Arvind's Newsletter

One of the biggest stories of 2023 , like the war in Ukraine in 2022, will be the re-opening of China. The article by the Economist in this issue, follows up on an earlier article by an boutique investment adviser a few days earlier, on how this will disrupt China and the world.

1. India took a big stride towards allowing foreign universities to operate in the country, with the University Grants Commission (UGC) on Thursday releasing draft regulations that will let them set up campuses in the country. The entry of the universities, which will also have autonomy in terms of admission processes and fee structure, is expected to provide more opportunities to Indian students and increase the depth of the higher-education sector in India. In turn, the universities will be able to tap into a huge and expanding market in one of the fastest growing major economies of the world. The key will be on how the new regulations will be implemented on the ground if this is to be truly game-changing.

2. Barnes & Noble(B&N), the U.S. bookseller owned by the private equity giant Elliott Management, plans to open 30 new physical stores this year. The plans, reported by Axios, challenge two apparently unquestionable truths: That commerce is increasingly moving online, and that private equity firms do little more than slash costs. Barnes & Noble’s strategy of empowering bookstore managers to court local customers and become part of the community works elsewhere, too. “I love that … our bookshop might have a claim, just like the best boozers, to be ‘a local’,” Tom Rowley, a former journalist at The Economist who quit to found his own bookstore in south London, wrote in his newsletter recently. After a long decline, the B&N is profitable and growing again—and in some instances, they are taking over locations where Amazon tried (and failed) to operate bookstores. At least for now, the stories of its (B&N's) death were greatly exaggerated.

3. After months and months of SARS-CoV-2 sub-variant soup, one ingredient has emerged in the United States with a flavour pungent enough to overwhelm the rest: XBB.1.5, an Omicron offshoot that now accounts for an estimated 75 percent of cases in the Northeast USA. XBB.1.5 is now officially the country’s fastest-spreading coronavirus sub-variant. But there’s no evidence to suggest it’s more severe than its predecessors

4. We have been following the story on OpenAI's ChatGPT and other related products for several weeks now. Now Wall Street Journal has reported that OpenAI, the research lab behind the viral ChatGPT chatbot, is in talks to sell existing shares in a tender offer that would value the company at around $29 billion, according to people familiar with the matter, making it one of the most valuable U.S. startups on paper despite generating little revenue. Venture-capital firms Thrive Capital and Founders Fund are in talks to buy shares, the people said. The new deal would roughly double OpenAI’s valuation from a prior tender offer completed in 2021, when OpenAI was valued at about $14 billion.

OpenAI, led by technology investor Sam Altman, was founded as a nonprofit in 2015 with the goal of pursuing artificial-intelligence research for the benefit of humanity. Its initial backers included Tesla Inc. Chief Executive Elon Musk, LinkedIn co-founder Reid Hoffman and Mr. Altman. In 2019, Microsoft invested $1 billion in OpenAI and became its preferred partner for commercialising new technologies for services like search engine Bing and design app Microsoft Design.

5 How China's reopening will disrupt the world economy- a tale of death, growth and inflation. Long but must read from the the Economist's lead story of the latest edition of the magazine.

"For the better part of three years—1,016 days to be exact—China will have been closed to the world. Most foreign students left the country at the start of the pandemic. Tourists have stopped visiting. Chinese scientists have stopped attending foreign conferences. Expat executives were barred from returning to their businesses in China. So when the country opens its borders on January 8th, abandoning the last remnants of its “zero-covid” policy, the renewal of commercial, intellectual and cultural contact will have huge consequences, mostly benign.

First, however, there will be horror. Inside China, the virus is raging. Tens of millions of people are catching it every day . Hospitals are overwhelmed. Although the zero-covid policy saved many lives when it was introduced (at great cost to individual liberties), the government failed to prepare properly for its relaxation by stockpiling drugs, vaccinating more of the elderly and adopting robust protocols to decide which patients to treat where. Our modelling suggests that, if the virus spreads unchecked, some 1.5m Chinese will die in the coming months.

