Ant’s Financial License Is in Limbo as China Shakes Up Regulatory System; Exclusive Insight: Wen Jiabao Allows the Snowball of China's Local Government Debts to Grow Ever Larger
China’s Qin Gang pledges to keep Moscow close in Ukraine peace bid; Malaysia’s Anwar says in talks to return 1MDB fugitive Jho Low; JPMorgan's Dimon to visit China for first time in 4 years
Welcome to this issue of The China Brief. Today is May 5, 2023. Here at The China Brief, we bring you the latest news on China's politics, economy, and society from global media sources, along with exclusive expert analysis. If you find our content helpful, please subscribe to our newsletter.
Exclusive Insight: Wen Jiabao Allows the Snowball of China's Local Government Debts to Grow Ever Larger
As previously mentioned, there were no local government debts in China during the planned economy era from 1949 to 1978. From 1978 to 1994, the early period of economic reform and opening up, local governments enjoyed relatively abundant finances while the central government's finances were strained. China still had no local government debt.
Following the tax-sharing reform in 1994, local government fiscal revenues decreased significantly, falling far short of their required fiscal expenditures. The gap between income and expenditure had to be bridged through central government transfers, land sales, or borrowing. During this time, due to strict limitations imposed by the Budget Law on local government borrowing, local governments could not directly borrow.
To circumvent the restrictions of the Budget Law, local governments resorted to an indirect method of borrowing. They injected land (which they owned) into "local government financing platform" companies and used the land as collateral to borrow from banks. From 1994 to 2008, although the scale of indirect local government borrowing grew continuously, the overall amount of local government debt remained very limited.
In 2008, the United States experienced a financial crisis. To combat the ensuing decline in economic growth, the Chinese central government launched the famous "4 trillion" economic stimulus plan, investing one trillion RMB itself while calling for three trillion RMB investment from local governments, stimulating an economy with a GDP of approximately 30 trillion RMB. However, local governments did not have sufficient funds to match the central government's stimulus, and due to the Budget Law restrictions, they could not borrow on a large scale.
At this point, the central government encouraged local governments to raise massive amounts of debt through "local government financing platform" companies and borrow from banks. As mentioned in the previous analysis, the debt incurred by the current government need not be repaid by them, and future administrations, or even several administrations down the line, could repay the debt.
As local officials were primarily assessed on economic growth, and there were no restrictions on debt financing, these officials pursued promotion without considering debt repayment. Consequently, the scale of the economic stimulus in 2008 far exceeded the three trillion RMB required by the central government. Since then, the snowball of China's local government debt has grown ever larger.
(This is the first in a series on "The Evolution and Current Situation of China's Local Government Debts" by Li Weijun, a contributing economist for The China Brief)
Ant’s Financial License Is in Limbo as China Shakes Up Regulatory System
WSJ
Ant Group's transformation into a fully regulated company has been delayed by a reshuffle of China's financial regulatory system. Ant has been awaiting Beijing's approval for its restructuring for over a year, and the last step in its overhaul is to obtain a financial-holding-company license. The creation of a powerful new financial regulator in China has held up the approval of the license, and this process could take months to complete. Ant is also likely to face a fine before the license can be granted, with the size and grounds of the fine still under discussion. Chinese regulators hope that Ant will set a precedent for other fintech businesses in the country regarding structure, governance, and licensing.
Chinese insurance stocks back in favor after best first-quarter result in five years
South China Morning Post
Chinese insurance stocks have seen their best Q1 results since 2018 as investor demand for insurance products has increased. A gauge of five insurers trading on the Shanghai Stock Exchange returned 22% since 1 April compared with the benchmark Shanghai Composite Index's 2%. The five listed insurers reported year-on-year profits up at least 27% for Q1 2021; the strongest start to a year for five years. This dwarfs the average 2.7% growth seen by all public companies on China’s onshore market in Q1. The lifting of Covid-19-related curbs has enabled sales agents to reach potential clients, by allowing greater mobility. Returning business value, a key gauge of future insurance profits, grew in Q1 2021 for the first time in three years, according to CCB International. The greater investor confidence in the sector has helped to make insurance stocks an attractive bet.
