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Xi Jinping’s plan to reset China’s economy and win back friends

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The costs of China’s chaotic exit from its zero-Covid strategy are surging. In spite of a virtually static official death toll, a slew of obituaries for elderly public figures from academics to opera singers demonstrate the impact of the virus among its vulnerable population.

Hospitals in several parts of the country are overwhelmed, and a scramble for antiviral drugs and painkillers is creating shortages across Asia. Unofficial projections are putting the number of people that could die in China’s exit wave at about 1mn.

Such prospects not only damage the image of Xi Jinping, China’s most powerful leader since Mao Zedong. They also leave Beijing’s propaganda organs struggling to defend policies after two years spent playing up hefty death tolls in the west as evidence of China’s superior governance.

But behind the havoc, a fundamental reset is taking place in Xi’s foreign and economic policies. According to Chinese officials and government advisers, Beijing is putting together policies aimed at improving diplomatic ties that have soured badly and boosting a deeply strained economy.

The motivation behind the intended resets — the success of which remains uncertain — derives from a confluence of different economic, social and foreign policy stresses that have reached critical levels, the officials and advisers add.

Vladimir Putin and Xi Jinping speak via video link in December. Several Chinese officials have in private striven to distance Beijing from  Moscow on the issue of Ukraine
Vladimir Putin and Xi Jinping speak via video link in December. Several Chinese officials have in private striven to distance Beijing from Moscow on the issue of Ukraine © Mikhail Klimentyev/Sputnik/Kremlin Pool/AP

Several of the new policies and plans represent a fleshing out of the “spirit” of the 20th congress of the Chinese Communist party in October, the most important set-piece event in the Chinese political calendar for five years that established the tone for a series of long-range objectives.

After months of fierce internal politics, Xi secured an unprecedented third term as leader of the CCP and was able to pick a ruling politburo composed exclusively of loyalists. With the congress behind him, Xi is now attempting a course-correction.

From an economic perspective, the main goals are to restore robust growth to China’s slowing economy, improve the lot of hundreds of millions of Chinese rural workers, stabilise the ailing property market and shore up a crisis afflicting the finances of scores of local governments, the officials and government advisers say.

Chen Zhiwu, one of several leading economists who expect Beijing to push through a series of pro-growth policies, said he expects 2023’s target will be “6 per cent or higher” — much higher than the IMF’s projection of 4.4 per cent.

“Given that they may aim for an average growth rate of 5 per cent and 2022 is likely to deliver about 3 per cent, they need to have something like 7 per cent for 2023,” says Chen, a professor of finance at Hong Kong University. Several other economists have predicted 2023 GDP growth at above 5 per cent.

From a diplomatic perspective, China’s main aim is to improve relations with some countries in the west, after a period which has at times left Beijing feeling uncomfortably isolated. The focus is on ties with Europe, which have been badly damaged by China’s support for its partner Russia throughout Moscow’s war against Ukraine.

Line chart of Average annual GDP change over previous five years (%) showing Chinese economic growth has been on a declining trend for over a decade

“Diplomatically, Beijing hopes it will not become a rival to every country in the west and nor does it wish to look isolated at multilateral fora,” says Yu Jie, a China expert at UK think-tank Chatham House. “Russia’s faltering military adventure in Ukraine has significantly reduced Beijing’s return on investment in its bilateral ties with Moscow.”

While Xi and Vladimir Putin, Russia’s president, pledged last month to deepen bilateral ties, several Chinese officials in private conversations with the Financial Times strove to put clear daylight between Beijing and Moscow on the issue of Ukraine — a message that has been repeated to some European diplomats.

Some are scathing. “Putin is crazy,” says one Chinese official, who declined to be identified. “The invasion decision was made by a very small group of people. China shouldn’t simply follow Russia.”

Mistrust with Moscow

The starting point for Xi’s diplomatic reset is a re-evaluation in Beijing about the benefits of its close relationship with Moscow.

China now perceives a likelihood that Russia will fail to prevail against Ukraine and emerge from the conflict a “minor power”, much diminished economically and diplomatically on the world stage, according to Chinese officials.

In addition, for all the public professions of bilateral amity, in private some Chinese officials express at least a measure of mistrust towards Putin himself.

Five senior Chinese officials with knowledge of the issue have told the FT at different times over the past nine months that Moscow did not inform Beijing of its intention to launch a full invasion of Ukraine before Putin ordered the attack.

Such views are at odds with the impression given by a joint statement issued by China and Russia on February 4 following a meeting between Xi and Putin in Beijing — just 20 days before Russia attacked Ukraine. It proclaimed that there were “no limits to Sino-Russian co-operation . . . no forbidden zones”.

