Letter From Shanghai No 1024 - The Unspoken Driver of Policy

The last letter before Christmas but maybe not the last letter this year. As you know, Christmas is not celebrated in China, both Monday and Tuesday will be normal working days. The opening of the DCE soy complex to international investors on the 26th December will likely pass with modest foreign engagement until the New Year.

Reading social media, it would seem everyone has covid symptoms except my wife and I. Most if not all, the smaller sidewalk shops have closed, either unable to staff or simply not having enough custom to remain open. The ferry that normally scuttles forward and back across the river below my window is lethargic at best, with few if any occupants. The nearby streets are empty, and everyone has remained at home.

China's struggle with the onset of covid is well-publicised. The transmissibility has surprised everyone, but its impact on the majority seemsless than feared, most seem able to emerge from its worst effects after two or three days. Those currently sheltering are no doubt planning their trip home for the Chinese New Year starting on the 20th January and many may already be buying the required CNY family presents online.

The international financial headlines driven by US inflation are of course transfixed with the if, when, and how deep debate on the impending US recession, and assume what happens in the US is a prescription for the rest of the world. However, the world is not as it was, globalisation had the effect of orchestrating economies to work together, but we have moved on. The somewhat grumpy neighbours China and Japan, the world's number two and three economies, have no inflation issues to speak of. The end of globalisation may be underpinning the robust US employment market as manufacturing and services are re-on-shored back to the US. But it also means the trajectory of its former trading partners are unshackled from the trajectory of the US itself.

Prior to zero covid, the Chinese economy was not heading into recession and with the removal of zero-covid there is no reason to think it will do now. History will probably judge the three years of zero covid as merely an intermission in the progress of the country. But history will be less forgiving as to the decline of the birth rate and the complications that it delivers in the years ahead. The birth rate which was already falling has slumped during covid and poses huge questions. Construction has been perhaps 40% of the Chinese economy and has been the go-to policy in times of economic stress, but now, construction, who is it for? If you think the total population of China may fall 30% in the next 60 years, (420m) why build more houses? Certainly, replace the old with the new, but additional stock, new towns etc. what for? Land sales which have underpinned city and regional finances for the last 40 years, may have to endure some dark days.

Let us assume repairing the birth rate will become the unspoken driver of policy changes for the next 10 years. China will become more equitable, a more pleasant place to live, and an easier and more enjoyable place to raise a family.

Actually, that is, the Chinese dream.

All the seasons' greetings

John