This is an audio transcript of the Behind the Money podcast episode: ‘China’s reset’

Michela Tindera
Hey, everyone. Before we start today’s episode, we at the FT want to hear from you, and we want to know what you’d like to hear more of. So to help us understand that, we’re running a survey that you can find online at FT.com/btmsurvey. That’s FT.com/btmsurvey. There’s also a link in our show notes. The survey takes around 10 minutes to complete, and if you fill it out, you’ll have the chance to win a pair of Bose QuietComfort earbuds. What better way to listen to Behind the Money? Thanks, everybody. Now let’s get on with the show.

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When FT reporter Tom Hale prepared to move to Shanghai last year, he knew China’s zero-Covid rules would be no picnic.

Thomas Hale
You were needing to take a PCR test nearly every day. Every major city had set up booths on every street corner. This little blue kind of almost like food stalls. And you’d have to go to one of them, take a test, scan your phone. A code on your phone would turn green if the test was negative. And you needed this green code to get in to any building. So if you were positive, you couldn’t go anywhere. And moreover, the system would know that you’d gone positive because they have your details on the phone, and they’d come and take you away to a quarantine facility.

Michela Tindera
And when Tom arrived last September, he was thrown in at the deep end of China’s strict Covid rules.

Thomas Hale
When I got in, I quarantine in a hotel, as everyone has to do. I got out of the hotel, and then I went to a bar, one bar. Someone in there had Covid.

Michela Tindera
That meant Tom was considered a Covid close contact. He was promptly transported to a quarantine facility about an hour outside of Shanghai and had to spend 10 days there.

Thomas Hale
So I basically lived in a kind of, I wouldn’t even say refurbished, but a slightly remodelled shipping container where there was no hot water, no shower. You know, there were kind of dozens of these containers lined up in this facility. And nobody there had Covid. They’d all been somewhere where someone had had Covid.

Michela Tindera
After that time in quarantine, Tom was released and able to finally start his life and job in Shanghai, of course, continuing to follow zero-Covid rules. Within a few months, the pressures of the system boiled over.

News clip 1
Dozens of protests erupted on university campuses and in cities across China on Saturday.

News clip 2
Protesting against Covid restrictions, this is after a fire in a block of flats killed 10 people.

Thomas Hale
This fire was a kind of lightning node for all those frustrations. And so thousands across China certainly took to the streets and openly criticised the central government, which very, very rarely happens.

Michela Tindera
(Protesters shouting) Tom covered the protests for the FT. Here’s a sound from a video he recorded in Shanghai showing police officers restraining someone. The crowds shouting “fang ren”, which means “release them”. (Protesters shouting)

Thomas Hale
It’s impossible to know exactly why the government made the decision that they made. There were, of course, very many factors involved, but the protests do seem to have had a very deep effect. And, you know, it was only a few days after they ended that the policy started to be properly unravelled.

Michela Tindera
After three years, the zero-Covid policies, the quarantine facilities, travel restrictions, PCR testing, they all ended.

Thomas Hale
It’s just part of a very strange period where you’ve gone from the world’s strictest Covid rules to the most kind of libertarian, let-it-rip policy imaginable, really.

Michela Tindera
Official numbers on illnesses and death are something of a black box in China. But reports came out that in just the first 20 days of December, roughly 250mn people had gotten Covid.

Thomas Hale
I would say from about early to mid-December onwards, Covid had completely swept Shanghai, and so the streets were pretty much deserted. It was, it was almost like a lockdown. And at least in Shanghai, a lot of businesses were closed because the staff had Covid. The hospitals in many cases, I think, were quite quickly swamped with patients and struggling to deal with that.

Michela Tindera
And even now, the virus is still spreading. Hundreds of millions of people travelled home from cities to rural towns for the Lunar New Year this past weekend.

Thomas Hale
The Covid outbreaks have been concentrated in the biggest cities of China so far. So this mass migration of people that happens every year in Chinese new year is likely to be the kind of mother of all super spreader events.

Michela Tindera
Sounds like chaos, right? But even as Covid’s tearing through the country, China’s president Xi Jinping and the Communist party are focused on something completely different. They want to reset the Chinese economy.

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I’m Michela Tindera from the Financial Times. China’s economy has undergone multiple seismic shifts in the last few years, from the crisis in its property sector to zero-Covid lockdowns. As it heads into the rest of 2023, it appears to be on the precipice of another major change. On Behind the Money today, we’re going to talk about what life after zero-Covid will look like for China’s economy and for the rest of the world.

