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Reassessing the future role of China in world aviation: part one – it will not be business as usual

Analysis

When China emerges from its COVID hibernation it will be a different aviation force. It will not be business as usual. The world has changed greatly since Jan-2020; and China has changed too.

Financial markets anticipate that China under President Xi will lean more towards central strategy, with a greater role played by national policy goals than previously. This reflects a sense that President Xi’s focus on national security and pandemic policies will go unchallenged — even if it means slower growth and shareholder discomfort.

China has in the past used the power of its outbound tourist expenditures to punish states for stepping out of line. Beijing pressure on agents, airlines and the public at large can steeply reduce tourism traffic to the countries who are the target of Beijing’s displeasure.

Aircraft orders have also been weapons in this armoury. But there are many other issues that have altered the shape of China’s aviation outlook since 2019.

Summary

  • China has changed since 2019, but so has the world.
  • China’s zero COVID policy is causing serious economic damage, internally and globally; but the virus is again spreading, as China seeks to reopen.
  • Asian aviation and markets are most deeply affected by the closure.
  • Econo-strategic moves like the Belt and Road will potentially influence aviation policy.
  • Weaponising tourism flows could again be a tool used.
  • Full reopening looks unlikely until well into 2023.

The geopolitical canvas has been repainted since 2019

With little clear evidence to go on, China’s aviation outlook remains inscrutable, so it is possible only to speculate on what the differences will look like when it emerges from COVID lockdown. In addition, the rest of the world is reassessing a wide range of issues that will have an effect on global aviation, both independent of China and in their attitudes towards the country.

Wider trade and security issues have always influenced aviation strategy, fluctuating according to the contemporary international environment.

In turbulent times, aviation can be little more than a rowboat in a storm. Casual damage like the Saudi strategic ban on airspace access by Qatar is one example, and the aircraft and airline sanctions involved in the Russian invasion of Ukraine – a more pungent one. There have been many others involving airspace and market access where geopolitics intrudes.

Today that environment is as acutely sensitive as it has been for several decades, as China rattles the sabre against Taiwan and expands its reach across the South China Sea and into the South Pacific, while North Korea recommences provocations against the South and more widely. Northeast Asia is potentially a dangerous place; Europe is already dangerous, as Russia escalates its attacks in Ukraine, supported by Iran – and not opposed by China.

All of this, too, is against a background of the intensifying rivalry for global leadership between the US and China, so that trade and security issues aggregate to form a new set of strategy priorities.

Interpreting what influence these will have on China’s future aviation outlook is no easy task, beyond assuming there will be changes.

Much of the new status quo has evolved since 2019, during which time China has been effectively closed to international passenger aviation. Until earlier this year, most of the rest of the world had been closed as well.

The summer 2022 reopening of international air services in North America and Europe might offer some indicators of what might be expected (meanwhile, intra-Americas international services had been largely restored) when China reopens. There was the expected surge in tourism demand as barriers to travel were removed, although it wasn’t clear if the anticipated uptake was as enthusiastic across the board as hoped for.

In most markets around the world the waters were further muddied by overwhelming staffing and infrastructure logjams, with immediate operational impacts that will almost certainly last into the longer term – a clear legacy of COVID-19.

Will the same occur in China?

Perhaps not, given the lessons learned, as well as the way China’s domestic system continued – with ups and downs – through most of the past three years. It’s also unlikely that China’s reopening will be anything like as gung-ho as Europe’s and America’s, instead allowing for a more phased and cautious and targeted reintroduction of traffic flows.

With President Xi now in complete control, the zero COVID policy can be revisited

Early signs are that President Xi will look to re-establish business as usual. This may well be an imperative, as China’s economic growth slows. There are enough economic problems at home to suggest restricting international links that could have repercussions domestically.  

During the president’s active round of discussions at the mid-Nov-2022 G20 meeting in Bali, Indonesia suggests an eagerness at least to open doors which had closed over recent months, in both political and trade areas.

If restoring foreign trade is essential, it comes with the qualification that under a now all-powerful President Xi, China’s increased assertiveness internationally elevates its influence on overall policy. Since his reappointment as general secretary, effectively for life, and the removal from the powerful Politburo Standing Committee of any opposition, the utterings of the Chinese president will be law.

In early Nov-2022, while welcoming German Chancellor Scholz, the first European leader to visit China at the head of a trade mission, President Xi expressed the hope that the two countries could continue to collaborate amid “times of change and turmoil”, and to contribute more to global peace and development.

However – more ominously – according to Xinhua, the Chinese president added the proviso that this could occur “as long as the two countries uphold the principles of mutual respect, seeking common ground while reserving differences, carrying out exchanges and learning from each other, and win-win cooperation”.

For European countries and the EU overall, a major issue in this regard would be concern over China’s human rights performance.

But for China’s East Asian neighbours, the concern will be even more challenging as the security divide between the US and China widens. Most have until now managed to tread a fine line between clear-cut support for either side, a sort of stable ambiguity.

The elevation of tensions in East Asia over Taiwan and disputes over territorial waters is making fence-sitting, with opaque positions, much more difficult, most notably for Japan and South Korea.

For both of them China is unavoidably a key aviation partner. And the US (and its allies) is the key security partner.

The partial reopening only amplifies the complex challenge Beijing faces

Some analysts have suggested that now President Xi’s position is so secure, he will relax the strict zero COVID policy that has kept China shuttered to the outside world (or, more specifically, subject to at least 10 days’ quarantine on arrival or return). This would assume a purely political, and potentially dangerous, decision.

From a health viewpoint, such a move must seem very unlikely: numbers are spiking across China, even with lockdowns. Eight out of ten major cities reported cases in Oct-2022, the result of holiday travel.

So it was unsurprising that immediately following Beijing’s announcement of an easing of entry requirements in early Nov-2022 China’s airline stocks surged, and airline booking numbers doubled within an hour.

China’s Hang Seng Index rose 8% and Asian share markets made their largest gains in two years. Such is the importance attached to the Chinese market.

Air China share price: one month to 16-Nov-2022

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But the euphoria was short lived. For practical purposes the move was more symbolic than functional. Airlines operating to and from China were pleased because the unattractive system of penalising them for bringing a COVID case into the country was terminated.

For visitors though, the improvement was limited. Previously, arrivals had to stay a week under guard in a hotel or similar facility, plus three days confined to home.

The week was reduced to five days, plus three days at home.

It was a step in the right direction, but hardly enough to open the floodgates.

As the economy stutters and the public becomes visibly more unhappy with lockdowns – some locked-down Guangzhou residents staged a noisy outbreak on 14-Nov-2022 – the virus is spreading rapidly, with nearly 18,000 new cases that day, 5,000 of them in Guangzhou.

Large conurbations, including Chongqing and Zhengzhou, are also experiencing surges.

With the new, more infectious, variants spreading around the world it is hardly a time to be allowing greater mobility within China.

So, despite the rising economic – and social – cost of semi-isolation, it would be bold and even foolish to remove all entry restrictions in the near future.

LOOK OUT FOR THE FUTURE PARTS OF THIS FOCUS ON CHINA, INCLUDING MORE DETAILED AVIATION INSIGHTS ON THE COUNTRY. 

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