to a quiet end. Guo Shuqing, Communist Party chief at the PBoC, told Xinhua news agency on January 7 that the crackdown on fintech operations and platforms of the 14 main internet companies was “basically” over. Finally, Chinese households, locked down for longer than anywhere else, have a very large stock of excess savings that they might be willing to spend — and, in the process, begin China’s long overdue rebalancing towards a more demand-driven economy.

As an external driver and support to this process of rebalancing and reform, the global attempt to “decouple” from China has been halted in its tracks. The German chancellor has distanced himself from decoupling, and the French president might follow. The presidency of the European Council has claimed that member states want to move forward on a stalled investment agreement between the European Union and China (but that the European Parliament still opposed it). Beijing, meanwhile, has dramatically shifted its leading “wolf warrior” diplomat, Zhao Lijian, to Deputy Director-General in the Department of Boundary and Ocean Affairs, which certainly does not sound like a promotion from “spokesperson”. And the new foreign minister is their former man in DC, Qin Gang, who is generally seen as being having worked to slow the rapid deterioration in Sino-US relations.

Investors have responded well to all these bits of news. Broad indices of Chinese stocks have gone up about 50 per cent since late October, and Morgan Stanley predicts that the bull run has 16 per cent left to run. This is an ongoing process. On Friday the 13th of January, offshore investors pushed another $2 billion into Chinese mainland shares; since late October, they have sent almost $24 billion into the mainland economy. The owners of this cash argue that pretty much every problem sector in China has seen a pro-growth, pro-reform policy pivot. So, are we back to the early 2010s — with a booming China and everyone else struggling to catch up and sometimes drowned in the surging tide?

Perhaps not. The long-term distance between China and the West — which remains the biggest threat to the sustainability of investments in the mainland — is not likely to go away even with a milder official tone in Beijing or a pusillanimous chancellor in Berlin. That this is a profoundly political disagreement and not an economic one is visible particularly in the aftermath of the Russian invasion of Ukraine, which seems to have consolidated the vision that many had of a world divided into West and East, just like during the Cold War. The Germans might think they can still make money in China, but they know after 2022 that they cannot live without common security.

Nor can anyone be certain that there is money to be made in China. “Basically completed” crackdown or not, what is certain is that Jack Ma has given up control of his company, and that Mr Xi has not retreated a bit in public from his rhetorical support for Party control of the economy’s commanding heights. Self-reliance has been embedded in the autocrat’s rhetoric. It is very hard for anyone to make money under those circumstances, and any investor interest is likely to be transitory.

The writer is director, Centre for the Economy and Growth, Observer Research Foundation