China’s Relations With the West: Straight Line Decline

There are those who believe China’s ongoing Party Congress will bode well for companies that do business in or with China. I am firmly convinced that the opposite is true and that it will used as yet another opportunity by China to show that it will not be cowered by the declining relations and sanctions/counter-sanctions between the United States / EU / Australia / Japan on the one hand, and China on the other. I see China using this Congress to let the world (domestic and external) know that it fully intends to fight back and fight back hard.

In other words, this Party Congress will lead to China’s decoupling from much of the world accelerating, not slowing down.

1. Worsening Relations with China Should Be No Surprise

Way back in October, 2018, in China, the United States and the New Normal, I made clear my negative view on the likelihood of China making nice with the West and called on foreign companies (especially those that sell their products to the United States) to work hard on reducing their China footprint.

In April 2019, I again went on record for being convinced that relations between China and the West were declining with no end in sight, when the Wall Street Journal quoted me in a cover story, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations:

“There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’” said Dan Harris, managing partner at Harris Sliwoski, a law firm that specializes in investment with China. “The tariffs and the arrests and the threats and the heightened risk have impacted companies and that will not go away.”

Then on May 4, 2019, I wrote The US-China Trade War: Winter is Coming on how the acceleration of this decoupling trend has been unleashed nothing is going to change that. I noted then (and I note again today) how “the US is cracking down hard on China deals with US companies on national security grounds. And China is doing what it can to stop its own companies from dealing with the United States.

And so began our steady stream of posts exhorting companies to look more closely at countries other than China.

2. China and the West Will Continue to Fight Over Almost Everything

On May 8, 2019, I talked about US-China in depth and I had this to say:

My first thought based on the last few days is that this trade war is at its core a fight between the United States and China for which country determines from where products are purchased. I am obviously not the first person to say this but I have to admit this did not really hit home for me until yesterday when one of my law firm’s Spain lawyers off-handedly mentioned something along these lines to me. Both President Trump and President Xi are using their powers to influence global buying decisions. I know when I say it like this it seems obvious, but I’m not so sure it was or even is until you hear the following explanation. But hey, if I’m all wrong on this, just let me know — as the saying (sorta) goes: “there are no bad ideas here.”

Earlier this week I read how President Xi controls China’s economy. Well duh, right. No, I mean like really controls it, down to just about every nib. China wants to pay Canada back for Canada’s abiding by international law in arresting Huawei CFO Meng Wanzhou. See The Huawei Indictments are the New Normal. China chooses to do this by essentially telling its businesses they better not buy any canola oil from Canada and — pretty much just like that — they don’t. This is on top of China already having taken hostage two Canadians and snap-deciding to sentence to execution another Canadian whose previous sentence was 15 years in prison. In other words, President Xi and those at the highest echelon of China’s government can snap their fingers and create a new business reality.

Lacking in such nearly unmitigated power, but wanting that same power for himself, President Trump has been using tariffs to essentially accomplish the same thing. He has been raising tariffs against China and then negotiating with China and then threatening to raise tariffs against China and then raising tariffs against China, all the while pressuring various U.S. governmental bodies to increase their pressures against China products via non- tariff actions like anti-dumping and countervailing duties (AD/CVD). See Another International Trade (AD/CVD) Petition Against China: This Time it’s Metal File Cabinets.

President Trump is doing whatever he can to convince American companies — really any company from anywhere in the world that sells its products to the United States — to stop doing business with China. In ‘We’re freaked’: Trump startles US businesses with fresh tariff hike, CNN explains how this works by focusing on how Trump’s last minute tariffs will harm U.S. businesses that did not prepare for this.

I went into the long history above for two reasons. One, to show that I’ve been right all along. I want to show this not to brag (though I do like highlighting this to those who wrote me hate mail at the time saying I didn’t have any clue what I was talking about), but to try to convince you that I know whereof I speak when I say that China’s relations with the West will continue to decline. Two, because what is written above from 2018 and 2019, could just as easily be written today about the present and the future of China decoupling.

