China Names New PBOC Party Chief, Sets Stage for Governor Change; The Leverage Ratio of China's Macroeconomics

To Foreign Policy Veteran, the Real Danger Is at Home; Explosion hits chemical plant in southeast China

Welcome to this issue of The China Brief. Today is July 1, 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: The Leverage Ratio of China's Macroeconomics

Similar to the aforementioned logic of individual investor's leverage ratio, every macroeconomy can determine its macro leverage ratio by calculating the proportion of the total debt of the real economy sector (excluding financial institutions' debts) to its GDP. The larger this value, the higher the risk of default when the GDP experiences a downward fluctuation. At a microeconomic level, businesses and households may encounter insolvency, leading to bankruptcy, and banks could face bankruptcy due to an increase in bad debts, thereby triggering financial and economic risks. Therefore, the larger the macro leverage ratio, the higher the economic risks faced by the macroeconomy, with an inability to withstand minor fluctuations.

In 2015, China's macro leverage ratio reached 2.3 times, higher than most emerging market countries, nearly on par with the United States and the average level of developed countries, with a rapid growth rate. The soaring debt has several main reasons, including (1) The central government-led economic stimulus in response to the 2008 international financial crisis, leading to a surge in local government debt; (2) The debt of real estate developers and residential mortgage loans corresponding to the real estate bubble; (3) State-owned enterprises borrowing without restraint due to "soft budget constraints"; (4) The shadow banking system generated by financial innovation (including off-balance-sheet lending by banks themselves, lending by non-bank financial institutions, and lending by the internet finance industry), providing loans for numerous projects that cannot be financed by banks.

China Names New PBOC Party Chief, Sets Stage for Governor Change

Bloomberg

China named Pan Gongsheng as the central bank’s new Communist Party chief, putting him in line to be the next governor. The decision was made at a People’s Bank of China meeting of top cadres on Saturday, the central bank said in a statement. Pan, 59, is a deputy governor at the central bank with extensive experience in commercial banking. Pan replaces Guo Shuqing, who retired as party chief. Central bank Governor Yi Gang, who was Guo’s deputy, also retired from his party role, according to the statement.

If confirmed, Pan would take office at a time when President Xi Jinping is looking for ways to strengthen an economy still struggling to recover from some of the world’s strictest Covid-19 restrictions.

A change in the central bank’s top leadership also comes ahead of a possible trip by US Treasury Secretary Janet Yellen in early July. Details of her visit haven’t been officially announced but people familiar with the scheduling said she plans to have the first high-level economic talks with her new Chinese counterpart.

Pan has held a deputy governor role at the central bank since 2012 and became the Administrator of the State Administration of Foreign Exchange in 2016, managing the country’s $3 trillion in foreign reserves. Prior to joining the PBOC, he held positions at the Agricultural Bank of China Ltd. and the Industrial and Commercial Bank of China Ltd. Pan holds a PhD in economics from the Renmin University of China, and has published dozens of papers and several books on banking, finance and the economy. His overseas experience includes post-doctoral research at Cambridge University and a research fellowship at Harvard University.

To Foreign Policy Veteran, the Real Danger Is at Home

NY Times

Richard N. Haass, the outgoing president of the Council on Foreign Relations, has concluded that the United States is the greatest threat to world security today. In his two decades heading America’s most prestigious private organization for international affairs, Haass has identified a wide range of threats to global stability, including Russia, China, Iran, North Korea, climate change, international terrorism, food insecurity, and — most recently — the global pandemic. However, his view is that the unravelling of America’s political system has caused the internal threat to overtake the external threat. Instead of being the most stable country in the volatile world, Haass says the US has become the most unstable and uncertain exemplar of democracy. This situation is “poisonous” to the country’s ability to function in the world, he said. Haass has therefore turned his attention inward and wants to focus on promoting the teaching of civics as a way to heal American society.

Explosion hits chemical plant in southeast China

Reuters

An explosion occurred at a chemical plant in the southeastern Chinese province of Jiangxi at noon (0200 GMT) on Saturday, state media reported.

Footage on state broadcaster CCTV showed dense smoke at the Qiantai New Material Co facility.

The authorities were trying to determine the extent of potential casualties, state media said. A woman who answered the phone at the company and declined to identify herself told Reuters there were none.

Wagner Uprising Highlights China’s Risks With Russia

NY Times

China's President Xi Jinping may be reconsidering his relationship with Russian President Vladimir Putin after a mutinous uprising in the country last month threatened Putin's grip on power. Analysts say that while the two leaders' interests align, Beijing may now be forced to consider how its geopolitical, economic and territorial interests would be affected if Putin were to be toppled. China has publicly reaffirmed its support for Russia following the uprising, but some analysts suggest that China may now distance itself from Russia to some degree. Any regime change in Russia would prompt an instant reckoning for the relationship, with China concerned that a new Russian leader would realign the country towards a more friendly posture with the US, leaving China isolated and exposed to more pressure. The uprising also raises questions about the fragility of Putin's government, which China had previously backed as it challenged the global order dominated by the US.

