Hi, everyone. Peter Zeihan here coming to you from Dallas where it’s 84 degrees and raining outside. So I am indoors.

I wanted to talk about what is going on in China right now.

Now I’m sure a lot of you have heard that there is an ongoing COVID lockdown in Shanghai. It has been going on since April 5th. So over a week now, in which most Shanghai residents have been unable to leave their apartment, even to get food.

If you have a high rise with full of condos, two people are allowed to go shopping for everyone once a day for two hours. So there are indications that we’ve got some pretty severe problems going on with literally famine in what’s supposedly a first world city.

The Chinese are not as enamored of processed foods as Americans are, so they would like to have their fish alive when they purchase them.

And the cold chain that is required for something like that just does not work when there is limited retail options under a lockdown.

So people have been running out of food for days now. And I’m sure a lot of you have seen some of the Twitter and the TikTok posts of people literally screaming from their windows about what’s going on, and in true Orwellian fashion, the Chinese have deployed a small army of drones to take photos of people so that their fines can be sent to the tax bureau for disobeying orders about leaving their windows open during lockdown, in generally a crappy situation.

But I think it’s worth exploring here what is going on at a deeper level.

Now in 2020, when we didn’t have a vaccine, our threshold for what would be considered successful was 50% protection against death. And the COVID vaccine that the Chinese ultimately engineered came in at 55%.

So, you know, call it a D minus, but a passing grade, as bad as it was.

Since then, the Chinese have faced a number of evolutions and devolutions in their China policy.

There’s a lot going on here.

So first of all, we’ve gone from the Wuhan strain to alpha, to delta, to omicron, to omicron B. And at each step, the Chinese vaccine has become less and less effective. And now it’s probably only in the low teens versus omicron B for preventing deaths.

Compare that to the Pfizer and Moderna models, the mRNA vaccines that we have in the United States. They were well above 95%, not just preventing death, but against preventing severe infection and even against preventing infection in the first place.

Now, just like with the Chinese vaccine, our vaccine has become less effective with each proceeding variant, but we’re still in the high nineties for preventing death and severe disease even though the omicron B can slip through the defenses that you get in terms of infection. So if you’re vaccinated in, in the United States, your chances of dying from COVID, if you’re under 70 are, are minuscule now.

The New Zealand, who, New Zealanders who have achieved 98% vaccination with those rates have a population that’s roughly similar to Hong Kong, which is also in a degree of lockdown, and the Kiwis haven’t had a death in weeks, whereas in Hong Kong, they’re talking, at least the thousands so far anyway. So that’s kind of piece one of all of this.

Piece two is there’s a crisis of legitimacy, a crisis of legitimacy going on in the Hong Kong system, in the Chinese system, in the Shanghai system, everywhere in the Chinese system. Oh, sorry. I’ve had too much coffee. Where was I? Yes, legitimacy.

Chairman Xi, he has instituted a cult of personality that is far more extreme than anything that any of the Chinese leaders before him have instituted. And that includes the emperors of old, as well as Mao himself.

He has executed or imprisoned or intimidated into silence or exiled everyone within the system who has a degree of intelligence or policy creativity. And now it is just him by himself. And that makes it impossible for the ship of state to turn. And so we’re seeing worse and worse decisions coming out of Beijing, cuz there’s no one, no longer is there anyone in the system who will tell Xi, what’s going on? Not that they won’t tell him bad news, they won’t tell him any news cuz they don’t know how he’s going to react. And he has literally shot the messenger so many times that nobody else wants the job.

How does that apply to COVID? Well, it starts with the Ukraine war. The Ukraine war is not going well for the Chinese. The infrastructure that is required to bring Russian export to China was operating at maximum capacity before the war began.

And the production side of things within Russia, especially in Eastern Siberia where the terrain is much more rugged than the geology, much more complex. The production there is dependent upon foreign companies being operating. That includes Shell and Exxon from the super majors or Baker Hughes and Schlumberger from the oil services firms.

And so the Russians were already sending the Chinese everything they could from the east. Anything else would have to come from the west and Russia’s export points on the Black Sea in Novorossiysk are shallow water ports. So the only way that the Chinese could get more crude or other materials from the Russians would be to send in a bunch of small shuttle tankers and then sail ’em into deeper waters, which are in sight of NATO coastlines, do a sea to sea transfer, which is risky at any day, and then sail it around a couple of continents to ultimately get to China.

So the Chinese state companies aren’t doing that. The Indians did it for a while. We can talk about them at a later time, but the Chinese are not. In fact the Chinese are even shrugging off some purchase agreements they had with the Russians in the far east, even though there’s no war threat there because they don’t want to get caught afoul of anything that would rob them of access to the American market, which is more important to the Chinese by at least a factor of 20.

So the Chinese are arguably, after the Ukrainians, of course, the biggest losers from the Ukraine war so far. They’re seeing their food security and their energy security weakened. They’re seeing their health policy in question. And if you are Xi and you no longer have anyone to use as a sounding board or a cadre of smart people that you can send to another room to come up with a backup plan, this is really bad because it means that the Chinese system cannot adapt to changing circumstances all of which have turned against the state.

So the only remaining tool that China has, that Xi has to maintain his power and his control over the population is health. And so every time we get a case outbreak in China, the state has no choice, but to do a complete zero tolerance lockdown because they don’t dare open.

Remember the Chinese vaccine doesn’t work very well at all. All and most Chinese citizens have not been exposed to the virus. So they have no natural antibodies.

Now we can have a debate in the United States about what is more effective: antibodies or the vaccine? But in China, they have neither, which means that if there was an outbreak like the United States had in say January with omicron, you are literally talking about millions of Chinese dying in a very short period of time because omicron B is far more communicable than the measles and has a fatality rate that is significantly higher.

And for it to all break out into the open all at once, lockdowns are all they can do.

So Shanghai, arguably the most economically viable city in the country is shut down. And it looks like within the next few days, not just Hong Kong, but Shenzhen and Guangzhou are gonna get locked down too.

So if you take the Yangtze River delta and remove it from the equation and take the Pearl River delta and remove it from the equation, there is not a lot left in the Chinese system from a manufacturing point of view that can either get built or shipped out. Those are the two big hubs.

So if you’re anywhere else in the world, and you’re dependent upon Chinese imports, you’ve got some math to run because the Chinese, for internal reasons, for legitimacy reasons, no longer see participating in international manufacturing supply chains as a key to their own success. It’s a nice to have, but they don’t have to have it. Central control is far more important. And so if you have not started moving your stuff out of China yet, it may well be too late because it will never get better than it is right now. Okay. That’s it from me until next time.