Glacial Earthquake

The news this week revolved around the three pillars of the year—virus, economy and Ukraine—with creeping developments on all three. The virus started to impact on Beijing, raising the specter of the capital experiencing the same lockdowns and dislocation that Shanghai has experienced over the past five weeks. This is a serious challenge to the policy of dynamic zero, which will eventually see its Waterloo in Shanghai, presumably within the next couple of weeks. As we write, there is no sign of an exit strategy from dynamic zero and the lockdown of the city, beyond the plan to get to zero, and the lack of guidance may or may not reflect the absence of a decision on how to get the city moving again, given the likelihood that zero is an impossibility and that once people are moving around beyond their apartments again, the ninja virus known as Omicron will resume its merry waltz. How much economic pain the Center is willing to put up with before reconsidering the number zero is the big question, and nobody can know, but if the May holiday ends, next Thursday, without clarity on the road map back to normal, there could well be consequences in terms of many companies and individuals. All of which does not bode well for GDP growth rates and the general economic future of Shanghai, and China beyond.

That then leads to the economy, and there are various predictions out there as to how severe the impact of the lockdowns will be on China’s economic growth. The politburo addressed the issue in a meeting this week and announced a policy of massive infrastructure investment over the coming months to offset the dire situation in the real economy. This in some ways matches the stimulus package of 2008 which created the massive debt overhang which is one of China’s main problems right now, and while infrastructure spending generally has a positive economic impact, there is a diminishing return from the construction of yet another bridge, yet another road, and the extra debt that will be created will add to the fundamental gloomy financial situation in the months ahead.

Internationally, the Ukraine war churned on with Russia looking ever more likely to suffer a humiliating dénouement, with Ukraine gaining increasing Western support. How all this impacts on China was partially reflected in a couple of corporate announcements over this past week, reflective of what appears to be a general stance of Chinese businesses on the issue—which is a desire to not get caught in a sanctions squeeze in the middle of it. UnionPay announced that it would not work with Sperbank and a couple of other Russian banks, and drone-maker DJI said it had decided to not do any more sales to either Russia or Ukraine “as a matter of principle.” The consequences of what is going on in Ukraine and the potential outcomes for Russia have such huge implications for the global strategic balance and for China‘s position in the world that it is useless to speculate right now on possibilities. But however it plays out, in terms of China’s relationship with Russia, and with Europe, among many other issues, this war has created an inflection point that will make itself felt through the years ahead.

Have a good weekend.