The Taiwan Banker

Xi Jinping is often described as China’s most powerful leader since Mao Zedong. Like the Great Helmsman, he puts politics first and takes ideology seriously. ver since becoming China’s leader a decade ago, Xi has consistently sought to assert greater Communist Party control over all aspects of Chinese society – even when the policies are bad for business. Prior to the coronavirus pandemic, China paid a minimal price for Xi’s politicking. To be sure, some businesses relocated some manufacturing outside of China to eschew Donald Trump’s tariffs, but by and large, the gravitational pull of the massive China market remained strong. Despite the pesky levies, China’s foreign direct investment (FDI) rose 5.8% annually to RMB 941.5 billion in 2019 and the country remained the world’s No. 2 recipient of FDI after the United States.There are so many infections in China that factories are unable to complete manufacturing orders. The Asia-based shipping firm HLS wrote in a January note to clients that an estimated one-half to three-quarters of the manufacturing labor force is sick with Covid-19 and unable to work. Additionally, three of China’s largest ports are experiencing Covid-driven supply chain travails: the ports of Shanghai, Shenzhen and Qingdao. While the abrupt transition to living with the virus has disrupted the Chinese economy considerably in the short term, some analysts believe that the expeditious reopening will reduce the duration of economic shocks. They expect that the pain will be concentrated around the time of the Lunar New Year holiday, when growth is tepid in China anyway.“The quick policy shift is to pave the way to a fuller economic recovery,” Yu Xiangrong, chief China economist of Citigroup Inc., wrote in a December research note, adding that the Covid disruptions’ impact on China’s economy in 2023 “could be smaller” than previously estimated.Economist surveyed by Bloomberg reckon that the Chinese economy will grow just 3% in 2022 but recover to 4.9% next year.No going backWhile there is no doubt China is jettisoning its pandemic restrictions, its business environment has lost considerable luster over the past three years. Beijing will not easily restore the confidence of most foreign investors.Those who continue championing China as an investment destination, such as Germany’s largest automakers or the German chemical company BASF, have too many sunk fixed costs in the country to do otherwise. They are stuck with China, for better or worse.In September, BASF inaugurated the first plant of its Zhanjiang Verbund site. The company will inject up to €10 billion in the site by its completion in 2030, making it BASF’s largest investment in China to date. Volkswagen, for which China accounts for about 40% of sales and half of profits, said in October it would invest €2.4 billion to establish an autonomous driving joint venture with the Chinese firm Horizon Robotics Inc.However, other large multinationals are reducing their dependency on China. Apple is among the most prominent of these companies. In December, The Wall Street Journal reported that the U.S. tech giant “is telling suppliers to plan more actively for assembling Apple products elsewhere in Asia, particularly India and Vietnam.”To be sure, Apple has been gradually shifting some production out of China since the start of the U.S.-China trade war in 2018. Yet the impetus to reduce its dependency on the country for manufacturing is stronger in the wake of a year of painful supply chain disruptions that culminated in chaos at the Zhengzhou factory of paramount iPhone supplier Foxconn in November. Violent protests broke out at the factory when workers frustrated with the zero-Covid policy and unpaid subsidies they were promised clashed with police.Apple ultimately hopes that India and Vietnam can account for a much greater share of the assembly of its devices. Currently, less than 10% of iPhones are assembled in India. Analysts say that in the long term, Apple wants the subcontinent to account for up to 45% of production of its flagship device. For its part, Vietnam will be expected to handle production of Apple laptops, smartwatches and AirPods.It will not be easy for Beijing to stymie the exodus of foreign capital and talent. After all, Xi Jinping has made clear that under his leadership, China will not put business interests first, nor will it hesitate to weaponize economics for political gain.Early in the pandemic, China imposed large punitive tariffs on Australia after Canberra called for an independent investigation into the origins of the coronavirus. As a result, Australia’s wine exports to China – once the largest market for Australian winemakers – plummeted 92% to A$21 million in the year ended September 30.Beijing also sanctioned Lithuania harshly after Vilnius established closer ties with Taiwan, prompting the European Union (EU) to request a panel at the World Trade Organization. “China's discriminatory measures against Lithuania affect intra-EU trade and intra-EU supply chains and they impact the functioning of the EU internal market, including by forced market adjustments,” the European Commission said in a December press release.Looking ahead, China will be increasingly strategic about the foreign business it courts. While U.S. firms remain large stakeholders in the Chinese economy, the geopolitical fallout with Washington is likely to worsen in the coming years. Companies such as Intel which once sought a role in building up China’s semiconductor sector will be forced to disengage from the country. In general, American companies in sensitive industries – those which make products with clear military applications – will find it increasingly difficult to invest in China because of pressure from Washington. Nevertheless, Wall Street will remain enthusiastic about China. Financial services firms do not produce technology that Beijing can appropriate for military means, and they will continue to lobby hard to prevent the U.S. from implementing any restrictions on outbound investment. China bulls will note that mainland China had its best-ever year for IPOs in 2022 as listings on the Shanghai and Shenzhen stock exchanges hit a new high. Nearly 400 companies went public, raising a record RMB 560 billion (US$80.4 billion), up 3% over 2021, according to PwC.Ray Dalio, founder of Bridgewater Associates and one of Wall Street’s most indefatigable China bulls, said in October at the Greenwich Economic Forum, “The longer-term picture in China is still bright.” “From my getting to know the leaders… They are reasonable people,” he added.