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China’s fragility fuels the doomsayers in Davos

China's fragility fuels the doomsayers in Davos

This time, Xi, who hasn’t left China since the coronavirus pandemic broke out two and a half years ago, didn’t even ring in for a Zoom call.

For the cohorts of business titans and policymakers who traveled to Davos to read the runes or the next recession was about to break, his absence was ominous. The conversation has shifted dramatically from cautious assessments of China’s strength to panic on the edge of its vulnerability.

Xi’s heavy-handed “Zero COVID” strategy has caused serious inconvenience to Western companies. The Economist Intelligence Unit estimates that the lockdown will cut 6 percent of Shanghai’s economic output on an annual basis, pushing China’s main port city into recession and Beijing falling short of its overall gross domestic product target.

Those kinds of numbers cause vibrations worldwide.

It fell to philanthropist George Soros – the ultimate Davos – to sum up the magnitude of what he labeled as “Xi’s biggest mistake.”

“The lockdowns had disastrous consequences,” he said. “They pushed the Chinese economy into free fall. It started in March and it will continue to gain momentum until Xi changes course – which he will never do as he cannot admit a mistake. On top of the real estate crisis, the damage will be so great that it will have consequences for the global economy. With supply chain disruption, global inflation threatens to turn into a global depression.”

In another sign of soured sentiment, David Rubenstein, co-founder of the private equity Carlyle Group, told POLITICO in Davos that “India has been more attractive [to buy assets] then leave China.”

China does have reasons other than the coronavirus to keep its head low this year. Beijing is well aware that it is no longer the flavor of the month due to the Russian invasion of Ukraine. Davos indeed got an unusual ‘War and Peace’ atmosphere this year, with a keynote speech by Ukrainian President Volodymyr Zelenskyy. Thanks to China’s logically tortured position of “pro-Russian neutrality”, which has received little support from the crowd, Xi is hardly the most welcome guest anymore.

Beijing’s official delegation may have played its only strength given the current mood, and was led by the most apolitical figure imaginable: veteran climate envoy Xie Zhenhua. The message is clear: Let’s put coronavirus and security disputes aside for now, and focus on the one topic the West is still genuinely interested in engaging with China.

For Soros, Russian President Vladimir Putin and Xi Jinping were now united by stubbornly holding onto their mistakes. “They rule through intimidation, and as a result they make mind-boggling mistakes. Putin expected to be welcomed in Ukraine as a liberator; Xi Jinping is committed to a Zero Covid policy that is impossible to sustain.”

Emergency stations in China

Economic signals from China are bad. Just as the chief executives and ministers at the Alps with glasses rang the bell, Chinese Prime Minister Li Keqiang was in emergency mode. Fears in the West are moving from annoyance at subsidy-fueled overproduction of everything from plastic toys to steel, to a more fundamental concern that supply chains are being broken and the world’s factory off the grid.

On Wednesday, the Chinese State Council, led by Li, organized an “unprecedented” conference call with 100,000 participants from across the country, at all levels of bureaucracy.

There is only one focus: to stabilize the economy. At the meeting, Li stressed the need for stability in “market entities, employment and people’s livelihoods” and to keep the economy afloat whenever possible, state media reported.

“Since March, and especially April. some economic indices are deteriorating particularly. In some ways, and to some extent, the difficulty [we are facing] is greater than that seen during the severe blow during the 2020 pandemic,” said Li, a day after the State Council rolled out a 33-point plan to get the economy back on track.

Stephen A. Orlins, chairman of the New York-based National Committee on US-China Relations, noted, “The Chinese economy is in significant trouble. No one has a crystal ball, but if the zero-tolerance COVID policy remains in place and COVID continues to crop up, the Chinese economy could contract in 2022. For a country that has experienced more than 40 years of growth, this is a shock. †

Li’s saying about economics is unusual. For much of his presidency, Xi has taken on most of the economic powers traditionally vested in the prime minister, rolling out nationalist policies aimed at curtailing the Big Tech and other innovative sectors. When the crisis hit, however, he stepped back and put Li forward as the fixer, as the Communist Party prepares for the once-every-five-year congress, where Xi will likely take the helm for a third time.

The Biggest Pessimists

Foreign companies don’t quite know how to do without a market that used to be their irreplaceable profit engine.

“While our surveys show widespread pessimism among CEOs in the US, China and Europe regions, CEOs of Western multinationals in China are considered the most pessimistic about current business conditions,” said David Hoffman, senior vice president. president of The Conference Board, an international economic research institution funded by donations from major corporations.

“Unexpected, sporadic and widespread COVID-19 lockdowns in numerous Chinese cities, most prolific Shanghai, and the logistics, people and manufacturing that this so-called Zero COVID policy has brought into the commercial sphere have clearly taken their toll on the business sentiment in the region,” says Hoffman.

Whether the future looks brighter or bleaker depends on who you ask. For Hoffman, the CEO survey shows that there is a general sense of long-term optimism, with “only 17 percent of the Chinese group saying they are diversifying away from Chinese suppliers,” suggesting “there is more coupling than decoupling.” “

Siva Yam, president of the Chicago-based US and China Chamber of Commerce, also noted a difference in sentiment between different sectors.

“You do see a negative sentiment because of the disruptions in the supply chain. For big companies… you won’t see a lot of new investment because China isn’t that competitive and you have more and more regulation. For small to medium sized businesses that have a niche product they can sell to China, they remain optimistic… [because] they are not so affected by [new] regulations,” he said.

But Jeremy Farrar, director of the Wellcome Trust, a foundation, was more broadly skeptical of China’s prospects for pandemic management.

He called China “a great unknown,” Farrar told POLITICO: “I don’t believe that a zero-COVID policy is sustainable, and at some point China will go through a major epidemic. And the population in China has a very different immunity than the rest of the world.”

“So that’s a big concern.”

Stéphane Bancel, chief executive of vaccine maker Moderna, said at a panel co-sponsored by POLITICO: “Like Jeremy, I am very concerned about China. Because I think as the virus gets more and more contagious, it’s less manageable with techniques that were great in 2020 to prevent a lot of deaths.”

Xi’s absence and his Zero COVID strategy are all the worse given his unquestioning commitment to globalization in his 2017 Davos script.

“Like it or not,” the Chinese leader said at the time, “the global economy is the vast ocean from which you cannot escape. Any attempt to cut off the flow of capital, technologies, products, industries and people between economies and diverting the waters in the ocean back to isolated lakes and creeks is simply not possible.”

Exalted feelings perhaps, but China itself is now trying to be the island that rises above that great ocean.

Sarah Wheaton, Matt Kaminski and Jamil Anderlini reported.

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