Next China: Hot war averted

Nancy Pelosi’s trip to Taiwan this week was met with a series of provocative moves from China, including military drills, deeper incursions into the island’s airspace and trade bans on some food and sand.

Published in Bloomberg on 5 August 2022 – 11.54 am

There are signs that Beijing may continue to escalate its response, including reports of even more missile tests. But the initial fallout, at least, could have been much more serious.

Pelosi’s arrival had prompted speculation about a heavy price to be paid for the visit: Hu Xijin, the former editor-in-chief of the Global Times and one of China’s most prominent nationalist voices, had suggested in a now-deleted tweet that Chinese warplanes could “forcibly dispel Pelosi’s plane.”

China’s Twitter-like Weibo service lit up with netizens in the country who expressed disappointment that their government repeated rhetorical flourishes without adopting harder measures to stop Pelosi’s trip. One of the most popular comments, with close to 100,000 likes, offered one impractical option: “Cancel the Taiwan-friendly policy and strictly prohibit cross-strait trade, making it an isolated island.”

Source: Bloomberg

To the relief of mankind, President Xi Jinping hasn’t pulled a page from Vladimir Putin’s playbook and invaded Taiwan. Beijing is in a stronger position than the last major cross-strait crisis in the mid-1990s, but it’s also far from being able to push the US around. While China’s leadership wants to look tough, it doesn’t want to take any steps that could unleash a conflict where there is any doubt about the outcome.

Xi may just not want a fight right now. His country is already grappling with a property crisis and slowing economic growth after more than two years of strict pandemic-control measures. Xi has been focused on eliminating risks ahead of an expected extending of his rule at a party congress later this year, which leaves little appetite for triggering a conflict that could spin out of control.

The US and Taiwan can take away a couple of wins from this week: The House Speaker, who is second in line to the presidency, got to pledge that the US is determined not to abandon Taiwan, while Taiwanese leader Tsai Ing-wen got a powerful show of American support.

But there may still be more to come from China.

In 2012, after Japan nationalized a set of uninhabited islands in the East China Sea, China began regular coast guard patrols in the area that never stopped. And in 2020, after US politicians supported Hong Kong’s pro-democracy protesters, Xi’s government imposed a sweeping national security law that effectively crushed any opposition.

“It’s important for Xi Jinping to respond strongly, but responding strongly and engaging in conflict are two very different things,” said Lev Nachman, assistant professor at National Chengchi University in Taipei. “There’s not going to be any kind of hot conflict because none of the three sides want that.”

Taiwan Tensions

Read more on the global ramifications of Pelosi’s trip:

  • Pelosi has nailed the optics of her Taiwan trip: Matthew Brooker
  • Asean envoys warn against miscalculation, conflict in Taiwan
  • Pelosi hints gender is real reason China is mad at Taiwan trip
  • Pelosi trip spurs China battery giant to pause plant debut
  • China slaps export ban on 100 Taiwan brands before Pelosi visit
  • Pelosi’s Taiwan trip is only start of US headaches: Minxin Pei
  • Pelosi’s roundabout flight to Taiwan shows China’s long reach
  • Why Taiwan’s status risks igniting a US-China clash: QuickTake

Keep Digging

Shanghai, a city of 25 million, reported three straight days of no Covid cases this week, the longest stretch in a month. Macau eliminated community transmission, enabling China to resume quarantine-free travel to the gambling enclave. Large companies in Shenzhen are being told they can exit so-called closed-loop management systems.

Despite signs big outbreaks are being largely contained, though, the Chinese government isn’t taking its foot off the gas. According to experts, China may stick with its Covid Zero policy well beyond this year.

For Xi, the political risks of opening up are still far greater than the benefits. China has staked so much on avoiding virus fatalities, it can’t exit the pandemic as other countries have — by accepting greater death as a reality of living permanently with Covid.

More than a million people might die if China — which has little natural immunity — were to abandon Covid Zero, according to an analysis by researchers at Shanghai’s Fudan University. And many elderly remain vaccine holdouts.

Joerg Wuttke, president of the European Union Chamber of Commerce in China, believes Covid Zero will remain in place for at least another year because it’s now inextricably tied to Xi.

“My guess is China can at the earliest open up late 2023,” he said. Officials “are in a deep hole and they keep digging.”

The biggest challenge could still come from how long China’s 1.4 billion people are willing to be shut off from the world.

In June, a report that mistakenly indicated Beijing would keep strict virus controls in place for the next five years spurred backlash online in China, prompting authorities to swiftly edit the article.

Stocking Up

With Chinese stocks posting another dismal performance in July and the economy in a precarious state, it’s hard to be optimistic about investing.

But one hedge fund that doubled returns in three months thinks there’s no better time than now. And Goldman Sachs tends to agree.

Liao Maolin, who manages the Guangdong Zhengyuan Private Fund, is betting that the worst is over as policy makers step up their efforts to bolster growth and avoid repeating Covid lockdowns like in Shanghai.

Some of his thesis has already panned out. Zhengyuan’s holdings in companies focused on photovoltaic technology — devices that convert light into electricity — have rebounded as he predicted, extending returns on one fund to 52 times since its inception six years ago. He’s now betting on downstream green energy companies. An oversupply in polysilicon will cut costs, bolstering margins and valuations of green power plants, Liao said. 

Meanwhile, Goldman Sachs is sticking with its bullish call on Chinese equities based on prospects of an economic recovery in the third quarter, contained inflation and easing policy in the region and globally. The bank forecast 24% potential returns over the next 12 months. But it may not be a smooth ride for investors given the ongoing tech crackdown, the threat of a delisting of firms in the US and geopolitical tensions.

Losing Billions Without Trying

It’s not easy to lose billions of dollars even when you’re trying, except if your wealth happens to be tied up in China’s wobbly real estate sector.

Yang Huiyan, the 40-something-year-old head of China’s biggest developer Country Garden, is no longer Asia’s richest woman after her fortune more than halved this year to $11 billion, according to the Bloomberg Billionaires Index. 

She forfeited that title to India’s Savitri Jindal, who has an $11.3 billion fortune thanks to her conglomerate Jindal Group, which is involved in industries including metals and power generation. Yang also slipped below fellow Chinese tycoon Fan Hongwei, whose wealth derives from chemical-fiber company Hengli Petrochemical.

Despite being considered one of the safer private developers and relatively unaffected by China’s mortgage boycotts, Country Garden hasn’t been able to escape a stock selloff driven by concern over the cash crunch in the industry. The company’s recent fundraising plans — selling equity at a discount — didn’t help matters.

“Investors worry that the mortgage boycott will spread to Country Garden as they are seeing the boycott project numbers increasing quickly,” said Kenny Ng, a strategist at Everbright Securities International in Hong Kong. “The company still has significant debts and recorded a slower month-on-month growth in June sales even though China resumed work.”

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