Malaysia’s Anwar says in talks to return 1MDB fugitive Jho Low
Al Jazeera
Malaysia is negotiating the return of Jho Low, a fugitive financier accused of masterminding the country’s $4.5bn 1MDB scandal. Speaking to local media, Prime Minister Anwar Ibrahim said Low’s return was being discussed through “diplomatic channels” and involved several countries but provided no further details. Low, who faces charges in the US and Malaysia, is believed to currently be in China. Investigations into allegations of money laundering and fraud in relation to the abuse of funds from Malaysia’s sovereign wealth fund have been carried out in countries including the UK, Switzerland and Singapore.
JPMorgan's Dimon to visit mainland China for first time in 4 years
Reuters
JPMorgan CEO Jamie Dimon is reportedly visiting mainland China this month for the first time in four years. The trip comes as JPMorgan is holding three conferences in Shanghai at the end of May, and marks Dimon's first visit since the pandemic began last year. The bank's conferences include the Morgan Tech Exchange, the China New Economy Forum, and the Global China Summit. JPMorgan's China business presence includes a wholly-owned securities venture and a funds management joint venture it acquired full ownership of in January.
Russia confirms enriched uranium supplies to China
South China Morning Post
Russian state atomic energy corporation Rosatom has confirmed that subsidiary TVEL will supply highly enriched uranium to two of China's reactors, the CFR-600 power plant at Xiapu in the Fujian province, over the next three years. The project comprises two fast-neutron reactors, capable of generating 600 MW of power each. The fuel TVEL is providing has a concentration of more than 30% of uranium-235, which is found in less than 1% of naturally occurring uranium. While China's foreign ministry claims the two countries are engaged in "normal civilian nuclear cooperation within the framework of international obligations", the US has expressed concern.
Taiwan fund questions TSMC stock value after Buffett slashes big stake
South China Morning Post
Uni-President Asset Management's Derek Lin has expressed his concerns over Taiwan Semiconductor Manufacturing Co (TSMC), stating the chipmaker's return on equity was more alarming than geopolitical risk. Lin, whose UPAMC Great China Fund ranks top among 144 mutual funds that invest mainly in the Greater China region, said he believed TSMC would struggle to maintain ROE at current levels in five to 10 years, due to overseas expansion leading to higher costs and lower efficiency. Despite TSMC being the world's largest contract manufacturer, Lin said he would only buy more shares if he could not find a better target.
Chinese troops to hold rare joint military exercise in Laos
Reuters
The People's Liberation Army will send troops to Laos to hold a joint military exercise with Laotian soldiers as part of China's approach to bolster security ties with its regional allies. The drill comes as the US is trying to expand its presence in Southeast Asia. The exercise called "Friendship Shield 2023," which takes place from 9 May to 28 May, will involve over 200 Chinese troops, and more than 900 personnel combined. This military exercise to fend off armed criminal groups follows China and Cambodia holding their first drills in Cambodian waters earlier this year.
Fewer luxury shoppers but bigger spenders as Chinese return to Europe
Japan Times
Chinese visitors holidaying in Europe are primarily high-end tourists and business travelers rather than large groups of budget travelers visiting luxury goods stores. In a shift caused by the limited reopening of China's borders, the primary surge in spending is being provided by well-heeled travelers less concerned about air travel and visa costs, although a lack of volume remains a challenge for luxury retailers. A report from Exane BNP Paribas stated that Chinese customers represented the third-largest spend after France and the US, and often the second at stores in tourist spots.
Factbox: Old disputes overshadow visit by Japan's Kishida to S.Korea
Reuters
Japanese Prime Minister Fumio Kishida will travel to South Korea to meet President Yoon Suk Yeol in an effort to improve bilateral ties between the two countries that have been strained since Japan's 1910-1945 occupation of Korea. While some progress has been made, including Japan's 2015 apology to women forced to work in wartime brothels, historical issues and disputes remain. These include a case brought against Japanese companies that used forced labor during the war, and Tokyo's decision to dump wastewater at the site of the damaged Fukushima Daiichi nuclear power plant into the sea, which South Korea is concerned could lead to environmental contamination.
Australia’s exports to China hit record high as relations thaw
CNN
Australian exports to China hit a record high in March, reaching AUD 19bn ($12.8bn), up 28% from the prior month and 31% from a year earlier, according to data from the Australian Bureau of Statistics. Thermal coal demand surged 122% from the previous year to AUD 238m while iron ore shipments grew by 28% and 22.5% for lump and fine varieties, respectively. The trade uptick follows a thaw in Sino-Australian relations, after a more than two-year diplomatic freeze that culminated in China imposing trade restrictions on Australian products including barley, lobster and coal.
