Weekly Blogs

Because it’s cool to make predictions at the begging of the year, here at MLI we propose to look back at what has happened in the past year and make suppositions on what will be the main drivers of 2023 in a series of four episodes called “The year ahead 2023”. We will look at business, politics and international relations of the main markets: China, United States of America and Europe. The last of the four episodes will concern our beloved country of Malta.

China is the largest economy in Asia and the second largest in the world. China had a rather complicated year, it had to relax Covid restrictions and it faces slower economic growth and rising geopolitical tensions with US. As president Xi Jinping starts his third 5-year term the year 2023 looks uncertain for China. Will its healthcare system cope with a massive wave of Covid cases as a result of relaxing restrictions? Are China rapid days of economic catch-up over? How might the war in Ukraine change the way China thinks of Taiwan, the democratic island China declares it’s historically its own?

The Covid pandemic started in China in early 2020. For two years the government has enforced the Zero Covid policy which allowed China to have one of the smallest death rates among very populous countries as well as steady economic growth. They achieved this through intensive testing, travel restrictions and hard lockdowns when needed. The Zero Covid policy worked fine until Omicron variant came along. This very transmissible variant forced more and more individuals to be locked up into isolation centres or in their homes. Starting November, the frustrations towards Zero Covid turned into protests and then full-blown riots in some major cities. So, the government stepped down and relaxed the restrictions gradually although from a propaganda point of view this is a major drawback as the president himself stood behind the Zero Covid policy.

But experience from other countries that have exit from Zero Covid policies shows that a country needs months up to a year to prepare for such a shift in policy. China has rushed preparations into a matter of weeks. Second, China is not using mRNA (messenger RNA) vaccines as the countries in the West use. Although its vaccines do prevent hard cases and death, they are still not as efficient as mRNA vaccines.

The fact that China is stepping down from the Zero Covid policy will have the following implications for the region in 2023:

1.       Chinese tourists are very important for Thailand, Cambodia, Vietnam, and even more exclusive and expensive destinations like Japan and Australia

2.       Although there is optimism that relaxing restrictions will create more consumption and will stabilize the overstretched supply chains, a quick spread of Covid will cripple the Chinese economy and break down supply chains in manufacturing as we have seen in the beginning of 2020

3.       From a geopolitical point of view, there’s a weakening of Xi Jinping’s position right at the beginning of his third term, as he had to abandon Zero Covid. Usually when there is trouble at home, leaders seek to distract attention with ideas abroad and that may worry the countries in the region.

Zero Covid policy was not the only economic headache of the Chinese government. China faced other economic challenges; it’s dealing with a crisis in the property sector which accounts for a huge part of the economy around 20% of GDP that was precipitated by a crackdown on the excesses of the property industry and some of it was well-intentioned. It was an attempt to ensure that developers had healthier balance sheets, but it also forced a lot of them to stop borrowing and sell down assets and limited their ability to continue building. The slowing down of the real estate industry is also having an important toll on local budgets of municipalities. The number of land deals made between municipalities and real estate developers decreased by 25% in 2022.

Also, the government over the past couple of years has cracked down on the tech sector giants and it’s really gone after big names like Tencent which is a big gaming and social media company and Alibaba which is the largest ecommerce company. These companies were gold mines for investors for years and then suddenly the government was laying down these new blueprints to reshape their industries and that’s worrying external investors. The government is rewriting the rules for how the economy works and it has sketched out this vision for a more socialist state-controlled economy. The Communist Party will have more of a say in how businesses are run and this will continue to really dent the dynamism of the private sector.

Another important fact is the demographic challenge that China faces in 2023. India will probably overtake it as the most populous country in the world the more important point is that for years China’s workforce has been shrinking which is not great for economic growth and it puts a huge burden on young people. If one looks at the birth rate it’s well below what is needed to keep the population stable, and what is needed to have it growing again. India will probably become the most populated country in the world in April 2023 when each will have 1.4 billion inhabitants (2.8 billion out of 8 billion worldwide, that’s 35% of the whole population is just two countries!).

All of these factors that are slowing down Chinese growth have economists think that China’s economy may now never overtake America’s in size something that was once seen as inevitable. It is very unlikely that China would continue to grow at anywhere between five and ten percent per year while the population was declining. China also has a debt problem to contend with and that’s going to make things even more dicey, but even with growth of two to three percent a year China could still become the world’s largest economy, but this will happen much further into the future. Even if China does overtake America’s economy in this sense America would still be much more prosperous and productive on a per person basis. The openness of the American economy, the dominance of the dollar would likely mean that America will maintain more influence than China.

