As China Falls Into Deflation, the Mood Turns Dark; British Foreign Secretary Cleverly to visit China this month

China’s economy is in crisis, but not on cusp of a ‘Lehman moment’; China accuses citizen of spying for CIA; BRICS club boom: What to expect in Johannesburg; China Cuts Key Interest Rate Again

Welcome to this issue of The China Brief. Today is August 21, 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.

As China Falls Into Deflation, the Mood Turns Dark

NY Times

China is experiencing a number of economic challenges, including youth unemployment, a housing slump, stagnant spending, and even deflation. These issues are causing a decline in confidence among business owners and consumers, with many people worried about the future of the economy. The decline in the Chinese economy could last for years, according to some experts, and people are already saving more and spending less. Many entrepreneurs are reluctant to take out loans due to the uncertain prospects they face. The root of these issues is believed to be the ideology of Xi Jinping, China's paramount leader, who is seen as having a dislike for the private sector and has dismantled elements of the market economy. This lack of confidence in the Chinese economy has led to a decline in spending and a rise in saving, which could further exacerbate the country's economic problems.

China accuses citizen of spying for CIA

Deutsche Welle

China has accused a government employee of spying for the CIA, the second such allegation in a month. The 39-year-old Chinese citizen, named simply as Hao, was studying in Japan when he came into contact with a US embassy employee known as "Ted". Ted then introduced Hao to a CIA employee called Li Jun. According to China's Ministry of State Security, Jun "instigated Hao into rebelling" and persuaded him to sign an espionage agreement. China also claims that Hao had received training from the US before returning to China and working for a government department.

BRICS club boom: What to expect in Johannesburg

Deutsche Welle

The BRICS nations are set to discuss expanding the group beyond Brazil, Russia, India, China and South Africa at the upcoming summit in Johannesburg. Over 20 countries have expressed interest in joining the group, including Saudi Arabia, Indonesia, Iran, Argentina and Ethiopia. The expansion would represent a major shake-up of the existing world order, with some countries looking to assert their growing self-confidence and challenge the influence of the West. Russia and China are particularly interested in countering the US and increasing their own influence through the BRICS group.

British Foreign Secretary Cleverly to visit China this month - sources

Reuters

British Foreign Secretary James Cleverly is set to visit China at the end of this month in an attempt to improve the strained relationship between the two countries. Cleverly's trip was initially planned for July but was postponed after China announced the replacement of his counterpart. The exact dates of the visit have not been confirmed.

China lodges complaint over criticisms of it at Camp David

Reuters

China has expressed its dissatisfaction with the criticism of China made by US, Japanese, and South Korean leaders at the recent Camp David summit. China's foreign ministry has lodged representations with the relevant parties regarding this issue.

China’s economy is in crisis, but not on cusp of a ‘Lehman moment’

South China Morning Post

Global investors are not overly concerned about the property crisis in China, according to Nicholas Spiro, a partner at Lauressa Advisory. Spiro says the fallout from the downturn in China's housing market is not seen as a "systemic credit event" and international investors are not positioning themselves for a China-induced meltdown. He also notes that China's state-controlled banking system and capital controls help to prevent a full-blown financial crisis. Spiro adds that the crisis is a structural economic one that cannot be resolved by market pressure.

Germany must adapt research practices in light of Chinese threat -minister

Reuters

Germany's research minister, Bettina Stark-Watzinger, has called for the country to align its academic practices with its security interests in light of tensions with China. Stark-Watzinger argues that Germany must not be naive in its dealings with China, which has a stated goal of converting civilian research into military applications. She suggests better protection for research conducted in Germany to prevent critical know-how from reaching China and potential use of civilian research for military purposes. Stark-Watzinger also recommends raising awareness at universities and research institutes and rethinking the strict separation of civilian and military research.

China and Iran pledge cooperation ahead of Brics summit

South China Morning Post

Iran's Foreign Minister, Hossein Amir-Abdollahian, spoke with his Chinese counterpart, Wang Yi, ahead of the Brics summit in Johannesburg. Iran is seeking to become the sixth member of the bloc and hopes to strengthen cooperation with Beijing in regional and international affairs. In 2021, Iran and China signed a $400bn strategic cooperation agreement, which paved the way for Iran's participation in the Belt and Road Initiative. During the phone conversation, Wang said that China would support Iran over issues concerning their core interests and that China is willing to jointly oppose external interference and defend the two countries' sovereignty and security.

