China risks, ‘Black Swans’ and those Xi rumors

Global Inc needs to prepare for the economic threats that are hiding just beyond the horizon

Global Inc risks burying its head in the sand as Chinese “Black Swans” gather just beyond the horizon.

As relations between the United States, the European Union and its Asian allies with China “deteriorate,” major corporations across the planet are still not prepared for the next big “crisis” in the world’s second-largest economy.

“It is no exaggeration to conclude that US-China ties have deteriorated to depths not seen since the late 1960s when the two had no diplomatic ties and were actually shooting at each other in Vietnam,” Scott Kennedy and Michael Green, of the Center for Strategic and International Studies, warned last week.

“This transition has occurred so fast that global companies that have thrived on doing business with China are not well prepared to adapt to this new normal or to try and stem the tide,” they wrote in a commentary on the Washington-based think tank’s website.

Tensions were already strained between Washington and Beijing before President Xi Jinping’s tacit backing in February of Russia’s illegal invasion of Ukraine, orchestrated by his “best friend” Vladimir Putin.

But now they are stretched to breaking point.

“China-US relations took an abrupt downward turn during the [Donald] Trump presidency [and] many placed their hopes on [Joe] Biden,” Jia Qingguo, of the Institute for Global Cooperation and Understanding at Peking University, said earlier this month.

“Yet, disappointingly, instead of stabilizing relations, [they] have continued worsening after he assumed office,” he wrote in an analysis entitled, Endless Darkness or Predawn?, which appeared on the academic website, China-US Focus.

Trouble in Party land:

  • Since the start of the year, the ruling Communist Party of China has been hit by a triple whammy.
  • President Xi’s diplomatic blunder in siding with Russia has further isolated the country.
  • His “zero-Covid” policy has also backfired domestically with spontaneous protests erupting after the draconian lockdowns in major cities such as Shanghai.
  • Even Beijing’s censors have failed to cope with the online backlash.
  • Another victim of Xi’s policy has been the tanking economy.
  • In turn, this has fueled rumors that he could be forced to resign by factions of the CCP.

The bad news is that few corporations engaged in China have contingency plans or long-term strategies.

Scott Kennedy and Michael Green, of the Center for Strategic and International Studies

Hang on a minute: Yes, that is right. There have been reports that Party Emperor Xi has “split” the CCP. Even influential Sinocism writer Bill Bishop has speculated on the speculation.

So, what did he say? “There are increasing numbers of rumors and overseas stories about pushback against Xi … but are the people talking to foreign media reflecting a real split that has political potential or are they just grumbling? I remain very skeptical, but this claim and various spinoffs of it have legs.”

Delve deeper: China’s state-backed nationalistic rhetoric and “Wolf Warrior” foreign policy have created few friends and alienated economic partners. In the past year, there has been a systemic shift on the “downside risks of growing geopolitical competition.”

A world apart: “Global businesses are for the most part keeping their heads down, hoping their China opportunities do not dry up [as they aim] for greater home government support to relocate some of their supply chains,” Kennedy and Green, of the Center for Strategic and International Studies, said.

Black Swans: “The good news is that almost all business leaders [we] have engaged on these scenarios were already used to thinking about Black Swans,” Kennedy and Green continued, referring to unpredictable events with severe consequences.

What Plan B? “The bad news is that few corporations engaged in China have contingency plans or long-term strategies to hedge against the downside risks of growing geopolitical competition,” Kennedy and Green added.

China Factor comment: For Beijing, these are turbulent times as Washington cements its alliances in the Indo-Pacific, backed by President Biden’s “new Economic Framework,” and closer ties in Europe. The pressure is now mounting on Xi and big business for gambling on his vision of China.