 It doesn’t even matter if or when China’s economy overtakes America’s in size, the problem with China’s rise and the reason why it causes so much alarm in the region and in the world is about how China wields its power. For twenty of so years China was growing at a remarkable pace and that was very good for the global economy. But now a days, the Chinese state has moved away from its past stance of fighting time and hiding their strength and they have come out to really use economic coercion to use this so called “wolf warrior diplomacy”, where they say “if you want do something that challenges what we consider our core interests, we’re going to use our economic strength to punish you for that”.

 When it comes to foreign policy one of the big questions is how Russia’s invasion of Ukraine might change China’s calculus on Taiwan. As China grows stronger, as it modernizes its military the risk increases but yet the war in Ukraine is obviously going to affect its calculus. The hope in America and Taiwan is that China will see how Ukraine has become this sort of unexpected surprise for Russia. Probably officials in Beijing will draw comparisons and think that taking Taiwan is a much riskier bet than they have thought. China’s generals already think it would be a pretty risky bet maintaining a maritime invasion across 160 kilometers of water (the Taiwan strait) isn’t an easy thing especially not if America gets involved. Joe Biden has promised that it would get involved and the generals in Washington really hope that the war in Ukraine sends the message to Taiwan to show a greater willingness to defend itself, to increase its military budget and adopt better strategies.

Taiwan is adopting a “porcupine” strategy that would make it hard for China to digest and that would involve it using more mobile and concealable defensive weapons especially missiles that could be used against ships and planes. But to this point Taiwanese generals seemed to prefer fancy jets, ships and submarines that would probably get blown up in the early stages of a war with China.

Politically speaking, China has changed over the past decade; it’s become a lot more nationalistic than it was ten years ago. The president craves unification and he has placed a great deal of emphasis on it as he sees Taiwan drifting away from the mainland Taiwan is a vibrant democracy led by a president from a party that favors independence. Taiwan is much more prosperous than the mainland on a per person basis and its people enjoy many more freedoms.

When the war in Ukraine started, there were questions about whether Taiwan would be the next Ukraine. If one looks at the public opinion polling there is very strong Taiwanese identity and only a tiny minority of people who are still pro unification, especially after seeing what happened to Hong Kong in 2019 and after seeing how the Communist Party has governed, one may believe public opinion in Taiwan is more resistant to Communist Party rule than ever.

In Taiwan there’s this sentiment that the chip industry is the silicon shield that protects the island. It makes Taiwan matter on the global stage and if people won’t fight for Taiwan’s democracy they will care about their iPhones. 90% of the most advanced chips in the world are being made in Taiwan. But, TSMC (Taiwan Semiconductor Manufacturing Company, the most valuable semiconductor company) is building factories in Arizona and is moving workers to America. A growing number of other Taiwanese companies are also moving to America to revitalize manufacturing after the Inflation Reduction Act, a piece of legislation that we will discuss next week when we talk about North America.

Taiwan is not the only international relations headache of China. It also shares a border with North Korea, the most isolated country on Earth, who’s leader has nuclear weapons ambitions.  If Kim Jong Un, the dictator of North Korea will test another nuclear weapon, the first since 2017 the question is what China would do about it. The odds are that it won’t do much and this will test relations between the US and China further more. In the East China Sea, China claims the Senkaku islands which are controlled by Japan and it also wants to dominate the South China Sea where it clashes with other island nations like the Philippines.  

Another leftover from history which actually goes back to the start of the 20th century is a disputed 3500-kilometer-long border between China and India and it’s certainly the case that neither side wants to see conflict there. President Xi Jinping has enough on his plate not to add another challenge or problem to his already significant pile meanwhile Prime Minister Narendra Modi of India knows that India would be outgunned up in the Himalayas. Nevertheless, incidents have a tendency to keep happening: in 2020 there was a deadly high-altitude brawl in which two dozen soldiers Chinese and Indians were killed above a river gorge not using guns but bats and rocks. The border is so sensitive that day-to-day soldiers are not armed. In early December 2022, there was a similar but less bloody incident.

Thank you for the patience to read this long analysis. We would like to hear your thoughts in the comments below and I hope to see you around and read the next episode on United States of America.

 Dr. Ovidiu Tieran – Lecturer MLI