Special report: Russia buying military-use drones from China

Nikkei Asia

Russia has been importing drones from Chinese companies to use in its invasion of Ukraine, according to a Nikkei Asia investigation. Despite Beijing's denials that such equipment is being deployed in the war, Russian companies imported at least 37 Chinese unmanned aerial vehicles between December 2022 and April 2023, worth around $103,000. These drones were designated in customs clearance records as being "for use in the special military operation" in Ukraine. While China has repeatedly denied providing weapons to Russia, reports have shown that Russia has been increasing its imports of Chinese drones since the beginning of the invasion. It is unclear whether the Chinese companies or government are aware of Russia's customs records regarding the drones. The investigation also found that Russian companies paid Chinese counterparts over $1.2 million for devices that detect and jam drones, as well as "rugged" portable personal computers, all of which were designated for use in the war.

China urges Netherlands to not abuse export control measures

Reuters

China has called on the Netherlands to not impede bilateral cooperation in the semiconductor industry and to avoid misusing export controls, according to a statement by China's Ministry of Commerce. The statement was made in response to media inquiries and noted that the two countries have engaged in frequent and multi-level communication on the issue. The Dutch government recently implemented new restrictions on the export of certain semiconductor equipment, aligning with a broader effort led by the United States to limit the supply of high-tech components to China.

Shanghai district plans to launch investment fund to support local tech firms

South China Morning Post

Huangpu district in Shanghai plans to launch an investment fund within the next year to support promising technology firms based in the area. The fund will be set up and run by an investment organisation affiliated with the local government, with the size of the fund yet to be revealed, but it will focus on a wide range of technology businesses from start-ups to listed firms.

Chinese military delegation visited UK, France - ministry

Reuters

A Chinese military delegation visited Britain and France from June 24 to Saturday to discuss the development of bilateral defence relations, according to China's Ministry of Defence. The delegation of the People's Liberation Army's defence strategy consultation exchanged views on international and regional security issues and enhanced mutual understanding and trust.

Long-time China scholar in Washington leaves for post at Hong Kong University

South China Morning Post

Cheng Li, the head of the John L. Thornton China Centre at the Brookings Institution, has left the role after 17 years to join the University of Hong Kong (HKU). Li is known for analysing the Chinese Communist Party and explaining its complex chain of command. Despite the deterioration in US-China relations, Li said his move was more about opportunity than leaving Washington. As Hong Kong increasingly loses its academic freedom, institutions in the city are intensifying their outreach to international scholars and Li hopes to use the city to promote peace over conflict.

Macau’s Casino Recovery Fizzles in June as Tourism Boom Fades

Bloomberg

Macau's gaming revenue in June missed estimates, signaling that the initial post-reopening boom in Chinese tourists may be fading. Gross gaming revenue rose 513.9% to $1.9 billion, compared to the median analyst estimate of a 530% increase. Revenue was also 2.3% lower than the previous month and a 36% drop from the 2019 level. Macau's casino operators have been diversifying into non-gaming activities to attract visitors as China's crackdown on high-rollers has impacted the VIP gambling sector, which used to contribute half of the city's gaming revenue.

Ukraine latest: Lukashenko says nuclear arms in Belarus will not be used

Nikkei Asia

Political turmoil continues to grip Russia as warlord Yevgeny Prigozhin and his Wagner mercenary group stage an armed mutiny against the Russian military leadership. Prigozhin initially took control of a military outpost in southern Russia and advanced towards Moscow with his fighters, but later reached an agreement to back down and return to their bases. The mutiny has raised concerns about stability in Russia and the loyalty of the country's security forces. Belarusian President Alexander Lukashenko, a close ally of Russia, has said that Russian tactical nuclear weapons deployed in his country will not be used. Meanwhile, Ukraine has launched a counteroffensive against Russian invasion forces, reclaiming occupied territory in the south and east of the country. The situation in Ukraine remains tense, with ongoing clashes between Ukrainian and Russian forces. NATO has reaffirmed its support for Ukraine, with Secretary-General Jens Stoltenberg stating that the mutiny demonstrates divisions within the Russian system. The international community is closely watching the situation, with countries like Australia and the US providing military aid to Ukraine. The European Union is also considering using frozen Russian assets to help rebuild Ukraine. However, there is uncertainty about the future and the potential impact of the mutiny on Russia's political landscape.

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