Chinese anti-corruption probe targets top Rocket Force generals; Chinese Property Selling Spree - A Complex Nexus Beyond Government's Reach
Biden, testing Xi, will bar Hong Kong’s leader from economic summit; Xi’s Security Obsession; China's Wang Yi makes first statement after reappointment as foreign minister
Welcome to this issue of The China Brief. Today is July 28, 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.
Chinese Property Selling Spree - A Complex Nexus Beyond Government's Reach
In a thought-provoking piece published in China Brief, Mr. Yi-min Xie makes a compelling case regarding the surge in property sell-offs in China and the simultaneous increase in Chinese overseas investments. While Mr. Xie argues that these phenomena are largely unrelated, I must respectfully disagree with his assessment, as I believe the situation is more intricately intertwined than he acknowledges.
One aspect that Mr. Xie appears to underestimate is the substantial impact of the liberalization of the Chinese currency, the RMB, and foreign currency under trade items. The rise in private enterprises engaging in import and export trade, facilitated by fully-funded organizations established overseas, has granted them greater agency to allocate assets globally. Thus, the practical ability of Chinese private enterprises to invest overseas exceeds Mr. Xie's estimation.
Admittedly, I concur with Mr. Xie's viewpoint that investing in real estate abroad is becoming less prevalent among Chinese buyers. Several factors contribute to this trend, including policies enacted in certain overseas regions (e.g., Hong Kong and Singapore) that restrict foreign individuals and entities from investing in domestic properties. Such policies often involve additional taxation and other deterrents aimed at curbing property price increases. Additionally, overseas property investment presents challenges in property management, tenant selection, and liquidity, which may not align with the current surge in dollar interest rates.
Based on information gathered from reputable overseas banks, it is evident that Chinese private enterprises and individuals increasingly favor financial products, such as high-interest deposits and insurance, for their overseas investments. Given the attractive annual interest rates (e.g., 5% or higher) available on short-term large dollar deposits, it becomes arduous for overseas property purchases to compete with such lucrative returns, except in specific locations like Dubai.
Furthermore, concerns regarding currency exchange losses do not seem to impede Chinese private enterprises. A significant portion of China's foreign trade imports and exports are priced in dollars, making Chinese businesses well-versed in the use and analysis of the dollar. Consequently, the recent surge in the dollar exchange rate and deposit interest rates, coupled with the sluggish domestic economy and RMB exchange rates, has led to the retention of capital overseas in dollars rather than its reinvestment in domestic production and trade procurement. High dollar interest rates, rather than currency exchange concerns, stand as the primary impetus behind Chinese overseas investments.
Mr. Xie's notion that foreign exchange controls could prevent those lacking confidence in the Chinese economy from investing overseas is a flawed interpretation. The influence of underground banks, providing foreign exchange transfer services primarily for small-scale personal and individual foreign trade, remains insignificant compared to the substantial capital inflows and outflows under trade items in China. Consequently, efforts to crack down on underground banks yield minimal impact on curbing financial cross-border flows.
While some believe that implementing stringent regulations can effectively halt capital outflow, the reality is more nuanced. As long as doubts persist about the future of the Chinese economy, total prevention of capital outflow appears unlikely. Even with restrictions on the inflow and outflow of capital under currency items, the free flow of currency under current trade items in China ensures that capital outflow may be slowed, but not substantially halted.
Anecdotal evidence from my extensive network of business associates reveals numerous instances of individuals selling domestic properties, utilizing the capital for daily operations of private companies, and depositing dollars into overseas banks as fixed deposits.
In light of the interconnectedness of the global supply chain, the Chinese economy plays a crucial role in this web of economic interdependence. Factors like the strength of the dollar, the performance of the European and Asian economies, and prevailing confidence (or lack thereof) in the Chinese economy significantly impact the investment decisions and asset allocation of Chinese economic participants. In this context, focusing solely on cracking down on underground banks will not alleviate the current challenges faced by the Chinese economy unless it fundamentally alters people's expectations of the future.
