China and the economic decoupling from the West: is it all part of the dragon’s powerplay?
Defeating Covid-19, or rather Omicron, at all costs and making the national economy as self-sufficient as possible, both energy-wise and economically/commercially.
In this instance, China has been continuing to adopt the ZERO-COVID strategy for two years now. A move that was as useful in the first phase of the pandemic as it was essentially ineffective now that highly contagious but less-than-lethal variants have taken hold. There are even those who question the real motivations that are leading Beijing to insist on this path.
Is it really and only health reasons that are driving the People’s Republic to pigeonhole its economy with such violence, or does the Dragon intend to implement a kind of economic “self-decoupling” from the West, in an attempt to disentangle itself from the United States and achieve an alternative global order with Russia?
Between rumors and more or less plausible clues, the debate rages on.
Beijing does not seem to care much about the fact that, thanks to the combined effect of vaccines and adaptation of the human organism to the pathogen, the latest mutations of Sars-CoV-2 seem less dangerous than the initial form of the virus. Chinese President Xi Jinping has reiterated that the Chinese government’s goal is to “annihilate the virus”.
That is, in the most radical way possible. To make sure that the daily epidemiological bulletins record the number zero under new cases, active cases and victims, the authorities have implemented draconian measures, including the lockdown of mega-cities inhabited by tens and tens of millions of people, resulting in economic blockades and to the entire supply chain of the country, and therefore global.
The script is always the same: people locked in their homes until further notice, business activities suspended with sporadic exceptions, and mass testing to ferret out even the most asymptomatic infected in every single neighborhood.
The reality is, that we have witnessed is a far worse situation since the beginnings of Wuhan, this virus has become even more contagious, and thus it is almost impossible to stop its spread. Yet Xi Jinping does not intend to change strategy, as China insists on having, perennially and permanently, zero Covid cases on its agenda.
Apparently, even at the cost of delivering mortal blows to its economic system.
Let’s start with the first hypothesis: China is implementing the zero Covid policy because it intends to zero Sars-CoV-2 cases on its territory.
One might immediately wonder about the sense of such a move, given that Omicron and its cousins have not given the impression that they are not as deadly and dangerous as the virus strain dating back to 2019.
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“The cost of China’s zero Covid policy is going up and policy support will not be sufficient to soften the blow,”
Allianz explained in an in-depth report last April devoted to the issue. Estimates of the effects of Covid in the first quarter and in April speak of -0.4 percentage points of Chinese GDP growth in 2022.
The People’s Bank of China (PBOC), or Central Bank of China, is expected to implement a further cut in the benchmark rate in the second quarter of 2022. Meanwhile, additional public investment of about 3 percent of GDP is planned for this year, but it seems that the support of such policies will not be enough to cushion the blow caused by the collapse in domestic demand. The aforementioned report goes on to talk about a reduction in China’s 2022 GDP growth forecast from the +4.9 percent predicted a month ago to the current +4.6 percent.
In a downside scenario in which the lockdown of Shanghai — the country’s main economic center — lasts more than two months, and it spreads onto other cities, then China’s GDP growth would slow to +3.8 percent.
The worst-case scenario, on the other hand, pictures a GDP growth of +1.3%.
This is true for China but what about the rest of the world?
A contraction in global trade volume in the second quarter of 2022 is highly likely. The slowdown in Chinese demand implies a $140 billion drop in exports for the rest of the world. On the supply side, a sudden halt in Chinese industrial activity would pose risks to global manufacturing, particularly in the electronics and automotive sectors. In addition, congestion at Chinese ports suggests that global shipment delays will remain high through 2022.
To make matters worse, continued supply chain disruptions will create additional inflationary pressure globally.
The shadow of decoupling?
The second hypothesis is that China is exploiting the long wave of Covid to review its economic relations with the rest of the world, the West foremost among them.
Having ascertained that the Zero-Covid strategy is poorly understood and that such a Chinese economic freeze will also have repercussions for the rest of the world, the trail of voluntary decoupling has been gaining momentum in recent weeks amidst a thousand doubts and suppositions. Of course, there is not enough evidence capable of confirming or disproving either the former or the latter hypothesis. However, there are some interesting clues to consider.
The American Chamber of Commerce (AmCham) in China, for example, released a white paper in which it outlined concerns and a set of policy proposals for U.S. companies operating beyond the Wall.
“We remain opposed to any attempt to completely decouple U.S.-China relations,” AmCham said, explaining that the costs of any Sino-U.S. decoupling would be significant and would not generate a clear winner.
Under pressure to tame high inflation, U.S. President Joe Biden said last week that he might even reduce some of the tariffs imposed on Chinese imports by the Trump administration.
We are facing a total reversal of reality: in the past, it was the United States, through the mouth of Donald Trump, that wanted in every way to disengage from China.
It is true that even at that time numerous companies and associations were pointing out to the Republican leader the weight of that eventual decision, but now it seems to be the Americans themselves who want to avert a possible decoupling, set in motion and accelerated by China, we do not know how voluntarily, thanks to the strict anti-Covid measures.
However, this whole reconstruction could be belied by the fact that Beijing intends to increase foreign investment, albeit of quality, and no longer aimed at feeding the production of cheap junk as in the past (dual circulation policy).
It is also useful to remember that between the Dragon and Brussels there is still the Comprehensive Agreement on Investment (CAI), or the Comprehensive Agreement on Mutual Investment, currently still on standby.
Whatever the truth of the matter, China continues to replenish its strategic energy stockpile, with Bloomberg reporting that Beijing is in talks to buy Russian oil at discounted prices.
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The feeling is that Xi Jinping is pursuing the health policy he embarked on in 2019, simply refusing to change strategy on the run. But in continuing along this increasingly uphill and fraught road,
Beijing is unintentionally moving economic levers it may not have wanted to and would not want to activate.
For updates & the latest news and analysis — follow me on Twitter @FilandroMi
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