Despot Times, Despot Measures

The balance of news flow out of China was anything but encouraging Monday, but don’t worry: It’s not incumbent upon markets to behave congruent with the news, nor are journalists and television anchors required to exercise their critical thinking skills while editorializing around current events.

“Traders” (air quotes, air quotes, air quotes) pushed up Chinese equities despite the National Health Commission’s forceful reiteration of an “unswerving” commitment to Xi Jinping’s no tolerance approach to COVID. Last week, Hong Kong shares surged the most in over a decade amid rampant speculation that the Party will abandon its commitment to rolling lockdowns and strict curbs relatively soon.

“Our prevention and control plans are completely correct,” Hu Xiang, a health official, insisted over the weekend. “The policies are also the most economical and effective.”

They’re effective, that’s for sure. Or maybe not. Because China is consistently recording the most new cases in months, including 3,659 on Friday, 4,420 on Saturday and more than 5,000 on Sunday. I’m no quant, but those numbers don’t look like zero to me. And those are the official numbers, mind you. Who knows what the actual numbers are in a country with 1.4 billion people. Not those numbers, I can assure you of that.

Whatever the case, it’s possible China will be forced out of “COVID zero” by COVID much like the RBA was forced out of yield-curve control by yields. But unlike RBA chief Philip Lowe, Xi isn’t a man inclined to folding. Getting a concession, let alone a surrender, out of a despot who staked his credibility in part on the virus curbs, isn’t going to be easy.

That said, I’ve described China’s approach to the rumor mill as “coy.” They’re countenancing the reopening narrative at least a little bit. The Party has also criticized cities for being too draconian in their virus enforcement, which must be especially frustrating for local officials (what, exactly, does “unswerving” mean?).

Relatedly, Apple had to cut its outlook for high-end iPhones due to virus protocol in Zhengzhou. Here’s the short statement, for anyone who missed it:

COVID-19 restrictions have temporarily impacted the primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou, China. The facility is currently operating at significantly reduced capacity. As we have done throughout the COVID-19 pandemic, we are prioritizing the health and safety of the workers in our supply chain. We continue to see strong demand for iPhone 14 Pro and iPhone 14 Pro Max models. However, we now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated and customers will experience longer wait times to receive their new products. We are working closely with our supplier to return to normal production levels while ensuring the health and safety of every worker.

That’s even tougher for me to swallow than it is for all the Apple fanatics who will apparently have to wait a little longer for the latest and greatest version of the “revolutionary and magical product” Steve Jobs unveiled 15 years ago. It’s China who’s “prioritizing the health and safety” of workers in Apple’s supply chain, only not really because, as The New York Times recounted last week, “lockdown measures have generated a wave of fear and unrest inside the world’s largest iPhone manufacturing complex, with stories of food shortages among quarantined employees filling social media, and large numbers of workers fleeing the facility.”

As the linked article (and if you don’t get the Times, you can read some version of the same story anywhere) went on to detail, workers were “at the mercy of Foxconn to feed themselves,” an intolerable state of affairs that apparently resulted in some workers getting no food “at all.”

Hon Hai pandered to Xi. “Foxconn is now working with the government in concerted effort to stamp out the pandemic and resume production to its full capacity as quickly as possible,” the company said, in a monthly revenue report released Monday. How about, instead, “Foxconn thinks this approach is counterproductive, particularly if the risks to workers’ psychological and physical well-being from the lockdowns outweigh the risks of contracting the virus, and we wish the government would reconsider its outdated approach to pandemic control”?

If you’re curious as to how onerous (and untenable) this situation really is, look no further than a Bloomberg piece published late last month called “iPhone Factory Worker Walked 25 Miles to Escape COVID Lockdown in China.” I’d quote from the article, but what’d be the point? The title tells you everything you need to know. As a separate article published on November 2 noted, Xi’s Zhengzhou lockdown “served up a stark reminder of the dangers for Apple of relying on a vast production machine centered on China in a time of unpredictable lockdowns and uncertain trade relations.”

Needless to say, this is bad news for Tim Cook ahead of the holiday season. Demand for consumer electronics is already imperiled by slower growth, looming recessions across developed markets and bloated consumer “inventories” accumulated during the pandemic, when “some” households spent their “stimmy” on TVs and gadgets instead of necessities. Although Apple says demand is strong, Bloomberg, citing “people familiar with the plans,” said Monday that the company now expects to produce “at least” three million fewer iPhone 14s than expected this year “due to softer demand.”

Note that Apple has moved some production to India in an effort to diversify its supply chain. Investors and corporations scarcely needed additional evidence to support the contention that China is most assuredly not “the alternative” (as one local television anchor suggested last week, in an ill-conceived foray into blogging), but they continue to get it anyway. Cheap labor doesn’t matter if you can’t get your products out of the country or even get the workers the parts they need to produce the products in the first place (“The local government has ordered people and vehicles off the streets except for medical or other essential reasons, a prohibition that threatens to cut off the flow of additional workers and components needed to rev up production ahead of the holiday-season crush,” Bloomberg’s account of Apple’s supply warning read.)

Meanwhile, China’s exports “unexpectedly” contracted in October for the first time in two years. In dollar terms, exports fell 0.3% (figure below). Economists saw a 4.5% gain.

Imports likewise contracted, falling 0.7%.

Exports, you’re reminded, were the lone pillar of support for the Chinese economy. That pillar began to crack months ago amid receding global demand for cheap goods. Now it’s crumbling.

I have a modest suggestion: If you want to bolster shipments abroad at a time when demand from trading partners is likely to slow further, a good place to start would be lifting restrictions that are preventing the world’s most popular consumer products from making it out of the country.

The good news is that the slowdown is pushing shipping costs lower. The bad news is that costs are declining for the wrong reasons.

The decline in imports can likewise be traced (in part anyway) to the COVID lockdowns — the virus curbs are curtailing domestic demand and prompting consumers to save rather than spend for fear of the unknown.

Maybe the PBoC can help. Only not Fan Yifei, one of six deputy governors. He’s busy being investigated by Xi for “suspected severe violations of discipline and laws,” according to the Central Commission for Discipline Inspection, a body you don’t want to run afoul of in China.

You’re reminded that PBoC chief Yi Gang was dropped from the Central Committee at last month’s party congress. As for Fan, it wasn’t immediately clear what he did wrong. Possibly not even to him.