To get a better picture of what’s happening here, I spoke with James Kynge. He’s the FT’s global China editor. James, welcome to the show.

James Kynge
Thank you very much.

Michela Tindera
So since the end of last year, we’ve seen this rapid about face in policy from Xi Jinping and the Communist party with their decision to end China’s zero-Covid restrictions. It’s all seem to happen so fast. Why is that?

James Kynge
I think there were a clutch of reasons why China had to shift so rapidly to exit its zero-Covid policy. One of them was definitely the reaction of normal citizens. There were protests in probably 22 cities across China against zero-Covid. But maybe more important than that was the pressure building up within China’s bureaucracy itself. And I think that pressure derives mainly from the fact that the economy was really flat on its back. Chinese growth has been anaemic. By Chinese standards, all of 2022, some of the GDP growth numbers China saw over the last couple of years has been the worst in many years.

Michela Tindera
So you have written recently about these main goals that Xi Jinping and the Communist party are trying to achieve with an economic reset that’s coming at the same time as lifting these zero-Covid policies. Could you outline what are these main goals?

James Kynge
We’re only just beginning to see the contours of what China’s main goals are in regard to an economic reset. We’ve had the 20th Party Congress in October. That’s the Congress of the Communist party. It’s a once in every five-year event, and it tends to set the tone, not only for near-term policy, but for the next five years. So it really is a very key moment to be reading the signs that are coming out of the Communist party hierarchy with regard to economic policy. But the way this happens in China is that until there’s another big meeting in March, that’s the National People’s Congress, we don’t get fully formulated policies emerging. And so what we’re doing at the moment is reading the runes in a way, looking at the statements of leading Communist party officials and trying to work out the general direction that things are going.

Michela Tindera
Mm-hmm. So what are the runes telling you?

James Kynge
One of the most important statements that came out recently was from Han Wenxiu. He’s a leading official in the influential Central Financial and Economic Affairs Commission. Now, that’s a commission which is headed by Xi Jinping himself. And what he has said is that maybe the first quarter of this year will be a problem because, as we all know, China emerging from the Covid pandemic is causing all kinds of economic issues. But he said that in the second quarter, we should be able to see economic growth at “an accelerated pace”. And Han singled out real estate and consumer spending as two particular areas for attention. Real estate is absolutely vital to the future of the Chinese economy. It accounts for around 28 per cent of GDP, and this sector has been flat on its back over the last couple of years. In fact, in November, real estate sales declined nearly 30 per cent year on year. That’s an absolute rout. And so it seems to me that Beijing is intent on reversing that and on bringing real estate sales back up to about zero year on year.

Michela Tindera
Right. And how does that translate to something like GDP growth?

James Kynge
I think a lot of it will be repairing some of the problems that China, you know, is experiencing now. I mentioned the slump in the property market, and I mentioned consumer spending. I think that Beijing is definitely looking forward to getting some kind of a boost in consumer spending. But there is also simultaneously a desire on the behalf of Beijing authorities to switch the nature and the main drivers of Chinese growth. And one of the areas in which China wants to switch away from is an overreliance on property. So most of the analysts that we talk to say the aim of the Chinese government now is not to spark a property boom but just to heal some of the pain.

Michela Tindera
Mm-hmm. Now, we’ve been talking a lot about the party’s plans to help China’s economy domestically, but how do you see this shaking out internationally?

James Kynge|
Basically, Beijing has decided that it wants a reset. It wants a reset not only of its economic fortunes, but also of its diplomatic fortunes because during the Covid period there was some really disastrous hits to China’s reputation in the world. First of all, China was blamed for as being the originator of Covid. Secondly, there was obviously a trade war and a tech war with the United States. And then thirdly, last year there was the Russian invasion of Ukraine. And everybody knows that Russia is a partner country to China. So China’s international reputation has taken huge hits over the last few years. And China really wants now to try to rehabilitate that. Boosting its economy is definitely part of the plan because Chinese officials know only too well that one of its main attractions to the world’s biggest companies, the west’s biggest companies, is the profits that those companies can make in the Chinese economy. And it also knows that those companies have considerable lobbying power in both Europe and America and in other countries around the world. So it’s no coincidence that China wants a reset to its economy and to its diplomatic relations concurrently. These two things are going hand in hand.

