Winter of Discontent?

Key Points

• The Beijing Winter Olympics are an opportunity for the Chinese Communist Party to showcase and promote a raft of significant national successes over the last decade and a half.
• The Games offer a window for democracies to increase and coordinate their criticism of China’s perceived human-rights abuses.
• Arguably the biggest issue for many is the treatment and status of the Xinjiang Uyghurs.
• Once the Games are over, we believe China will have three key priorities to tackle in 2022: shore up and engineer a soft landing in its troubled property sector; address slowing and anemic domestic consumption; and protect and bolster global supply chains which may come under renewed pressure from the US and its allies.

The Beijing Winter Olympics begin on February 4, bringing together 3,000 athletes from around 90 different countries at an estimated cost of US$3.9 billion. For China’s government, the Olympics transcend a mere sporting event; they represent a fabulous opportunity to showcase the country’s social, economic and technical achievements, as underpinned by what it perceives to be a superior system of political governance. As President Biden’s administration and US Congress have expanded competition with China into a new ideological dimension, as characterized by democratic values and human rights, the games have taken on a geopolitical intensity not seen since the days of Cold War rivalry between the US and the Soviet Union.

The Politics

The Olympics hold a special significance for China and for the city of Beijing. It was the Beijing Summer Olympics in 2008 that heralded China’s arrival as a great power on the international stage. The same year undoubtedly marked the start of the west’s relative decline as the global financial crisis rocked its economies and planted the seeds of slower growth, burgeoning debt, rising inequality and political fracturing.

Fourteen years on, the Winter Olympics is an opportunity for the Chinese Communist Party to showcase and promote its national successes of the last decade and a half, including ten years under the leadership of President Xi Jinping. Most prominent among these will be the country’s governance system of ‘socialism with Chinese characteristics’, which has enabled the country to claim to have eradicated poverty by the end of its 14^th Five-Year Plan, and to attain the status of ‘moderately prosperous society’ – a feat that would have been unthinkable 30 years ago and perhaps even as recently as 2008.

China’s leadership will also be eager to highlight its successes in dealing with the Covid pandemic and to contrast this with the West’s deficient pandemic management experience: as of late January 2022, China had officially recorded 4,600 Covid fatalities, placing it 119^th in the global league tables, compared with the US at the top of the table and sadly approaching 900,000 Covid deaths.¹

Nor has China’s Covid management experience deprived it of significant discernable economic performance; the economy continued to expand in both 2020 and 2021, while other large countries experienced mid-single-digit economic contraction in one of those years. China’s economy ended 2021 10.5% larger than at the end of 2019, the period immediately prior to Covid. By comparison, the US and eurozone economies were 2.0% larger and 1.4% smaller than in late 2019 respectively.² However, it will be the nation’s technological progress over the last 14 years that China’s leadership is most proud of, and what gives it confidence to stand tall among the community of leading nations.

Since 2008, China has modernized its military, built its own aircraft carriers, developed hypersonic-missile capability, become a leader in 5G technology and electric vehicles, built its own space station, and landed a probe on Mars. Even if the country is still to close the gap with the US on semiconductor performance, these achievements do not suggest China remains a second-rate technological nation, or that its strong trajectory in technology capability won’t continue along a similar path.

Geopolitics and Controversies

The Winter Olympics hold important geopolitical significance too. Ahead of the important 20^th National Congress of the Chinese Communist Party in November this year, the games will become a platform and propaganda tool for focusing nationalistic support, yet the event will also serve as a geopolitical reality check for leaders of democratic countries, both in the east and west. For many democratic world leaders, China’s rising international power and political ambitions over the last 14 years have seen the country evolve from being compliant with, to being an offender against, the rules-based order. This is the case in both the economic and geopolitical spheres.

Through currency manipulation, vast state subsidies, forced intellectual property transfer and theft, and other non-tariff barriers, Chinese companies have been seen to gain an unfair advantage at the expense of their international competitors. Internationally, observers have witnessed China violating the rule-of-law norms around maritime sovereignty in the South China Sea, frequent incursions into Taiwanese airspace and the premature termination of Hong Kong’s ‘one country two systems’ agreement, along with aggressive ‘Belt and Road’ debt diplomacy in many smaller countries.

Perhaps no international political theme will be as closely associated with the Beijing Winter Olympics, however, as that of human rights and the status of the Xinjiang Uyghurs in particular, against whom western leaders and media accuse China’s leadership of human-rights abuses. This has been met by strong denial from China, but the issue has already led to a diplomatic boycott of the Games by the US, Canada, UK, Australia and several smaller nations. Western companies doing business in China are increasingly caught in the crossfire between Beijing and Washington over the Xinjiang issue. The dozen international corporate sponsors of the Winter Olympics have reportedly invested a collective US$1 billion on securing the official rights to the Games, but outside China are maintaining a low profile of their association for fear of the negative publicity this could cause their brands.

