Letter From Shanghai No 1032 - A Postcard from Hong Kong

So as the first step in my big new adventure, it’s hello from Hong Kong. It has taken a few days to settle in, so I thought I should open with a few observations. Firstly, Hong Kong is not as far on the back foot as I thought it would be. If Hong Kong can thread a “we are China, but different” scenario, then I can see that role providing a way forward within the Greater Bay Area group of cities. If HK is a low-tax, arguably entrepreneurial environment with company law based on British practice, then there is a commercial way forward. A recent HK SFC circular set out the regulation of the HK crypto industry, which is all the more interesting as trading crypto on the mainland is banned, highlighting to me at least that HK and the mainland are on separate commercial paths, which may yet yield dividends for HK in five to ten years’ time. However, in the short term, the usual issues remain: housing and office space are massively overpriced.

Secondly, much of the Western media has been discussing the Chinese Covid infection wave as families reunite during the Chinese New Year. Covid in China has not been waiting for a CNY party invitation and had already reached the most remote communities. Peak Covid in Shanghai was around Christmas Day and in Beijing a few days before that. As we exit January, it’s likely we will find China’s Covid experience is over, and the domestic economy will leap forward, unfettered, and the previous restrictions will fall away.

In the everything happens for a reason department, Liu He, who only a few years ago flew to Trumpian Washington to find no one wanted to meet him, recently spoke at Davos and had a closed-door meeting with US Treasury Secretary Janet Yellen, who may go to Beijing later this year. But why? Obviously, any dialogue is better than none, but China remains an easy target in Washington and there are no political advantages in creating a rapprochement. Of course, the dark conspiracist within me thinks the US doesn’t want China to continue to reduce its US treasury holdings; now at USD 870bn, it is at the lowest level in 13 years. However, bank analysts could tell me if the reduction of exports to the US has led to smaller USD inflows into China and that an unforeseen consequence of de-globalisation is a natural and terminal reduction of Chinese USD Treasury holdings, which, let’s face it, is a very unpleasant outlook for the US Treasury.?

Perhaps the current leadership will be judged in the cold gaze of history not by the growth of the economy but by the decline in the population. The NBS recently confirmed the population of China has fallen from 1.413bn in 2021 to 1.412bn in 2022. By extrapolation, the total fertility rate, the average number of children born to a woman over her lifetime, had fallen from an average of 1.66 between 1991 and 2017 to 1.28 in 2020 and now 1.15 in 2021 and could be as low as 1.08 in 2022. A rate of 2.1 is generally assumed to be necessary to maintain the population. Should China’s fertility rate remain at 1.1 in future, China’s population would be around 600m by 2100. Although some pundits are blue sky thinking that automation will increase or maintain China’s manufacturing productivity, imagine what you would do with all those empty residential buildings, all those empty homes? So, let us imagine this problem in terms of Covid. A cold and silent killer (old age) stalks the streets, which will kill 800m people in the next 80 years without any replacement. Considering the effort Beijing made to prevent Covid deaths, one might imagine a similar effort to prevent population decline by improving the birth rate. However, that is not just a subsidy to have children; it has got to be a holistic reform of the environment of child-rearing in China. The cost of Covid has yet to be paid, and the cost to get the birth rate up could be titanic, nothing less than a political rethink of what it is to live in China.

Speak soon.

Best regards,

John