Based on Hideo Tamura’s essay in Seiron magazine, this article examines China’s economy and Xi Jinping’s expansionism after the coronavirus shock. It discusses China’s rapid rise after the Lehman shock, its penetration into Europe through the Belt and Road Initiative, Chinese capital and population flows into northern Italy, and the structural fragility of China’s economy, arguing for the need to thoroughly pursue an “own economy first” policy.

April 7, 2020
In March one year earlier, President Xi, while visiting Rome, met with Italian Prime Minister Conte and exchanged a memorandum of understanding on cooperation in the “Belt and Road,” incorporating a member of the Group of Seven major advanced countries, the G7, into the Belt and Road for the first time.
The following is from an essay by Hideo Tamura, published in this month’s issue of the monthly magazine Seiron under the title “Now Is the Time to Thoroughly Pursue ‘Own Economy First.’”
He is now one of Japan’s foremost economic commentators.
A malignant virus changes its form through trials and returns as an even greater threat.
What, then, of China’s totalitarian model, which powerfully controls people, information, and markets?
Will the novel coronavirus shock finish off the Chinese economy, which had been facing a financial crisis?
No, the opposite may happen.
If we recall that after the Lehman shock of September 2008, China recovered faster than any other country in the world and rapidly expanded economically, politically, and militarily, then it would not be strange if the novel coronavirus shock became an even greater opportunity than Lehman for the expansion of the influence of a Communist Party dictatorship.
In fact, the Xi Jinping administration is rushing, without regard to appearances, to declare the containment of the virus crisis.
That is because it calculates that, while the advanced countries face the collapse of financial markets and oil-producing countries face the plunge in oil prices, if it displays the path to a V-shaped recovery of its own economy, it can attract the world’s huge surplus money that has lost its destination, technology, and corporate executives and political leaders who have lost confidence.
Should one call it the strange world of Lewis Carroll’s Through the Looking-Glass, where everything appears upside down?
The source of the novel coronavirus shock becomes the savior.
On March 11, the World Health Organization, WHO, declared the novel coronavirus originating from Wuhan, Hubei Province, China, to be a pandemic, a worldwide epidemic.
But two days later, Director-General Tedros declared that “Europe has become the center of the pandemic.”
It was a statement typical of Tedros, an Ethiopian dependent on China money, who had defended the Xi Jinping administration’s measures since the outbreak of the novel coronavirus.
Yet, as the days passed, it began to look increasingly plausible.
On the 18th, German Chancellor Merkel spoke in a sorrowful voice about the novel coronavirus, calling it “a challenge since the Second World War.”
On the 19th, the number of deaths from the novel coronavirus in Italy finally surpassed that of China, the source of the outbreak.
On the same day, as if triumphantly, the Xi administration announced that the number of new infections in Hubei Province had become zero.
Before that, it had successively announced support for Europe and elsewhere.
It dispatched medical support teams to Italy and Iran, and promised support in the form of epidemic-prevention materials to France, Greece, Serbia, and other countries.
Xi held a telephone conversation with Spanish President Sánchez and expressed his intention to provide support “to the extent of China’s ability.”
Europe lies at the western end of the Xi administration’s expanding Chinese economic sphere concept, the “Belt and Road,” which covers the Eurasian continent and its surrounding areas.
In March one year earlier, President Xi, while visiting Rome, met with Italian Prime Minister Conte and exchanged a memorandum of understanding on cooperation in the “Belt and Road,” incorporating a member of the Group of Seven major advanced countries, the G7, into the Belt and Road for the first time.
In particular, northern Italy, the starting point of the Silk Road, is lined with China’s bases for its European strategy.
Chinese capital has undertaken the development of terminals and the surrounding railway network to strengthen the functions of the Port of Trieste, which faces the Adriatic Sea.
Near Genoa, construction has already begun on a terminal capable of receiving the world’s largest-class container ships.
In northern Italy, including Milan, hundreds of thousands of Chinese had already settled, anticipating contract manufacturing businesses for brand-name goods and the like.
The result is the spread of novel coronavirus infection.
Expansionism that was already near death
In reality, the Chinese expansionism of the Xi Jinping administration, represented by the Belt and Road, was in danger of failing even before the novel coronavirus shock.
This was because the slowdown in the domestic economy that began at the start of 2018 was intensified by the U.S.-China trade war.
It is often thought that the coronavirus from Wuhan will confirm the decline of China’s economic power and that the Xi administration will have even less room to promote the Belt and Road.
But it will not fall and simply stay down.
Rather, it aims to grow fat from the disaster, though I will discuss the details later.
First, let me explain the structural fragility of the Chinese economy.
Graph 1 shows the year-on-year changes in annual production volumes up to each month for automobiles and cement in China.
Automobiles are the key to China’s industrial sector, and cement production is the main material for fixed-asset investment, investment in structures excluding land costs, which accounts for around 50 percent of gross domestic product, GDP.
Both peaked out in March 2017.
Cement production fell into negative year-on-year territory at the beginning of 2018, and automobiles in the autumn of 2018.
Cement production turned positive in the second half of last year, but the annual growth rate was just under 6 percent, and the production scale did not reach the level of 2015.
Automobile production has truly fallen into the abyss, with the annual figure up to February this year down 28 percent from the previous year.
Given that automobile production and fixed-asset investment, which support GDP, are sluggish, the official announcement that China’s real economic growth rate is in the 6 percent range is probably a lie.
The Nihon Keizai Shimbun and others often report that the Xi administration has taken economic stimulus measures through monetary easing, but that is not accurate.
There have been interest-rate cuts, but they have been extremely small.
In terms of quantity, rather, it has been conducting monetary tightening.
One need only look at Graph 2.
The People’s Bank of China issues yuan funds indispensable for economic growth and injects them into financial institutions.
But since the beginning of 2018, it has restrained the growth, and last year the year-on-year figure remained negative throughout the year.
The cause of quantitative tightening is the decline in the People’s Bank’s foreign-currency assets.
The People’s Bank’s currency issuance is accompanied by the purchase of foreign currency flowing into China.
Unless the inflow of foreign currency increases, it cannot increase the amount of yuan issuance.
Looking at the ratio of foreign-currency assets to the outstanding balance of yuan issuance, the foreign-currency asset ratio has fallen below 100 percent, but the 70 percent line is being maintained as the minimum.
For monetary quantitative easing, in other words, for additional issuance of yuan funds, there is no choice but to lower the 70 percent ratio.
But that could affect confidence in the yuan.
China’s main source of foreign-currency inflow is its trade surplus with the United States.
The Trump administration has launched a trade war against China in order to reduce the U.S. trade deficit with China.
A large reduction in China’s surplus with the United States could greatly restrict China’s monetary policy.
Moreover, the Xi administration is troubled by capital flight.
Unless it increases foreign borrowing, it cannot secure foreign currency, and finance will no longer function.
This article continues.