Economic Implications

The Winter Games will offer a window for democracies to increase and coordinate their criticism of China’s human rights. The Biden administration has already made political values and ideology an inclusive part of the great competitive power dynamic with China, and the Olympics will serve as a symbol and channel of this new dynamic. Criticism from western democracies during the Games will rankle with China but will not cause Beijing’s policymakers to deviate from their long-term ambitions or strategic objectives. However, it is shorter-term conditions that are likely to be causing a greater sense of malaise for Beijing. While the Games afford China’s leaders a degree of self-congratulation over the nation’s longer-term development, there are three pressing issues that must be addressed once the fog of the Winter Olympics has receded:

• The Property Market: China’s economic growth decelerated markedly in the second half of 2021, against a backdrop of tightening credit, stricter regulatory enforcement and a slowdown in the housing market. The economy closed the year with a sub-par Q4 growth rate of 4%.³ The Communist Party’s Central Economic Work Conference last December identified the need to stabilize the economy, and China’s central bank – the People’s Bank of China – has started to loosen liquidity measures and reduce policy rates. Following recent debt defaults by specific property developers and tightening credit for the broader sector, the government must work hard to engineer a soft landing for the property sector and, given the sector’s size and importance, establish a GDP growth floor for 2022. While consensus forecasts are for a real GDP growth rate of 5.2% this year⁴, Beijing’s full attention post the Winter Olympics will need to shift to how to achieve this. The government’s official 2022 growth target will be announced at the National People’s Congress in March.

• Consumption: Addressing China’s anemic consumption will be an important component of putting overall growth back on a firm footing, given household consumption’s 40% contribution to the economy⁵. China’s December retail sales recorded a meagre 1.7% year-on-year growth⁶, the weakest level in 14 months. While real income growth for Chinese households has been muted in recent years, the more significant driver of consumer weakness has undoubtedly been tough Covid restrictions, as the government clings to its Covid-zero policy, in contrast with other countries, thus preventing the consumer from accessing a full range of services. While most experts believe that the Chinese government will keep restrictions in place until the country has developed its own mRNA vaccine or the Covid virus has mutated into a benign variant, it is possible that the government will choose to adopt a more liberal approach to consumer restrictions after the Beijing Winter Olympics, which might allow consumption to recover closer to more normal recent growth levels. In that sense, the Games themselves might represent ‘peak-Covid restrictions’ for the economy.

• Trade and Supply Chains: After the Winter Olympics, the government will need to turn its attention to trade and supply chains, both for imports and exports. China has enjoyed a remarkable boost to its exports over the last two years as its powerful manufacturing industry has filled the gap left by others during the pandemic, and western demand for Chinese-made goods has sky-rocketed. China’s exports grew by almost 30% in nominal terms in 2021⁷, which policymakers appreciate is clearly unsustainable. Furthermore, as supply chains begin to normalize and western countries have more sourcing options, Chinese export industries that have recently become politicized by US Congress, including those linked to Xinjiang, will face greater headwinds. It is unlikely that the human-rights pressure will abate after the Olympics or that the US will return to a more pragmatic trade policy. On the import side, China, like many parts of the world, faced widespread energy shortages in late Q3 and Q4 2021, and had to curtail certain activities. After the Olympics, and as China starts its lunar new year, policy attention will need to double down on supply-chain resilience and the ‘dual circulation’ self-reliance strategy contained within the current 14^th Five-Year Plan.

Conclusion

The Beijing Winter Olympics give China’s leadership the opportunity to reflect upon and celebrate considerable achievements in the areas of economic development, technological innovation and international leadership realised since the same city hosted the Summer Olympics in 2008. The event also represents a significant milestone in the final year of President’s Xi’s second term, before he embarks on an unprecedented third term in the post-Mao era. However, the pressures on the Chinese economy facing policymakers in 2022 mean that the Olympic euphoria will be short-lived.

For investors, who have experienced the regulatory headwinds unleashed by ‘common prosperity’ in 2021, heightened Covid restrictions and geopolitical tensions, all resulting in economic slowdown over the last several quarters, the hope will be that the Winter Olympics mark the peak in macro uncertainty and that policymakers can restore the economy to a more stable growth path for 2022.

¹ Source: www.worldometers.info/coronavirus/ January 27, 2021
² Source: Bloomberg, December 31, 2021.
³ Bloomberg, National Bureau of Statistics of China. January 16, 2022
⁴ Bloomberg Economic Forecasts. January 27, 2022
⁵ https://www.theglobaleconomy.com/china/household_consumption/ January 16, 2022
⁶ Bloomberg, National Bureau of Statistics of China. January 16, 2022
⁷ https://www.reuters.com/markets/currencies/chinas-exports-imports-grow-more-slowly-december-2022-01-14/ January 14, 2021

Authors

Richard Bullock

Portfolio manager, Fixed Income team