China Forecast - Partly Cloudy


Jason Wang
Partner
Vermilion Partners

China has “reopened” ... The removal of almost all zero-Covid protocols and cross-border travel restrictions has led to an undeniable (and unsurprising) improvement in sentiment on the ground in China. Zoom calls prefaced with ten minutes of Covid war stories are gradually giving way to in-the-flesh meetings and talk of upcoming holiday plans! Expected visits to China by the likes of Tim Cook and Emmanuel Macron in the coming weeks will further underline this return to ‘normality’.

 

Yet, it is hard to ignore certain clouds rolling in to this clear blue sky, which, in the best-case scenario, cast something of a shadow over this nascent optimism, but in the worst case could be shielding a pair of F22 Raptors ready to blow this balloon of positivity right out of the air. 

 

The clouds of which this tortured analogy speaks are of course those of economic fragility (let’s say a regular cumulus, or perhaps a nimbostratus) and geopolitical uncertainty (a big dark ol’ cumulonimbus).

 

While 2022 was a challenging year for the Chinese government, policy-wise only one thing really mattered – the response to Covid. In many ways 2023 will be a much more difficult year as China must return confidence to a Covid-battered economy, whilst navigating perhaps the most difficult and perilous geopolitical situation it has faced for over 30 years.

"On the economic front, there has been some clear rhetorical signaling that Beijing is seeking to adopt a more pro-market stance, including encouraging both inbound and outbound investment ."

On the economic front, there has been some clear rhetorical signaling that Beijing is seeking to adopt a more pro-market stance, including encouraging both inbound and outbound investment (see any analysis of the Dec 6th ’22 Central Economic Work Conference for more detail). More in the way of hard policy is likely to be forthcoming in the coming weeks, following the Lianghui *.

 

From a foreign relations perspective, despite the setback of ‘balloon-gate’, the Chinese government is also trying to signal a change in approach. One example from early this year was the transfer of “wolf warrior” diplomat Zhao Lijian, from his position as combative spokesman for the Foreign Ministry to a position with the Department of Boundary and Ocean Affairs.

 

Another signal is the appointment of more sophisticated and resourceful officials to key, sensitive roles. For instance, Wang Huning, the éminence grise of the CCP who has been a trusted adviser to each of the last three leaders – Jiang, Hu and now Xi – is set to become chairman of the CPPCC and as such a critical figure in the formulation of Taiwan policy. Already in February we have seen efforts to adjust approach through forging closer ties with Taiwan’s main opposition party, the Kuomintang, and the first visit by mainland officials to Taiwan in three years.

 

A similar theme can be observed with the appointment of Fu Cong as the new head of the Chinese mission to the EU. Perhaps most crucially of all, China has waded into the Russia-Ukraine conflict with the release of its “Twelve Point Peace Plan”. Although reception to the plan has been muted, it is again consistent with other efforts to adjust course in the hope of releasing some of the geopolitical and economic pressure currently faced by the government.

"Although reception to China's 12 Point Peace Plan has been muted, it is again consistent with other efforts to adjust course in the hope of releasing some of the geopolitical and economic pressure currently faced by the government."

We remain optimistic, but will be keeping an eye to the sky to see what happens to those clouds...

 

A number of important events in the coming weeks or months are worth watching out for:

  • The Lianghui, which concluded on March 13, will give more insight on the direction/trend of China’s most recent political and economic policies. 
  • President Xi Jinping’s potential visit to Russia
  • Tsai Ing-wen’s visit to the US
  • A potential visit by US House speaker, Kevin McCarthy, to Taiwan

 

What does this all mean for cross-border M&A?  It is noted that there is a gathering of pace in inbound deals – investing in China for China, as well as tilting existing activities towards the domestic market.  At the same time, outbound in sectors such as clean energy, natural resources and infrastructure will remain active. Geographically, not much action with US, but better picture in Europe, Australia, and Southeast Asian countries.

*The annual meetings of China’s top political advisory body (aka CPPCC, the Chinese People’s Political Consultative Conference) and legislature (aka NPC, the National People’s Congress) are collectively known as the "Two Sessions" or "Lianghui". The meetings this year took place from March 4-13.

 

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