China's new law tightens Xi's powers against the West; Exclusive Insight: The Leverage of the Chinese Economy
ASML Hit With New Limits on Chip Gear Exports to China; Lavrov, asked about failed mutiny aftermath, says Russia always emerges stronger from trouble
Welcome to this issue of The China Brief. Today is June 30, 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 of the Chinese Economy
Li Weijun
In this article and several ensuing pieces, I shall provide a rudimentary explanation for our readers on a handful of immediate, pressing issues pertinent to the Chinese macro-economy. These topics will include the Chinese real estate market, financial stability, local government debt, and economic stimulation.
What has transpired? To comprehend the current economic dilemmas in China, the concept of "leverage" is an indispensable piece of background knowledge. Let's illustrate with an example: suppose I possess one million dollars in cash, and I borrow an additional nine million dollars, thus having ten million dollars in total, which I invest entirely in Apple Inc. shares. When the stock price of Apple ascends by ten percent, I sell the shares now worth eleven million dollars. After reimbursing the loan of nine million dollars, I am left with two million dollars, thus reaping a profit of one million. If I had not borrowed the nine million dollars and only utilized my own one million to purchase the shares, a ten percent surge in price would have garnered me merely a hundred thousand dollars in profit, significantly below the return from leveraging.
However, if I invest my own one million dollars, plus the borrowed nine million dollars entirely into Apple Inc. shares, and the stock price declines by ten percent, and I subsequently sell, after repaying the nine million dollar debt, my own one million dollars would have entirely evaporated. In contrast, if I had not borrowed any money and only used my own one million to buy shares, a ten percent drop in the stock price would have resulted in a loss of only one hundred thousand dollars, significantly less than the loss from leveraging.
Evidently, investment through borrowing amplifies investment risk. In the example above, I have one million dollars of my own, borrow nine million dollars, and collectively purchase ten million dollars worth of Apple Inc. shares. In finance, the ratio of total assets (ten million dollars) to own funds (one million dollars) is referred to as the leverage ratio. The larger this ratio, the greater the returns when decisions are correct, and conversely, the greater the probability of bankruptcy when decisions are erroneous, thereby heightening the associated risk.
ASML Hit With New Limits on Chip Gear Exports to China
Bloomberg
The Netherlands has introduced new export controls that will require ASML to apply for export licenses for the shipment of some advanced deep ultraviolet lithography (DUV) systems, potentially restricting the company from sending chipmaking machines to China. Although the measures do not specifically mention China or ASML, they are designed to limit shipments of three models of the company's machines to the Asian country. The restrictions are expected to prevent shipments of the TWINSCAN NXT:2000i, the NXT:2050i, and the NXT:2100i, which are all immersion DUV models.
China's new law tightens Xi's powers against the West
BBC
China has enacted a new law that asserts Beijing's interests on the world stage and threatens punishment for entities that act in ways "detrimental" to China's interests. While the law does not specify which actions should be avoided, experts say it highlights China's aggressive diplomacy and its intention to pursue its interests through coercion and pressure. The law also emphasizes the ruling Communist Party's control over foreign policy, further consolidating President Xi Jinping's power. The full implications of the law will depend on the courts' interpretation and the punitive measures imposed.
Lavrov, asked about failed mutiny aftermath, says Russia always emerges stronger from trouble
Reuters
Russian Foreign Minister Sergei Lavrov has said that Russia always emerges stronger and more resilient from difficulties, following the recent failed mercenary mutiny. Lavrov also criticised Western officials for their reaction to the mutiny, suggesting that they were at war with Moscow. He called for the expansion of the UN Security Council to give more representation to Asian, African, and Latin American countries in order to break what he called Western domination of the world. Lavrov also reiterated Russia's accusation that the West, particularly the US, is trying to prevent Russia and China from acting independently in a multipolar world.
Chinese spy balloon did not collect information, US says
Deutsche Welle
The Chinese balloon that flew across the US from Alaska earlier this year did not collect intelligence, according to the Pentagon. The US Air Force shot down the balloon in February after it had floated over the US mainland for several days. US officials have been studying the debris recovered from the Atlantic Ocean. The balloon was reported to have a large payload of electronics, leading to concerns that Beijing was collecting vital intelligence. China has repeatedly denied the accusations, claiming the balloon was carrying meteorological equipment. The incident caused strains between the US and China, and US Secretary of State Antony Blinken cancelled his long-planned trip to China in February.
EU leaders to pledge de-risk from China and debate what this means
Reuters
European Union leaders are discussing how to reduce the bloc's dependence on China while still engaging in areas such as climate change. The leaders are concerned about the growing relationship between China and Russia and its potential implications. The draft conclusions of the summit call on China to press Russia to stop the war in Ukraine and express concern about tensions in the Taiwan Strait. The EU leaders aim to present a united front, but there are differences between countries like France and Germany, which have significant business interests in China, and Lithuania, which has faced Chinese sanctions. The EU plans to reduce critical dependencies and vulnerabilities, including in supply chains, and to de-risk and diversify where necessary. The European Commission is also urging stronger controls on exports and outflows of technologies to military use by "countries of concern," with China clearly in mind.