China’s Qin Gang pledges to keep Moscow close in Ukraine peace bid
South China Morning Post
The foreign ministers of China and Russia, Qin Gang and Sergey Lavrov, met in Goa to speak about developing communication and coordination to oppose a “new cold war” and to help Ukraine reach peace talks. The SCO foreign ministers’ gathering meeting comes after a call between Chinese President Xi Jinping and Ukraine’s President Volodymyr Zelensky, which sought to strengthen the relationship between the two countries. The meeting further intensified tensions between China and the West, after reports suggested that Nato plans to open its first liaison office in Asia; Minister of National Defense for China, Zhao Lijian, criticized the move, saying it would only increase tensions within the region.
Chinese law firm leaders ambitious for growth
Financial Times
There are now nearly 700,000 lawyers in China, or nearly five times as many as the number working in the UK. The country has seen a massive expansion in its legal representation over the course of the last three decades, as the Chinese economy has grown and the country has emerged as a major global power. Of the largest law firms in the Asia-Pacific region, 15 work in China or outside the country, but most of their lawyers based within China itself. One legal firm, Yingke, is widely believed to be the biggest in the world in terms of its headcount, with around 12,000 lawyers alone. However, international sanctions have slowed economic growth in China at a time when geopolitical tensions between the country and governments in the West are rising.
China seeks to ease fears of legal disputes to bolster global trade
Financial Times
China's growing status as a consumer of goods and acquirer of foreign companies is creating a more complex relationship between the country and Western businesses. Demand for luxury and beauty products is particularly significant, and the price tags of cross-border acquisitions have climbed higher in recent years. However, complications grow along with the size of these businesses, making takeovers more tricky and complex. The clash of geopolitical tensions between China and the U.S., as well as the country's growing influence in global supply chains, makes for greater disruption risk, which legal remedies can help offset.
Jack Ma-Backed Ant Weighs Introducing Investor in HK Bank Unit
Bloomberg
Fintech heavyweight Ant Group may sell shares in its virtual Hong Kong unit, Ant Bank, amid ongoing restructuring within the company, say sources. Ant Bank is one of eight virtual banks authorized to operate by the Hong Kong Monetary Authority and has suffered losses of about $30m this year, but has not yet reportedly decided whether to proceed with any potential sale.
This Week in China: Beware Sleepy Yuan as Macro Trades Falter
Bloomberg
The yuan has appeared to be stable against the dollar since mid-March, but it is facing many depreciation pressures that are endangering its state of calm. Due to geopolitics and heightened scrutiny of foreign firms, international funds will most likely not invest in China's stock market on big scale, restraining the influx of capital. Chinese government bonds presented weaker returns compared to comparable Treasuries, which diminished the draw of yuan-denominated assets. The strengthening of China's domestic consumption, as well as weakening global demand, is also putting pressure on China's trade balance.
US puts China’s ‘economic coercion’ on table for Apec trade meeting
South China Morning Post
A senior US trade official has said "economic coercion" by China remains a major concern and is expected to be discussed at an Asian-Pacific Economic Cooperation (APEC) meeting in May. Christopher Wilson, Apec assistant US trade representative, outlined the government's concerns regarding the Chinese economy, particularly its "distortionary effects" on the US economy as a whole. Despite concerns, some US officials are open to a dialogue with China. However, issues like intellectual property and trade tariffs remain points of friction between the countries.
These hugely successful companies were born in China. They don’t want you to know that
CNN
Several China-based consumer-focused companies, such as Binance, PDD and Shein, are distancing themselves from their roots in China in a bid to overcome concerns among regulators and consumers around the world who associate them with the Chinese government's extensive surveillance infrastructure and human rights abuses. Shelving their origins is seen as crucial for the companies, especially as the treatment of Beijing-based ByteDance's TikTok has led to the recruitment of foreign executives to help curry favor in certain markets. "Being (seen as) a Chinese company is potentially bad for doing global business and comes with a variety of risks,” said Scott Kennedy, a senior adviser and trustee chair in Chinese business and economics at the Center for Strategic and International Studies.
PDD, Shein and TikTok did not respond to requests for comment on this story, but companies’ downplaying of their roots to gain favor is seen as understandable. Ben Cavender, a Shanghai-based managing director of strategy consultancy China Market Research Group, said: “There’s almost this automatic take by the US government that these companies are potentially a risk,” because of the inference that they could share data with the Chinese government, or act in a nefarious capacity. "I think downplaying their roots allows them to navigate these tensions and build relationships with US customers and regulators,” said Garrett Sheridan, CEO of corporate advisory firm Lotis Blue Consulting.