In conclusion, the surge in Chinese property sell-offs and overseas investments represents a complex web of economic factors that cannot be solely addressed through regulatory measures. The intertwined nature of global economies and the inherent uncertainties demand a more holistic approach to navigating these intricate waters.
(Note: The author of this article is Tian Yang, an investor, CEO, and guest author for China Brief.)
Biden, testing Xi, will bar Hong Kong’s leader from economic summit
Washington Post
The White House has decided to bar Hong Kong's top government official from attending a major economic summit in the US this fall, according to anonymous US officials. Chief Executive John Lee was sanctioned by Washington in 2020 after implementing a national security law imposed by Beijing that enabled the targeting of pro-democracy leaders. The snub by the US could induce Chinese President Xi Jinping to skip the summit, where a meeting with Biden has been anticipated. However, others say they expect Xi to attend, as China will want to project leadership to restore global investor confidence and show Xi's domestic audience that he is effectively managing the country's ties with the US. The sanction on Lee does not prevent Hong Kong's participation in the summit, allowing for another senior representative to attend instead.
Chinese anti-corruption probe targets top Rocket Force generals: sources
South China Morning Post
Several senior commanders in China's People's Liberation Army's Rocket Force have been implicated in an anti-corruption investigation, according to sources. The investigation is being conducted by the Central Military Commission's Commission for Discipline Inspection and audit office. The investigation reportedly began after the retirement of former Defence Minister Wei Fenghe. The Rocket Force was created in 2015 and is responsible for China's nuclear arsenal. The force is also involved in China's military pressure campaign on Taiwan.
Foreign Affairs
Chinese leader Xi Jinping's commitment to national security remains unwavering, both domestically and internationally. Xi's "comprehensive national security concept" is centered on protecting the Chinese Communist Party's governing authority and regime security. This has led to the implementation of repressive laws, the construction of a surveillance state, and the weakening of U.S. alliances and partnerships. Despite recent challenges to China's regime stability, such as public opposition to COVID policies and economic troubles, Xi's focus on security has not wavered.
Xi's third term as leader indicates that regime security concerns will continue to drive Chinese foreign policy. The paradox is that the defensive goal of protecting regime security at home necessitates assertive actions abroad, which in turn invite responses from other countries. Xi's recent personnel appointments, such as those with experience in internal security, demonstrate the CCP's commitment to national security.
China's foreign policy is also shaped by its new development pattern, which prioritizes security as a precondition for development. The goal is to insulate China from external threats and ensure its progress towards national rejuvenation. China's Global Security Initiative (GSI) aims to create new forms of global security governance that bypass or reduce the importance of the U.S. alliance system. By externalizing the comprehensive national security concept, China seeks to bolster regime security through foreign policy.
This poses challenges for the United States, as China's approach may gain traction among countries dissatisfied with the current international security order. The United States should identify areas of cooperation and offer an alternative to China's revisionist approach. This includes addressing nontraditional security challenges and building a new and inclusive security architecture that meets the needs of a changing world.
US expected to ban Hong Kong leader from Apec, Beijing condemns move
South China Morning Post
The United States is expected to ban Hong Kong leader John Li Ka-chiu from attending the Asia-Pacific Economic Cooperation (Apec) summit in San Francisco in November. The move has been strongly condemned by Beijing, with the Chinese embassy in Washington stating that the ban violates Apec rules and breaks commitments made by the US. The Hong Kong government has called on the US to invite the city's leader to the summit as usual. Russian President Vladimir Putin is also reportedly banned from the summit, while Chinese President Xi Jinping is expected to attend.