Shoppers return to a mall in Beijing this month after Covid restrictions were lifted. Boosting consumer spending is thought to be a priority for President Xi
Shoppers return to a mall in Beijing this month after Covid restrictions were lifted. Boosting consumer spending is thought to be a priority for President Xi © Ng Han Guan/AP

No transcript of their conversation has been made public, so exactly what passed between Xi and Putin is unclear. However, one official told the FT that the closest that Putin got to informing Xi was to say that Russia “would not rule out taking whatever measures possible if eastern Ukrainian separatists attack Russian territory and cause humanitarian disasters”.

This line was taken by the Chinese side as signalling the potential for some limited military engagement, not the wholesale invasion that Putin launched, the official said.

Evidence to support failures of Chinese understanding, according to Chinese officials, has been the demotion in June of Le Yucheng, who at the time of the invasion was a vice-minister of foreign affairs and the ministry’s top Russia expert. Le had been widely spoken of in Chinese official circles as the likely next foreign minister. He now occupies a post as deputy head of the National Radio and Television Administration.

“Le was demoted by two levels of seniority,” said one person familiar with the issue. “He was held responsible for the intelligence failure on Russia’s invasion.”

Whatever the exact nature of what Putin told Xi, Chinese diplomats seeking to rehabilitate China’s standing in Europe have in private conversations maintained that Beijing was unaware of Moscow’s intention to launch a full invasion, Chinese officials and European diplomats said.

This line is just one strand in a broader strategy aimed at lessening China’s sense of isolation and preventing Europe from becoming even closer to the US.

Beijing’s main ploy is to attempt to reassure European counterparts that it is willing to use the closeness of its relationship with Moscow to restrain Putin from resorting to the use of nuclear weapons, Chinese and European officials say.

People look at a model of a residential complex in Qingzhou, Shandong province. China’s housing market in November suffered a sales decline of 28.4% year on year
People look at a model of a residential complex in Qingzhou, Shandong province. China’s housing market in November suffered a sales decline of 28.4% © CFOTO/Future Publishing via Getty Images

Another aspect of Beijing’s strategy is to position itself not only as a potential peacemaker but also as a willing party in any postwar efforts to help rebuild Ukraine, Chinese officials say.

Xi himself sought to portray himself as on the side of peace in remarks he made to Putin late last month.

“The road to peace talks will not be smooth, but as long as the efforts are not given up, the prospect of peace will always exist,” Xi said. “China will continue to uphold an objective and fair stance, work to bring together the international community, and play a constructive role in peacefully resolving the Ukrainian crisis.”

In another sign that China is seeking to dial back its antagonism towards the west, it has sidelined Zhao Lijian, one of its most prominent “wolf warrior” diplomats. A former official spokesperson for the foreign ministry, Zhao is now listed as one of three deputy directors for boundary and ocean affairs, a relatively obscure department.

Zhao, who has 1.9m followers on Twitter, frequently used his account to lash out at the west. In 2019, Susan Rice, who served as Barack Obama’s national security adviser, labelled Zhao a “racist disgrace” after he sent a provocative tweet about race relations in Washington DC.

As it seeks to repair ties with European powers, Beijing is insisting that its European counterparts agree to repeat a “no decoupling” mantra — marking a clear difference with Washington, which is seeking to limit US commercial ties with China in certain areas, particularly with regard to sensitive technologies.

“China has realised that it has antagonised too many countries at the same time, particularly among developed countries which still today are its main trade and economic partners,” says Jean-Pierre Cabestan, a China expert at Hong Kong Baptist University.

Olaf Scholz meets Xi in Beijing. The German chancellor made clear during this visit that Berlin sees China as an ‘important economic and commercial partner’
Olaf Scholz meets Xi in Beijing. The German chancellor made clear during this visit that Berlin sees China as an ‘important economic and commercial partner’ © Yao Dawei/Xinhua via AP

“So it is trying very hard to reach out to the EU and key European nations — Germany, France, Italy and Spain — as well as America’s Asian allies, such as Japan and South Korea and US partners such as Vietnam.”

The EU is China’s biggest trade partner and Beijing runs a huge trade surplus with the bloc. Similarly, several of Europe’s leading companies rank among China’s biggest foreign investors.

China’s desire for a diplomatic reset with Europe appears to be yielding significant results. Visits to Beijing in November by Olaf Scholz, the German chancellor, and Charles Michel, president of the European Council, are set to be followed early this year by French president Emmanuel Macron and Italian prime minister Giorgia Meloni.

Macron is expected to follow Scholz in voicing opposition to “decoupling” from China, thereby ceding to Beijing some ground in its long-running strategy to sow division between European powers and the US.

Although he has also talked about reducing dependency on China, Scholz made clear during this visit that Berlin not only rejects “decoupling” but also sees China as an “important economic and commercial partner”.

“Macron, like Scholz, is opposed to decoupling. He is still promoting engagement,” says Cabestan. “China will try to utilise Macron’s strategic autonomy ambitions to drive a wedge between Europe and America.”

The hope that China can help restrain Moscow from using nuclear weapons is a potent motivator in European capitals, European officials and analysts say.

