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A Tale of Two Endings

Ichiro Suzuki Since the final weeks of 2022, the world has witnessed a flurry of reversal of policies that had been enforced on China and its people the last couple of years. Most notably, zero-COVID policy is dropped after people took to the streets of major cities in rare protests against the government. People explicitly showed their dissatisfaction of living under austere measures. As people got what they demanded, costs of China’s chaotic zero-COVID strategy suddenly have become visible. In spite of minimum official death tolls, a slew of obituaries for elderly public figures from academics to opera singers demonstrated the impact of the virus among the vulnerable population. Lifting of the zero-COVID policy has amplified usual doubts on credibility of announcements from Beijing, including economic statistics. Through zero-COVID’s advertised ‘success’, the Chinese Communist Party boasted superiority of China’s governance system over that of messy Western democracies that suffered huge death tolls. The propaganda stoked nationalism among frustrated citizens. Then, after Xi Jinping was elected for the unprecedented third term, the policy was reversed all of a sudden with little scientific grounds and explanations. Not surprisingly, infections have soared. In mid-January Beijing has abruptly announced that about 60,000 people died because of the pandemic since the zero-COVID policy was scrapped in the previous month, all the way up from 30. This represented the CCP’s attempt to close a huge gap between what they want to admit and what the rest of the world, including the WHO, thinks is the truth. No one knows if 60,000 is almost the truth or not. The world is bracing for Chinese tourists’ arrivals as Beijing has suddenly allowed people to travel both in and outside the country amid infections’ explosion due not only to relatively low rates of vaccination but also to lack of availability of mRNA vaccines. COVID-19 has proved that freedom of people can’t be suppressed indefinitely not even in China. Not even Xi Jinping’s strong hands proved to be ineffective in containing the coronavirus, of course. The virus has brought Xi’s competence, or lack of it, to light, and carefully crafted facade of the authoritarian ruler’s omnipotence is crumbling. Would people continue to worship, or pretend to worship, Xi after this very visible fumbling? To the rest of the world, potentially a weak Xi could pose a greater trouble than an omnipotent Xi. The world doesn’t know how to face the former. In the mean time, the Communist Party’s crackdown on the country’s tech sector appears to have run its course. Market participants are guessing that the CCP’s drive to lay the groundwork for ‘common prosperity’ has gone far enough. Xi Jinping must have felt that he has sufficiently scared the business community and entrepreneurs so that they behave in a right manner by the standards of the party. Then, it was announced that Jack Ma has ceded control of Ant Group, whose financial arm’s IPO cancellation in November 2020 has sparked draconian regulatory tightening all over the tech sector. It was also revealed that the state has taken a stake in ‘golden shares’ of Alibaba and Tencent so that the party’s voice is duly reflected in management of these tech giants. Beijing’s assault on the sector resulted in losses of well over a trillion dollars in shareholders’ value. Though some of the losses would have happened anyway in response to monetary tightening both in the U.S. and Europe, the way that much value was destroyed shocked the global investment community as much as China’s entrepreneurs. The way attacks on the tech sector has receded did nothing to reverse investors’ persistent concerns on the opacity of Beijing’s decision process. Everything is done at a whim of the supreme leader, who believes he is never wrong. No one is allowed to disagree with him, and he is surrounded with loyalists. This is not a recipe for great investor confidence. Regardless of how much the CCP’s decision making process has appalled investors, the market feels relieved for now. Having marked the bottom at the end of October, the Chinese market has staged a massive 50% rally by mid-January, from grossly oversold levels. Market participants are pleased with getting what they wanted: reopening of economic activity and seeming end of tech crackdown. Nonetheless, prices have been paid. Volatility events in the market over the last two years have abundantly made it clear that China runs a different kind of financial market from others on this earth, especially that of the United States where all the information is ruthlessly thrown into the markets and then is digested aggressively and efficiently. Such efficient function of the market is broken in China by the heavy hands of the Communist Party that places itself above the invisible hand. Mechanism of price formation is much distorted. The market, therefore, is going to treat China as such, and valuation given to the Chinese market would never be the same again, due to the CCP’s penchant for bending the market to its convenience. There is a reasonable chance that China after this relief rally would no longer inspire investors in a way it once did. About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.

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