Shanghai vows 2-hour project approvals to woo foreign investments

South China Morning Post

Shanghai has pledged to cut red tape and accelerate infrastructure construction to attract new foreign investment projects. The city's municipal government plans to complete the business-registration process for a foreign-invested project within two hours at the Lingang free-trade zone, compared to the previous two-day approval process. Shanghai aims to replicate the success of Tesla's Gigafactory in the Lingang FTZ, which took one year to build and is now the largest production hub for the US carmaker.

China's Saudi crude imports to remain depressed through third quarter -analysts

Reuters

China's crude oil imports from Saudi Arabia are expected to remain low in the third quarter of 2023 due to reduced shipments from the top exporter. In July, Chinese imports from Saudi Arabia fell to their lowest level in 13 months, declining by 31% from June and by 14% from a year earlier. The drop is attributed to output cuts made by OPEC+ members, including Saudi Arabia, and the country's additional voluntary output cut of 1 million barrels per day (bpd) from July through September. China, the world's largest crude importer, has been turning to smaller suppliers such as Brazil and Iran to secure cheaper shipments and drawing down record inventories.

Russian miners, Chinese investors interested in Polymetal's Russian assets -FT

Reuters

Russian miners and Chinese investors are among the interested parties in the sale of Polymetal International's Russian assets, the CEO, Vitaly Nesis, has said. Sanctions imposed by the US on Polymetal's Russian assets in May have forced the company to seek a sale of its Russian business. Nesis said that a sale is now the only reasonable option and that the company intends to sell within six to nine months. However, he warned that Russia's competition regulator and other requirements for foreign asset sales could hinder the process.

China’s Honor stages India return with local manufacturing plans in early 2024

South China Morning Post

Chinese smartphone brand Honor is set to relaunch in India through a licensing deal with a local company, Honor Tech. The company aims to start domestic manufacturing by early next year. Honor had stopped selling its smartphones in India last year due to limited marketing budget and portfolio management issues. Under the licensing deal, Honor Tech will make, sell, and service Honor-branded smartphones in India. The company plans to capture a 5% share of India's smartphone market by sales volumes in 2024 and achieve a revenue of at least INR 100 billion ($1.2 billion).

South Africa won’t be bul­lied to side with glob­al pow­ers, says Ramaphosa

Al Jazeera

South African President Cyril Ramaphosa has stated that South Africa will not be forced to side with any global powers. His comments come ahead of the BRICS summit in Johannesburg this week, which will see leaders from Brazil, Russia, India, China, and South Africa discuss issues of common interest and seek to widen their influence in global geopolitics. South Africa's hosting of the summit has brought attention to its ties with Russia, particularly as it has refused to condemn Russia's invasion of Ukraine. Ramaphosa emphasized that South Africa will not align itself with any global powers or influential blocs of nations. The BRICS nations account for about a quarter of the global economy, and interest in joining the group has surged this year, with at least 40 countries expressing interest in membership.

The BRICS Club of Emerging Nations Debates Letting Others In

NY Times

Leaders of the BRICS nations – Brazil, Russia, India, China, and South Africa – are meeting in Johannesburg to discuss the group's future, including the potential for expansion. The BRICS countries, which represent 40% of the world's population and a quarter of the global economy, are looking to establish themselves as a credible counterweight to Western-led forums such as the G7. However, the group is hindered by divergent interests and internal rivalries. China wants to expand BRICS as a platform to challenge US power, while Russia wants to demonstrate that it has loyal allies despite its isolation over the Ukraine crisis. India, currently embroiled in a territorial dispute with China, is wary of Beijing's dominance in the group. Brazil and South Africa want good relations with China and Russia, but do not want to be overly aligned with either in order to avoid alienating the US. Dozens of countries have expressed interest in joining BRICS, including those in China's camp such as Iran and Belarus, and non-aligned states such as Egypt and Kazakhstan. Expansion of the group is likely to be a leading topic of discussion at this week's summit.

More economists cut China forecasts as real estate gloom deepens

Nikkei Asia

Goldman Sachs and UBS have both cut their outlook for Chinese shares after a series of missed payments by property developers. Goldman Sachs now expects earnings per share of MSCI China stocks to grow 11% this year, compared to its previous outlook of 14%. Meanwhile, UBS has cut its forecast for China's GDP growth to 4.8% for 2023 and 4.2% for 2024, down from 5.2% and 5% respectively. Nomura, Morgan Stanley and Barclays have also cut their China GDP forecasts following weak macroeconomic data for July.