Marcos says Philippines bases could be 'useful' if Taiwan attacked
Reuters
Philippines President Ferdinand Marcos Jr has confirmed that US access to Philippines military bases is a "defensive" means of safeguarding the Philippines against aggression from China. Whilst the 2014 Enhanced Defense Cooperation Agreement (EDCA) was originally designed to improve disaster relief, Marcos argues that greater tensions increasing in the Taiwan Straits call for a more coordinated, militarised defense strategy: "The safety of our Filipino nationals in Taiwan becomes of primordial importance". Following earlier talks with President Biden, the US made it clear that its commitment to the Philippines remains "ironclad".
Shenzhen’s ‘special charm’ sees tech hub’s economy shine despite US tech curbs
South China Morning Post
Shenzhen, China's Silicon Valley, has recorded the highest economic growth of any top-tier city in the country in Q1 2023, with a YoY rate of 6.5% propelled by strong performances in the EV sector. This reinforces the city's technological innovation capabilities and its ability to weather US-led pressure to contain China's tech development. Dozens of Shenzhen-based firms, including Huawei, are included on the US entity list, which bars their access to US technology and markets without a license. The growth suggests China's tech sector could withstand Washington's curbs.
However, while Shenzhen has potential in biotech and advanced technology, private sector incentives to innovate are in doubt. Analysts say the Chinese government must continue financial support for innovation, given ballooning public debt and cash-strapped local governments, while entrepreneurs must continue to feel incentivized to innovate. The Greater Bay Area in Shenzhen is an important engine driving the country's economic upgrade and Hong Kong is seen as the main biotech gateway to the bay area, facilitating foreign manufacturers of proprietary Chinese medicine products, medical devices, and drugs.
Some cautioned it was too early to judge Shenzhen's ability to maintain growth rates, but said the high financial growth figures were a signal of the city's recovery as China's coronavirus control measures ended. However, trade and technology wars could disrupt its independent development by bringing a series of other issues such as supply chain disruption to an already strained economy.
Exclusive: Indonesia quietly engaging key stakeholders in Myanmar crisis - foreign minister
Reuters
Indonesia has engaged in peace talks with Myanmar's ruling junta, ethnic minority armies, and a pro-democracy shadow government in an attempt to quell the violence that has wracked the country since the military ousted the democratically elected government earlier this year. Indonesia, as the chair of the Association of Southeast Asian Nations (ASEAN) this year, has been working diligently behind the scenes to end the conflict as the situation continues to escalate. Indonesian diplomats have held more than 60 "engagements" with all parties involved, according to Indonesian Foreign Minister Retno Marsudi. ASEAN leaders have lost patience with the Myanmar junta, and the bloc has barred Myanmar's generals from attending its high-level meetings until progress is demonstrated.
China assures Russia, India of deepening 'cooperation'
Reuters
Chinese Foreign Minister Qin Gang has pledged to deepen ties with Russia and India during a meeting with his counterparts from the Shanghai Cooperation Organisation (SCO), a bloc of nations spanning most of Eurasia. Beijing has been seeking to preserve stable relations with countries in the region as ties with the West, Washington in particular, remain tense. During a meeting on the sidelines of the SCO, Qin told Russian Foreign Minister Sergei Lavrov that China is "willing to maintain communication and coordination with Russia to make tangible contributions to the political settlement of the crisis" in Ukraine.
China’s services activity expands as consumers return, but is it sustainable?
South China Morning Post
China's services sector continued to expand for the fourth consecutive month in April, benefitting from a return to pre-Covid-19 levels of demand. The Caixin/S&P Global services purchasing managers’ index (PMI) declined to 56.4 in April from 57.8 in March, but remained above the point that shows expansion/contraction. Services companies' operating expenses rose to a 12-month high as demand increased while new orders, including for exports, also expanded for the fourth straight month.
Stay informed about the latest news, analysis, and policy briefs from across the globe related to China with the China brief. Our team aggregates, synthesizes, and summarizes the most important information from various sources, including media outlets, think tanks, government agencies, and industry experts.
Our mission is to provide you with easily accessible and critically valuable information tailored to your specific field of interest. We understand the significance of staying up-to-date on developments related to China and aim to make this information comprehensible for our readers.
Join the conversation and stay informed about the latest news and developments related to China by visiting our website at 6dobrief.com