In unpacking the suite of policy changes in China over recent weeks, we have considered the restructuring of the education system and the wresting of control of big data away from commercial operators. Both of these policy actions are related to the idea of common prosperity and the idea of sovereignty. These policy changes all relate to the access to capital for economic growth.
We pick up from where we left off last week.
For many Western countries, Covid revealed the vulnerability of supply chains. It came as a shock and it led to an almost instant cry for diversification to reduce reliance on a single supply chain. It should come as no surprise that China reached the same conclusions. This was driven by Covid, but also by the increasing range of trade sanctions applied under the mafia capitalism model deployed by President Donald Trump. Rather than outcompete, Trump favoured putting people out of business. It had much in common with a mafia protection racket.
There was a hope that the new Biden administration would step back from this policy approach. That hope has not materialised, although the methods deployed by President Joe Biden are not as blunt as those used by Trump.
Sanctions on chip supplies and Covid impact heightened China’s focus on sovereignty. This should not be confused with nationalism, although the two are often confused in this way in Western media reporting, particularly in Australia. For China, sovereignty means the ability to survive independently of the world on its own terms. It means developing alternative supply chains and access. It means preserving existing supply chains. Sovereignty is the ability to sustain a country without foreign interference.
Domestic economic activities
One iteration of this concern is the formalised policy around the dual circulation economy. It is not a new idea, but nor is it just a fancy slogan. Its importance is that it seeks to reduce China’s dependency on the export economy. This has been steadily reducing for years, but this slew of policies is designed to develop two equally strong components: “internal circulation”, which refers to domestic economic activities; and “external circulation”, which relates to China’s economic links with the outside world. It signals that China wants to reduce the role of international trade in its economy, and strengthen its domestic economy.
Surveys show that now 66% of consumers prefer domestic brands, compared with just 8% in 2015. This is an indication of the growing strength of the internal circulation economy.
Some Western commentators like to suggest that the Belt and Road Initiative is dead, but Covid and sanctions have given it new impetus. New supply chains include opening up rail routes like those from Wuhan to Milan.
South China Sea concerns
Supply chain vulnerability issues also underpin China’s concerns with South China Sea.
South China Sea is the world’s most important trade route, or so the US and Australia would have us believe. So what is it that China threatens in this trade route? Imports going to China from Australia and the US? Exports from China to Australia and the US? Just exactly what is it that is so important in South China Sea that is not directly or indirectly related to trade with China?
Apply some clear thinking to the discussion, and it rapidly becomes apparent that it is not in China’s interest to have these trade routes blocked in any way. Why would China block the import of goods from the US or Australia which it needs to sustain growth? Why would China block these trade routes to prevent the export of goods from China upon which its prosperity rests?
China’s prosperity depends on open trade routes so the threat of blocking or closing these trade routes does not come from China, but from the actions of the US and a resurging coalition of past imperial European powers.
Supply chain vulnerability is overcome by increasing the strength of the domestic economy and this requires policy and regulatory changes. Among these is the access to and operation of the capital markets. The final piece to unpack in this suite of recent policy announcements is the changes in the capital markets which have three aspects. We will examine these next week.
There is no Shanghai index update this week as I am inspecting mining sites in remote parts of Australia where no Internet access is available.
Daryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a national board member of the Australia China Business Council. The writer owns China stock and index ETFs.
Photo: Bloomberg