And in many respects, it was written today, but by Dexter Roberts for the China Project. First a bit about Dexter Roberts, who I have considered to be one of the foremost experts on China since his days as Bloomberg Businessweek’s China bureau chief. Roberts is. currently a senior fellow at the Atlantic Council’s Asia Security Initiative and a fellow at the Maureen and Mike Mansfield Center, He is also the author of The Myth of Chinese Capitalism and writes the Trade War newsletter, both of which are superb most-reads.

3. China’s COVID-Zero Policy is Here to Stay

Roberts — like me — believes that China’s COVID-zero policy is going to continue and that Xi is bad for business and bad for China’s relations with the West. And like me, he thinks those who believe otherwise are (like those who excoriated me for my negative predictions way back in 2018 are engaging in wishful thinking. I (like Roberts) believe that the motivations of some of those who claim to believe things will get good again after today’s CCP Congress are doing so because their China related jobs/income depend on their companies or their investors/clients believing things will get better.

Roberts puts it this way:

After a very rough couple of years for business in China, some seem to be expecting — or willfully hoping for — a post 20th Party Congress economic policy reset.

The COVID-zero policy that has slammed the Chinese economy is likely to be lifted sometime in the not-too-distant future, say eager investment banks. The replacement for outgoing premier Lǐ Kèqiáng 李克强 could be an open-minded reformer, according to leadership succession tea leaf readers. And Xí Jìnpíng 习近平 — almost certain to be around for years to come — could be just the powerful and effective leader China needs to overcome its many development challenges, including an unbalanced economy, rising debt, and an aging population.

Roberts emphatically states that “COVID zero isn’t going away .  . . . [and] China won’t see its growth recover at all if it doesn’t end its stringent pandemic measures.” He then notes how investment banks like “Nomura and Goldman Sachs, recently predicted officials will lift the tough restrictions in the spring, after the 20th Party Congress and next March’s National People’s Congress.”

“Reopening appears the remaining meaningful tool to manage the economy,” wrote Morgan Stanley analysts in a recent note. (That banks are the ones making this bullish prediction is hardly surprising; they know well that their business will be badly hurt if a breakthrough doesn’t happen soon.)”

But like me (see Doing Business in and with China During COVID Lockdowns) Roberts does not see China moving away from COVID-zero because due to its “mind-boggling” policy of not importing more effective mRNA vaccines:

That’s likely why the People’s Daily, the house newspaper of the Communist Party, has taken the unusual step of publishing three editorials (123) in the space of just one week vigorously defending its COVID-zero policy while attacking other countries for their own much-looser approaches. “This is Xi telling the country: This is my policy, don’t dispute that, there is no room for negotiation,”Alfred Wu, a professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy, said to Bloomberg.

4. The CCP is AND Will be Bad for Business

Roberts also sees things getting even worse for companies that do business in or with China. He bases this on the fact that the new leadership will consist of economics professionals “with much less diverse experience, with much less international renown, and with much less collective voice in the making of economic policy.” If “Xi is favoring loyalty over technocratic competence, this would be one of the strongest policy signals out of the congress — and one that would be interpreted negatively for China’s economic outlook over the next five years,” notes Logan Wright of Rhodium Group, a research firm.

Roberts then does a great job refuting “the old two-part and tired argument: that ultimately Xi is a pragmatist willing to take any path that helps makes China strong and prosperous and able to achieve its ‘great rejuvenation’ and that his heavy-handed consolidation of power allows him to overcome entrenched anti-reform interests before he loosens the reins over the economy and unleashes growth.” He notes that you would “think people would have learned their lesson after watching Xi emerge as one of the most conservative, ideological leaders of China in decades” and then gives a long history of how those with these thoughts have consistently been proven wrong. My comment to clients who engage in this branch of wishful thinking is that for as long as I’ve been dealing with China it has always prioritized CCP control over the populace of economic growth. That has not changed one bit. All that has changed is the greater need to allow the economy to stagnate so as to allow CCP control to increase.

What are you seeing out there?

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