Germany – having bet the farm on globalisation, with its energy outsourced to Russia, defence to America and economic growth to China – found its collision with reality especially harsh.
Nothing embodies the revenge of reality over magical thinking better than Germany’s energy policy: to compensate for lost Russian gas and the self-inflicted shutdown of its zero-emission nuclear power industry, Berlin had to reactivate coal-fired power stations.
As realism belatedly creeps into the Net Zero conversation, other governments – including Japan, America, Sweden and France – are looking afresh at nuclear power. An atomic renaissance is coming.
XI’S THE ONE
In China, Xi Jinping secured his third term as paramount leader. A near clean sweep of allies at 2022’s quinquennial Chinese Communist Party (CCP) Congress seemingly confirmed the reassertion of the party state in all areas of China’s economy.
But covid didn’t get the memo, and Xi was forced into a humbling U-turn over his flagship suppression policy. Zero covid was an extreme case of trying, and failing, to defy reality – you can’t hold off a highly contagious virus forever. The bills became unbearable: 20% youth unemployment;7 crumbling economic growth and local government finances; the most widespread protests since 1989. For China’s economy, zero covid was a near-death experience.
A re-opening boom now beckons. How this impacts global inflation and central bank policies is one of the great questions for the year ahead, as is who profits from it.
But Beijing’s policy pivot goes far beyond covid – a reminder that, when it comes to China, it pays to expect the unexpected. Xi’s G20 appearance in Bali and New Year address, a partial deal over US-listed Chinese stock audits, greater support for the private sector – including regulatory relief for tech platforms – and a diplomatic reset with Australia all suggest a concerted attempt to buy breathing space: to address internal crises; lure back foreign capital; and torpedo American attempts at containment.
It’s working – for now. Fresh from the humiliation of Germany’s failed Ostpolitik, Chancellor Scholz rushed to Beijing to double down on China, whose markets are far more important to Europe than to America. Other European leaders are likely to follow suit. This is risky. Many firms found their Russian assets written down to zero overnight after the invasion. How can boards be confident they won’t face similar risk in China?
The mood music is sweeter for now, but a re-opening sugar rush won’t resolve the Middle Kingdom’s cluster-crises, from debt, housing and demography to water scarcity and the new Cold War. Nor will it change the reality that all returns in China are ultimately in the gift of the CCP.
Given China’s reliance on imported fuel, food and tech, sanctions on Russia are fresh encouragement for Beijing to create a fortress economy and a sphere of influence.
“Many firms found their Russian assets written down to zero overnight after the invasion. How can boards be confident they won’t face similar risk in China?”
So investors face a dilemma. Policy pivots signal an encouraging setback for magical thinking in Beijing and the potential for a significant rally in China-related assets. But the long-term geopolitical bear market remains. New US restrictions on investment into, and from, China are coming. And, with China and India once again sparring in the Himalayas whilst US and Chinese aircraft play chicken over the South China Sea, a major crisis for markets is feet away.
That matters for business. Apple, a globalisation posterchild (‘designed by Apple in California, assembled in China’), has announced plans to move some China-based production to India and Vietnam. More unstable world order and more politicised policymaking in China are turning the theory of supply chain diversification into fact. Good for resilience. Bad for margins, efficiency and valuations.
7 National Bureau of Statistics of China