“China would always have opposed the use of nuclear weapons,” says Susan Shirk, chair of the 21st Century China Center at the University of California in San Diego. “But when Xi Jinping says these kinds of things to European leaders, he wants to emphasise a certain distance from Russia.”

There are indications that the approach is working in Beijing’s favour. “China-Europe relations have picked up significantly because Europe is not advocating decoupling from China and demanding strategic independence,” says Ding Chun, a director at the Centre for European Studies at Fudan University in Shanghai.

“Europe also faces a series of problems such as the energy crisis and the pressure on economic recovery,” Ding adds. “Relations are surely recovering but how far they can go, we should not have overly high expectations.”

Chinese citizens gather at a train station in Lviv, Ukraine, after Russia’s invasion. Five senior Chinese officials have said that Moscow did not inform Beijing of its intention to launch a full invasion of Ukraine
Chinese citizens gather at a train station in Lviv, Ukraine, after Russia’s invasion. Five senior Chinese officials have said that Moscow did not inform Beijing of its intention to launch a full invasion of Ukraine © Adri Salido/Anadolu Agency via Getty Images

Regardless of Beijing’s protestations that it had no forewarning from Moscow, there is still considerable scepticism about China’s efforts to mend ties with Europe.

EU officials and member state governments have consistently griped at China’s support for Putin’s war and Xi’s failure to pressure him to end it. In addition, the war’s stark exposure of the EU’s reliance on Russia for energy has accelerated a push to reduce a similar reliance on China for certain critical raw minerals and technological goods.

The EU’s foreign service in October used a private paper to urge EU capitals to toughen their attitude towards China, in what one senior Brussels official told the FT amounted to “moving to a logic of all-out competition [with Beijing], economically but also politically”.

A spending spree?

While China’s intended diplomatic reset is starting to make waves around the world, its strategy to shore up economic growth at home is regarded as of greater importance in Beijing. The untested assumption behind the pro-growth strategy taking shape is that China will emerge from its Covid-induced economic malaise over the next few months.

Han Wenxiu, a leading official in the influential Central Financial and Economic Affairs Commission, said in December that the first quarter of next year was likely to suffer from significant disruptions but the second quarter was expected to see an economic improvement at an “accelerated pace”.

“We have the confidence, conditions and capacity to turn China’s economy for the better as a whole,” Han said.

His words are thought to carry extra weight because the commission in which he works is chaired by Xi.

Han singled out real estate and consumer spending as two areas for attention. In the case of the property market — which has been a prime driver of GDP growth over the past two decades — Han announced that “preventing and resolving the risks . . . are a top priority”.

Analysts interpret his words as meaning that Beijing plans to stabilise the market — which in November suffered a sales decline of 28.4 per cent year on year — sometime next year. In addition to Han’s verbal support, China has unveiled 16 support measures for the property market, while state-run banks have pledged an estimated $256bn in potential credit to specific developers.

Boosting consumer spending was also a focus that featured at the Central Economic Work Conference, which took place in mid-December. This annual conference is seen as particularly significant because it came on the heels of the 20th party congress and can therefore be seen as a statement of intent for Xi’s new administration.

In the longer term, Beijing intends to realise its goal of “common prosperity” by substantially increasing the number of people in a “middle income” cohort, government advisers say. But in the short term, several analysts are expecting a “relief wave” of spending after Covid disruptions are over.

Andy Rothman, an investment strategist at the Matthews Asia fund, says that a huge pool of household savings could fuel a spree of spending once the exit from Covid lockdowns is achieved. He notes that family bank balances are up 42 per cent, or $4.8tn, since the start of 2020 — an amount that is larger than the UK’s GDP.

Rothman sees a return to “pragmatism” in Beijing’s economic policymaking after a statist lurch in recent years, citing Xi’s pledges at the party congress to “bring per capita income to new heights” and “provide an enabling environment for private enterprise”.

Portfolio investors appear ready to embrace the idea that China’s economy is on the verge of a return to health. Hong Kong’s Hang Seng index, a gauge of sentiment towards China’s fortunes, has bounced back strongly from a recent nadir hit in October last year.

But some analysts remain more hesitant, pointing to China’s chaotic emergence from its lockdowns.

“With Covid-zero now in the rear-view mirror, markets expect a gangbuster 2023 recovery. That will be right, eventually,” says Derek Scissors, chief economist at Beige Book, a research company. “However, with the ongoing Covid tidal wave, investment sliding to a 10-quarter low, and new orders continuing to get battered, a meaningful Q1 recovery is increasingly unrealistic.”

Additional reporting by Ryan McMorrow in Beijing and Henry Foy in Brussels

More deep dives into Xi’s China

China’s property crash

A two-part series looks at how the slump in house prices is causing a sharp slowdown in China’s economy. Can consumer spending become the backbone of a new growth model?

All the emperor’s men

China’s president has stacked key positions with loyalists and sidelined his challengers. Check out an examination of the machinations and how Xi plans to expand his power base


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Economic

We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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