Russia, China look to advance agendas at BRICS summit of developing countries in South Africa

The Independent

Leaders from the BRICS economic bloc of Brazil, Russia, India, China and South Africa are meeting in South Africa this week to discuss political and economic cooperation. The summit is expected to produce calls for greater cooperation among countries in the Global South, amid rising discontent over perceived Western dominance of global institutions. One possible outcome of the summit is the expansion of the BRICS bloc. Saudi Arabia has formally applied to join BRICS, a move that would bring "extraordinary importance" to the group. Other countries that have applied to join include Argentina, Algeria, Egypt, Iran, Indonesia and the United Arab Emirates. The expansion of BRICS would be a moral victory for Russia and China, who favour adding more countries to create a counterbalance to the G7 and to enhance their own influence. The US and European Union are keen to offset any Russian or Chinese influence emanating from BRICS and have stressed their bilateral ties with South Africa, Brazil and India.

Why a default isn’t the worst possible news for Country Garden

South China Morning Post

Country Garden Holdings, China's biggest property firm, is on the verge of defaulting on $22.5m in coupon payments. However, restructuring and property analysts have said a default is not the end of the world, as it can preserve cash and keep operations stable to maintain value for all stakeholders. Whether the company can make these payments within a 30-day grace period will determine whether it is truly in default.

Why Chi­na is grap­pling with falling prices – and be­ing com­pared to Japan

Al Jazeera

China has slipped into deflation for the first time in two years as consumer prices fell 0.3% in July. While lower prices may seem appealing to consumers, economists view deflation as a negative sign for the economy. Falling prices lead to reduced consumer spending and decreased production by companies, which can result in layoffs and lower salaries. China’s slide into deflation raises doubts about the strength of its post-pandemic recovery and its ability to meet its economic growth targets without major stimulus measures. The Chinese economy is facing a number of challenges, including a record low birth rate, high levels of local government debt, a flagging real estate market, high youth unemployment, and geopolitical tensions.

The situation is drawing comparisons to Japan’s economic struggles in the early 1990s when the collapse of a massive asset bubble led to a cycle of deflation and stagnant growth. China’s economic outlook is particularly marred by challenges in the property sector, which accounts for nearly one-third of the country’s economy. The market has experienced oversupply and a proliferation of empty housing estates. The recent default of major developer Evergrande and the potential default of other developers have added to the economic concerns. China’s economy needs to transition towards more consumer spending, but it faces structural problems and vested interests that make reform difficult.

While China has advantages over Japan in the 1990s, such as continued economic growth and higher interest rates, the government will need to take action to boost household incomes and consumption and switch resources away from the state sector and investment towards the consumer sector. The Bank of China has room to adjust its monetary policy, and further support for the economy is possible. However, Beijing prefers to target support at producers rather than consumers and is reluctant to use large-scale stimulus. Consumer prices may recover if economic growth improves and boosts consumer confidence.

China Cuts Key Interest Rate Again as Property Slump Spreads

NY Times

China's central bank has cut the main benchmark interest rate that commercial banks use for issuing one-year bank loans, in an attempt to address falling apartment prices, weak consumer spending and broad debt troubles. However, the reduction was smaller than expected, indicating that the government's usual tools for addressing an economic slowdown may have lost some of their effectiveness. The move follows last week's lowering of borrowing costs for commercial banks, and is aimed at widening the profit margins for banks and helping them accumulate more reserves to offset losses.

Frustration in the air again over 2-hour wait for Hong Kong Airlines’ free tickets

South China Morning Post

Hong Kong Airlines' third round of free tickets under a promotion drive left some online users frustrated as they experienced waiting times exceeding two hours. The tickets were part of the government's "Happy Hong Kong" campaign to revive the travel industry. The airline apologised for long waits during the previous rounds and made 8,500 complimentary return tickets available this time. Users were required to queue for a ticket to their preferred destination on the airline's website, with Tokyo having the highest number of tickets available and Okinawa having the least.

Chi­na-bro­kered Sau­di-Iran deal dri­ving ‘wave of rec­on­cil­i­a­tion’, says Chinese FM Wang Yi

Al Jazeera

China's Foreign Minister, Wang Yi, has expressed support for Iran and the recent detente between Iran and Saudi Arabia, which was brokered by China. Wang commended Iran's efforts to improve relations with Saudi Arabia and pledged to support Iran on issues concerning core interests. The detente between Iran and Saudi Arabia, facilitated by China, followed years of rivalry and instability in the Middle East. Both countries' deteriorating relations with the US played a significant role in their decision to pursue reconciliation. Since the detente, Iran and Saudi Arabia have taken steps to reopen diplomatic missions and have expressed intentions to strengthen ties. Wang also called for the full implementation of the Joint Comprehensive Plan of Action (JCPOA) to resolve the nuclear issue. The nuclear talks, which began in Vienna two years ago, have remained deadlocked with no visible progress.

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