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Projections for the year of the Rabbitt
In this piece we take the risk to predict trends and outcomes in business and geopolitics in China in this Year of the Rabbit.
Over the past few months, China’s has toned down and reduced the wolf warrior rhetoric. The last significant outburst of which was in December when Xi dressed down Justin Trudeau in Bali. The majority of what we are hearing from China officially on the world stage resembles the music Liu He sang in Davos: “China is open for business. We welcome the international business community and will support the private entrepreneur. We are not the evil empire. We are your friend and partner in solving the world’s economic, environmental, and existential problems.”
After a Davos power lunch to discuss financial services opportunities in the new new China, the global financial services elite posed for a photo to applaud and smile alongside Mr. Liu, their luncheon host. We expect these bankers will continue to promote opportunities in China in the hope that being in the CCP’s good graces will provide access, deal flow and financial sector reform. Indeed, some regulatory doors have already been opened a crack, providing better access and more control for foreign financial institutions. It is noteworthy, that the same playbook was used to profound effect in the early 90’s when China enticed the world’s industrial leadership with gifts to motivate businesses to sing China’s praises.
Unfortunately, the positive mood music will face constant interruption from the sparing in the Taiwan Straits with incursions into Taiwan airspace and corresponding military shadow boxing along with the requisite trash talking. We expect the US military and most of the rest of Asia to continue to increase military preparedness, with major investments, forward deployments, and new base treaties in and around SE Asia. As if on cue, Fiji recently asked the Chinese police to step aside for Australia to take the lead in training its police.
This year we hope to see increased diplomatic efforts that implement protocols and procedures that help limit confrontations to near misses with at most some bloody noses, skinned knees, and the occasional broken bone. We would not be surprised by another US spy plane colliding with a Chinese jet and expect that this will be resolved without full scale war. Just friendly sparring and heated debate.
The Thucydides trap is not the only cloud haunting smooth relations with China. Although Hong Kong and Xinjiang have moved to mostly back burner status with little new development and drama, these issues will continue to cook a soup that many will find unpalatable and difficult to manage. Smolder on these issues will however, as fundamental differences in interpretation leave little room for resolutions that will placate all.
Rumors are afloat that President Clinton’s political campaign advisors are consulting for the CCP to implement a version of Clinton’s winning campaign strategy: “It’s the economy stupid.” Voters in China have voiced their concerns regarding mismanagement of the economy and the leadership has heard the clarion call to get on with the pragmatic things that can Make China Great Again. Red hats and all!
The CCP will promote many variations on a theme that reinforces Party support for the private entrepreneur, equal opportunity and thankfully not equality of outcome. There has already been some limited but useful regulatory and monetary relief for small businesses and the basic steps for this dance are well ingrained in muscle memory from the past few decades. Namely, “Regulators, please stay out of our way. Make our lives easier and we will all make money.” We expect private employment to grow, and the state to continue to recedein most markets outside of “Alcohol, Tobacco and Firearms.” (aka those deemed central to the Party).
Unfortunately, the first half of 2023 will deliver abysmal economic results. The economy is in a dismal state, and it will take time and more than words to shake people out of the three-year hibernation. However, by the end of the Year of the Rabbit, animal spirits will have rekindled and things will be hopping!
It remains to be seen how some of the main structural instability in the economy will be addressed. For example, what to do about debt levels in real estate and local governments; How to break the addiction to land sales and infrastructure investment as the main sources of growth and income. But we expect to see little to no movement on major reforms as the government focuses on stability and growth. There is little appetite for revolutionary reform.
Exiting from Covid has so far been a smooth albeit morbid process. Official reports and anecdotal surveys reveal that more than 80% of Chinese have tested positive in the first wave. Notwithstanding the low official death rate, we the case fatality rates to align with the rest of the world. But the Chinese are keeping calm and carrying on, stoically dealing with the challenges. People mock or mostly ignore the official Covid statistics, preferring to just move on. There is a quiet determined demand for economic results and little patience for propaganda and theatrics. Interestingly, Covid was not part of the program in this year’s annual New Year’s Eve television celebration. No hail to the glorious chief for protecting us. Little to no reference of the sacrifices of front-line workers. No elephants in this room!
As the Western media continue their efforts to provoke excitement and inject drama into the China narrative, expect to see more binary reports that lack context, insight, or new information. The typical China story will either state that the CCP is the antichrist, and the economy is in a death spiral. Or China is an engine of growth and opportunity. Like a good horoscope, the readers will have their own interpretation and it will feel relevant and accurate! Not surprisingly, the truth will be something in between the extremes.
We for one will be collaborating with our clients and partners to search for accurate intelligence and opportunities to generate value. Hope to see you at the hop!