China risk

In a strange reprise of March, there are now areas of Xi’an and Shanghai which are being locked down thanks to the ever-frisky omicron variants (now plural) which refuse to obey the clear instructions from the Center. The biggest fallout from this is not potential social dislocation and economic downward pressure, but a rise in the sense of uncertainty that relates in some way to just about any business decision relating to China. The uncertainties highlighted and confirmed in this situation are taking the concept of China Risk to a new level, and the consequences of that for business and investment, both domestic and foreign, have not been fully factored into predictions on the future, in our view. There has always been a degree of opacity, and there has always been an awareness that non-negotiable and unexpected announcements from the Center might change the entire game plan any time. But over the past 40 years, both domestic and foreign investors have generally speaking taken that into account and accepted it, because it was balanced by a booming economy and a sense of pragmatic systemic flexibility, a grayness which could allow things to happen regardless of a stark policy position from the center. In the words of the famous or actually not so famous song, nothing is allowed but everything is possible. The second half of that lyric is feeling less and less appropriate.

     In terms of systemic atmospherics, the week provided some evidence indicating yet more clearly and not surprisingly, that Mr. Xi is well placed to be confirmed for a third term as leader. A noted official commentator published an article which referred to the need to continue to use his Thoughts as the guiding principle for many years to come. Paired with that was a comment from someone in the system who said that by the end of the year there was likely to be a shift in direction towards more open and balanced. It’s all vague, as it always tends to be in this pre-congress phase, but it remains our view that China’s only viable long-term approach is to be a part of the world.

    Another puzzling atmospheric was the decision to institute a vaccine mandate—a requirement and proof of having had a vaccination jab—to enter certain public spaces in Beijing, which was then rescinded. Lots of factors, no doubt, playing into that. But it’s weird.

    In other news, BYD this week became the world’s biggest producer of battery powered cars, overtaking Tesla. This could well be the key milestone marking the arrival of China on the international auto market in a way that fundamentally changes that industry, so long dominated by the Germans and major US auto makers.

   Keep an eye on the news, you just don’t know what’s going to happen these days. But also strive to have a very pleasant weekend.