China's President Xi Jinping: Pivots, Broken Trust and Wolf Warriors

This Week's Key Developments in China Markets Include Beijing's Accelerating Pivot Away From Covid Zero and the Deep Distrust of President Xi Jinping Among American Investors.

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To many observers, Chinese assets have become the world’s “easiest” macro trade ... at least in the short term. There’s a new cadre of Xi loyalists reopening borders, wrapping up the rectification of the country’s tech giants and easing the deleveraging drive that’s strained the property industry. And geopolitical tensions are cooling as the regime’s wolf warrior diplomats try to project a friendlier image to the world.

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However, not everyone was quick to embrace China's economic policies. US-based asset owners and allocators remain distrustful of Xi and his hot-and-cold relationship with markets. The coming weeks and months will be a test of whether China's frayed ties with global capital can be fully repaired.
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Analysts are recommending that investors buy Chinese tech shares, despite the regulatory uncertainties facing the sector. Guo Shuqing, an influential voice at China’s central bank, has said that the regulatory squeeze on internet firms is basically complete. However, it is unclear what the future may hold for the sector.
Government entities are taking "golden shares" in local units of Chinese tech giants like Alibaba and Tencent. Such ownership structures in theory provide Beijing with special voting rights. However, this move may delay the IPO of Ant, which is controlled by Jack Ma.

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China has transferred Zhao Lijian, a senior diplomat closely associated with Beijing's more confrontational tone during the pandemic, to a markedly less prominent role. Zhao is now a deputy director at the Department of Boundary and Ocean Affairs. BYD, a Chinese carmaker, is aiming to capture 40% of India's electric car market by 2030. This comes as relations between China and India become increasingly strained, with India now scrutinizing business ties with its neighbor.

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It appears that US manufacturers of Covid-19 drugs are refusing to negotiate significant price reductions with China. According to local media reports, Merck's pricing for molnupiravir is not as low as China has requested. There also appears to be a stalemate over Pfizer's Paxlovid.

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China's consumer prices rose by 1.8% in December, while factory prices remained in deflationary territory. This data confirms that the spread of Covid-19 damaged industrial demand that month. Exports from China fell by almost 10% in December, although this was better than feared. This shows that global demand for Chinese goods is slowing down.

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China is targeting a budget deficit of around 3% of GDP for 2023, which is wider than the deficit of last year. Some analysts are expecting more stimulus measures from the government. In a meeting with the market regulator, Premier Li Keqiang said that officials must stabilize growth, employment and consumer prices.