China’s biggest online travel agency to pay employees $10k to have kids
The Sydney Morning Herald
Trip.com Group, one of the world's largest online travel agencies, has announced that it will pay a cash subsidy of CNY 10,000 ($2,081) annually for five years for every child born to its employees worldwide. The initiative, which will cost around CNY 1 billion ($208 million), is aimed at addressing China's ageing population and declining birth rate. China's birth rate fell to a record low of 6.77 births per 1,000 people last year, with couples citing high childcare and education costs, low income, a weak social safety net, and gender inequality as deterrents to having children. Trip.com executive chairman James Liang, who is also a demographer, has suggested that 2% of China's GDP should be allocated to encouraging fertility.
Hong Kong, Beijing bourses agree to dual stock listings
Nikkei Asia
The Hong Kong Stock Exchange (HKEX) and the Beijing Stock Exchange (BSE) have signed a memorandum of understanding that will allow qualified companies to apply for listing on each other's markets. Under the agreement, companies traded on the BSE can apply for flotation on the HKEX, and vice versa. The exchanges have also agreed to joint marketing, research, investor education, and personnel exchanges. The move underscores the BSE's commitment to further opening up its market and responds to market needs. The BSE was launched in November 2021 as an incubator for small businesses to tap investors directly.
Wanda Faces Key Payment Test as Bond Setback May Revive Concerns
Bloomberg
Chinese conglomerate Dalian Wanda faces the biggest test of its ability to repay debt with a $400m bond due on 23 July. The company has been unable to list its shopping mall unit in Hong Kong, a move that has affected plans to issue debt. If the listing fails, the company may have to pay $4.1bn to investors of the unit.
Taiwan says 11 Chinese aircraft crossed the Taiwan Strait median line
Reuters
On Friday morning, eleven Chinese aircraft crossed the median line of the Taiwan Strait, which serves as an unofficial barrier between Taiwan and China. In total, 24 Chinese warplanes, including fighter jets and bombers, were spotted near Taiwan, along with five Chinese battleships. Taiwan responded by sending aircraft and ships to warn away the Chinese activities and monitored them with missile systems.
Probe underway into firing of infectious disease scientists at top-secret Winnipeg lab
The Globe and Mail
A special committee of MPs and judges in Canada has begun an investigation into the firing of two infectious disease scientists from the country's top-secret laboratory in Winnipeg. The probe will examine whether the scientists provided confidential scientific intelligence to China. The investigation will focus on the transfer of Ebola and Henipah viruses overseen by one of the scientists, Dr. Xiangguo Qiu, to China's Wuhan Institute of Virology in 2019. The scientists were dismissed in January 2021 and the RCMP are investigating whether they passed on Canadian intellectual property to China.
Pfizer, China Drugmaker Partner to Sell Local Brand of Paxlovid
Bloomberg
Pfizer has partnered with Chinese drugmaker CSPC Pharmaceutical Group to launch a local brand of its Covid-19 antiviral medication, Paxlovid, in China. CSPC will manufacture and sell the medication in mainland China. The deal comes after China's state medical insurance stopped reimbursing Paxlovid due to failed price negotiations between Pfizer and the government. The move comes as China has been developing its own homegrown Covid-19 antivirals. Pfizer has previously secured partnerships with other Chinese companies to expand access to Paxlovid in the country.
Senior China Diplomat Dispatched to Italy to Keep Nation in Belt and Road Initiative
Bloomberg
China has dispatched a senior diplomat to Italy this week in an effort to persuade the European nation not to leave President Xi Jinping’s flagship global investment pact, the Belt and Road Initiative (BRI). Italy joined the BRI in 2019, becoming the only G7 nation to join the pact. However, current Prime Minister Giorgia Meloni favours leaving the initiative and has stated that Italy can maintain good relations with China outside of the BRI. China has warned Italy that there will be negative consequences if Rome withdraws from the initiative. China is trying to persuade Europe to take a less hawkish stance than the US, which has imposed a raft of export controls on China.
U.S. State Dept OKs two possible military sales to Taiwan -Pentagon
Reuters
The U.S. State Department has approved the potential sale of ammunition and logistics supply support to Taiwan in two separate deals valued at up to $440 million. Taiwan has requested to purchase 30mm ammunition and a Blanket Order Cooperative Logistics Supply Support Arrangement. The principal contractors for these deals will be Alliant Techsystems Operations and General Dynamics. The Pentagon's Defense Security Cooperation Agency notified Congress of both of the possible sales.
China Growth Momentum Slows Further Amid Calls for Stimulus
Bloomberg
China's manufacturing industry contracted again in June, with the official Purchasing Managers' Index (PMI) for manufacturing at 49, the same as May, and the non-manufacturing gauge for construction and services at 53.2, down from 54.5 in May. Both readings signal contraction from the previous month. The data is increasing speculation for more policy support for the economy. After a strong first quarter, consumer spending is slowing, housing has fizzled, and infrastructure investment and exports are muted.
China's June factory activity falls for third straight month - PMI
Reuters
China's manufacturing activity contracted for the third consecutive month in June, although at a slower pace, according to the official purchasing managers' index (PMI). The PMI was at 49.0, just below the 50-point mark that separates expansion from contraction. The slower contraction in manufacturing activity comes as pressure builds for policymakers to release more stimulus to support weak demand. Economic forecasts for China's economy for the rest of the year have been downgraded after disappointing May industrial output and retail sales data. The government has set a modest GDP growth target of about 5% for this year.
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