Michela Tindera
Yeah. And who is China focusing on most as far as working to repair some of these diplomatic relationships?

James Kynge
So far, it looks as if China is focusing mostly on Europe. The reason for that is that Chinese relations with the United States have been in such a poor state in the last few years that I think the policymakers in Beijing see little chance for a fundamental reset with the US. So it’s going to its next most important partner, and that is Europe. China is Europe’s biggest trade partner. Many of Europe’s biggest companies make handsome profits in the China market.

Michela Tindera
So how does that relationship work between China and potential European partners?

James Kynge
China is a very particular market for western multinationals to work in. This is because it is not primarily a free market. The level of bureaucratic control over the economy is really strong and, in many cases, is very detailed. For instance, let’s say a European company wants to get approval to set up a joint venture or to move into a different market segment, that type of action will almost always require, if not official approval by a regulatory ministry, at least tacit unofficial approval. And a lot of things happen in China according to tacit unofficial approvals that the rest of the world never hears about. The result of this is that it gives the Chinese government huge influence over the Fortune 500 companies from the west that are operating in that country. And then the Chinese government use that leverage in its political relationship with those countries.

Michela Tindera
And what about China’s relationship with the US? I mean, you said it’s in a pretty poor state right now. Where do you see that going?

James Kynge
The big crunch point comes over the issue of decoupling. So this is economic decoupling.

Michela Tindera
And what is that, decoupling?

James Kynge
What decoupling really means to the US is an attempt to strip out sensitive Chinese components of crucial technologies and also preventing Chinese companies from getting hold of sensitive US technologies. The aim of that is to effectively shore up the US supply chain to make it less dependent on China, and also to restrict the development of certain Chinese companies that are in the high-tech sphere.

Michela Tindera
And so that’s different than what Europe’s stance is?

James Kynge
I think the real crunch point in terms of differences of approach between European powers towards China and the US towards China comes on the issue of decoupling. The US says it wants to decouple its supply chain from China. Effectively, what it’s talking about there is in areas of particular sensitive technologies. But as we’ve seen in the trips by the German chancellor Olaf Scholz and what we expect to see when Emmanuel Macron, the French president, goes to China soon is statements that affirm those European countries’ policies against decoupling. So when Scholz went to China, in fact just before he went, he said that there would be no decoupling between Germany and China. This is at a time when the US is, is well known to be pursuing decoupling as one of its main policies towards China. So effectively what’s happening is that a significant difference is growing between the US and some of its crucial European allies on a very key aspect of how to maintain this relationship with China.

Michela Tindera
So how likely is it that Xi Jinping will actually achieve these goals that you’ve explained here?

James Kynge
Personally, I think that China has a fairly high chance of being able to return its economy to a decent growth footing. You know, we’ve seen this in other countries around the world once the Covid exit wave is passed, we have seen a return to economic growth.

Michela Tindera
Right. And what would that really look like for China if it does work out?

James Kynge
I do think that if China manages to pull this off, in other words if Chinese GDP in 2023 rises well above 5 per cent, which is what many Chinese economists have been telling us, then I think you’re going to see a big divergence between China’s performance and that of the rest of the world, which is still, for various different reasons, in the grip of either a recession or rather low growth. I don’t know that that will be negative per se. But it will probably focus global attention on the fact that China is or is returning to its previous position as one of the world’s crucial growth dynamos. And that could have big implications for financial markets, I would say.

Michela Tindera
Thanks, James, so much for being on the show.

James Kynge
That’s a great pleasure.

Michela Tindera
As China prepares for this reset, Tom Hale, who we heard from at the beginning of the show, says that life has gone back to something a bit more normal in Shanghai.

Thomas Hale
Most people that I know and meet seem to have already had the virus, but the lack of transparent data from the government means that no one, I think no one really knows exactly what stage we’re at in terms of progression of this virus. So I think the mood is not exactly exultant yet. I think people expected it to be full of grand reopening. It’s been very much, you know, compromised by the fact that the virus has been ripping through the country.

Michela Tindera
Tom says there was a lot of hardship under the zero-Covid policies of the last few years and under this recent Covid wave.

Thomas Hale
But the difference now, I think, is that people do have a sense that there’ll be light at the end of the tunnel and a feeling that whether it’s months or whether it’s years, there will be a point in the future where the virus is not the dominant story in China anymore.

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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Special thanks to Manuela Saragosa. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.

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