China is back, baby

China has been hurt by Covid. The response of the national government has been a catastrophe, and the capabilities of the healthcare sector in China have been shown to be extremely feeble, both the capability of developing vaccines, and the ability of the country to deliver healthcare to its citizens. Dictators are usually much more concerned about spending money to maximize the tax rake than on making life longer or more tolerant for its citizens.

However, the fact that Xi Jinping and his fellow kleptocrats are much less good at providing public services than they’d like to pretend does not mean that China cannot return to its prior dominant role in some roles in the global economy. Countries will want to reshore some manufacturing, but two decades of determined offshoring will not be reversed in a week. For the next decade, iPhones will be largely manufactured in China. There is no economic way for the production process to be untangled quicker.

On the longer term, China will decline. The artificial boost from joining the WTO with ‘most favoured nation’ status has lead to an astonishing transformation of the country. The idea that a deeper integration of China’s economy with the rest of the world would result in improved human rights has been proved to be entirely without foundation. For sure, it was an expensive way to find out, but we can’t unlearn that lesson, however much politicians pretend that it was nothing to do with them (I’m looking at you, Bill Clinton). Over time, capital will leak out of the country. The elites will find ways of smuggling it out. Their kids all attend US Ivy League colleges already. It won’t take them long to work something out. As Xi gets old and frail, his lieutenants will get bolder and grab more of the pie for themselves and their children, and their mistresses children. More saving will leak out of productive investment and into Swiss bank accounts. We’ve seen this story goes so many times before.

The question is, what has all this got to do with the price of fish? Or securities? Things that China consumes will get more expensive. This includes commodities, especially energy, but also minerals like copper and lithium, cobalt and nickel, rare earths and uranium. Even food commodities will see demand rising, as the Chinese start to eat more and better. Brazil and Chile and Australia will surely benefit, maybe Canada and Mexico too. Makers of machine tools will benefit, as well as sellers of expensive cars. A double win for Germany.

Maybe a restarting China will be good for inflation. Plastic toys will get cheaper, surely, even if oil gets pricier. Interest rates, real ones, will surely fall. Probably the RMB (CNH) currency will strengthen: that’s hard to trade, but a proxy might be the AUD. China’s money and FX markets are heavily rigged, so this is a very tentative prediction. China needs its currency to be cheap, to keep its factories humming.

I feel very sorry about China, and about the millions of hard-working, honest Chinese who feel they have no alternative to emigrate and make another life elsewhere. They are a pragmatic lot. Even if I were a lot longer, I’d look to my own good and that of my families over trying to foment revolution, no matter how much more utility might be created by the attempt.