There is not much outsiders can do to help. For fear of looking weak, the Chinese government spurns even offers of free, effective vaccines from Europe. But the rest of the world can prepare for the economic effects of the Communist Party’s great u-turn. These will not be smooth. China’s economy could contract in the first quarter, especially if local officials reverse course and seal off towns to keep cases down. But eventually economic activity will rebound sharply, along with Chinese demand for goods, services and commodities. The impact will be felt on the beaches of Thailand, across firms such as Apple and Tesla, and at the world’s central banks. China’s reopening will be the biggest economic event of 2023.

As the year progresses and the worst of the covid wave passes, many of the sick will return to work. Shoppers and travellers will spend more freely. Some economists reckon that gdp in the first three months of 2024 could be a tenth higher than in the troubled first quarter of 2023. Such a sharp rebound in such a huge economy means that China alone could power much of global growth over the period.

The party is banking on it. It hopes to be judged not on the tragedy its incompetence is compounding, but on the economic recovery to follow. In Xi Jinping’s year-end address, the party chief thanked pandemic workers for bravely sticking to their posts and, while nodding to “tough challenges” ahead, promised that “The light of hope is right in front of us.” He sounded eager to look past the pandemic, emphasising the chances of a swift economic revival in 2023 and offering reasons to be proud of living in a rising China under party rule.

The ending of China’s self-imposed isolation will be good news for places that depended on Chinese spending. Hotels in Phuket and malls in Hong Kong suffered as Chinese were locked up at home. Now would-be travellers are flocking to travel websites. Bookings on Trip.com rose by 250% on December 27th compared with the previous day. Economists are pencilling in a gdp boost for Hong Kong of as much as 8% over time. Exporters of the commodities that China consumes will also benefit. The country buys a fifth of the world’s oil, over half of its refined copper, nickel and zinc, and more than three-fifths of its iron ore.

Elsewhere, though, China’s recovery will have painful side-effects. In much of the world it could show up not in higher growth, but in higher inflation or interest rates. Central banks are already raising rates at a frenetic pace to fight inflation. If China’s reopening increases price pressure to an uncomfortable degree, they will have to keep monetary policy tighter for longer. Countries that import commodities, including much of the West, are at the greatest risk of such disruption.

Take the oil market. Rising Chinese demand should more than compensate for faltering consumption in Europe and America, as their economies slow. According to Goldman Sachs, a bank, a rapid recovery in China could help push the price of Brent crude oil to $100 a barrel, an increase of a quarter compared with today’s prices (though still below the heights reached after Russia invaded Ukraine). Rising energy costs will prove another hurdle to taming inflation.

For Europe, China’s reopening is another reason not to be complacent about gas supplies later in the year. Zero-covid, by suppressing China’s demand for gas, made it less costly than it otherwise would have been for Europe to fill its storage tanks in 2022. A strong recovery in China will mean more competition for imports of liquefied natural gas. In December the International Energy Agency, a forecaster, warned of a scenario in which winter starts punctually in 2023 and Russia cuts off piped gas to Europe entirely. That could result in shortages amounting to as much as 7% of the continent’s annual consumption, forcing it to introduce rationing.

For China itself, the post-pandemic normal will not be a return to the status quo ante. After watching the government enforce zero-covid in a draconian fashion and then scrap it without due preparation, many investment houses now see China as a riskier bet. Foreign firms are less confident that their operations will not be disrupted. Many are willing to pay higher costs to manufacture elsewhere. Inbound investment in new factories seems to be slowing, while the number of companies moving business outside China has jumped, by some accounts.

As Chinese officials struggle to repair the damage, they should remember some history. China’s previous great reopening, after the stultifying isolation of the Mao years, led to an explosion of prosperity as goods, people, investment and ideas surged across its borders in both directions. Both China and the world have benefited from such flows, something politicians in Beijing and Washington seldom acknowledge. With luck, China’s current reopening will ultimately succeed. But some of the paranoid, xenophobic mood that the party stoked during the pandemic years will surely linger. Exactly how open the new China will be remains to be seen.