Gloom continued

We always like to be contrarian when possible, and in light of that, we would dare to predict that the lockdown in Shanghai is likely to ease next week, and there will be progress in terms of control of the situation in the rest of China. This is a gamble, but it would appear from reports in the city that one way or another an acceptable level of infections will be achieved by Sunday. Or else. Ditto Beijing. While the ideological purity of the process is unquestionably a requirement, there is also an obvious need to get the Chinese economy moving again, in order to head off a really, really serious problem in terms of employment, production and social harmony. We saw one security house prediction that as a result of the lockdowns and other developments over the past couple of months, China’s GDP growth this year is now likely to be 2%. If it continues for very much longer, even that will be an impossible target to hit in terms of the real economy. As we have occasionally noted in previous weekly missives, there is always an assumption that China needs to hit a certain percentage growth level in order to remain economically and socially stable. In the 1980s the assumption was that this level was 7%, and China more than met that number through most of the years subsequent, up to recent times. Where the line is today is questionable, and it will definitely be lower than 7% because of the overall greater prosperity and size of the China socioeconomic machine. But we guess that 2% would be really pushing it in terms of the location of the line.

    More indicators were issued during the week which further emphasized the depth of the economic problem now facing the Center. And anecdotal evidence indicates that many companies and individuals are seriously considering their China presence as a result of the lockdowns and the impact thereof, but also the implications of the way it is all being handled, and how that plays into planning of both corporate activities and individual careers and lives. This really has the makings of a significant inflection point in many ways, and the confidence with which the Center holds to its Marxism with Chinese characteristics line was no better illustrated than the official reaction to the comment from the WHO chief, who said plainly that dynamic zero was not a good idea. The response from the foreign ministry, which was inevitable given the categorical statement issued by the politburo last week, was that the WHO has got it wrong and doesn’t understand.

    Talking about other sectors of the economy such as property and tech doesn’t seem very useful right now given the overhang of lockdowns and the flowon consequence for logistics and other fundamental elements of the machine. But the announcement on Thursday that foreign travel by Chinese citizens would be discouraged and should be restricted only to essential trips created quite a lot of puzzlement. This really is, as we have stated before, a new era.

    Have a good weekend.