China’s new money man once fixed a crisis. He may need to again
The Sydney Morning Herald
Pan Gongsheng, the current head of China's State Administration of Foreign Exchange (SAFE), has been appointed as the new governor of the People's Bank of China (PBOC). Pan will take over from Yi Gang, who has held the position since 2018. The move comes as China's post-pandemic recovery falters, its banking system is weighed down by bad loans, and its currency teeters near 15-year lows. As head of SAFE, Pan stabilised the yuan after a devaluation in 2015. His strict limits on capital outflows stopped the outflow of capital but damaged the international appeal of the yuan. Pan's appointment as head of the PBOC will give him significant policy influence over the Chinese financial system. Pan is known for his technical expertise and lack of political backing from higher-ups. His appointment comes at a time when China's central bank is facing increased scrutiny, as foreign investors think twice about putting money into China and domestic investors withdraw their investments from the country.
China Evergrande’s EV unit plunges 69 per cent after 16-month suspension
South China Morning Post
Shares of China Evergrande New Energy Vehicle Group, the electric vehicle (EV) manufacturing unit of China Evergrande Group, fell by as much as 69% after trading resumed following a suspension of 16 months. The company fulfilled the bourse's requirements to resume trading after disclosing overdue annual reports for 2021 and 2022. Evergrande NEV, which has been hit by a liquidity crisis, now has a market capitalisation of $1.7bn, less than 2% of China's largest EV maker BYD.
China-Taiwan military balance 'rapidly tilting' toward Beijing: Japan
Nikkei Asia
Japan's annual defense report, released on Friday, highlighted the growing military imbalance between China and Taiwan, stating that it is "rapidly tilting to China's favor." The report expressed concern over China's "coercive military activities" near Taiwan and its increasing military presence in the region. Japan, a U.S. ally, is particularly concerned about a potential invasion of Taiwan due to its proximity to the Tokyo-controlled Senkaku Islands in the East China Sea. The report also expressed concern about China-Russia military ties and North Korea's nuclear and missile programs.
North Korea holds military parade with guests Russia, China
Deutsche Welle
North Korea held a military parade in Pyongyang to mark the 70th anniversary of the end of the Korean War. The parade showcased nuclear-capable missiles and new attack drones. North Korea's state news agency, KCNA, reported that the strategic unmanned reconnaissance aircraft and multi-purpose attack drones flew in demonstrations over Kim Il Sung square during the parade. The event was attended by Russian Defense Minister Sergei Shoigu and Chinese Communist Party official Li Hongzhong, who are the first high-ranking foreign visitors to North Korea since the outbreak of COVID-19. The parade comes amid heightened tensions for both Russia and China with Western powers.
China's Wang Yi makes first statement after reappointment as foreign minister
Reuters
China's reappointed foreign minister, Wang Yi, has promised to deepen partnerships and safeguard sovereignty in his first comments since his reappointment. This comes after Qin Gang, who was foreign minister for just seven months, mysteriously disappeared for a month due to unspecified health reasons. Wang stated that his ministry will actively participate in the reform of global governance and protect China's sovereignty, security, development, and interests. Wang previously held the foreign minister position from 2013-2022.
Judge Rejects Hong Kong’s Bid to Ban Pro-Democracy Song From Internet
NY Times
A judge in Hong Kong has denied a government request to ban the popular pro-democracy song "Glory to Hong Kong" from the internet. The government sought an injunction that would have given it the power to force tech companies, including Google, to restrict access to the song. The song, which was the unofficial anthem of the 2019 democracy protests, has been banned from schools and has drawn official rebukes when played at sports competitions. The judge ruled that the government's request was too broad and would have had a chilling effect on free speech, and also noted that existing criminal laws already give authorities the power to prosecute people for spreading the song.
Taiwan returns to growth in Q2 on strong domestic demand, but exports weak
Reuters
Taiwan's economy grew by 1.45% in Q2 2023, beating expectations and returning to growth after slipping into recession in Q1. The growth was driven by resilient domestic consumption, while exports remained weak due to flagging demand for technology products. The government predicts that a return to export growth may not occur until November. Analysts expect domestic consumption to continue to grow in Q3, but export demand is likely to remain weak. The government expects full-year 2023 growth of 2.04%, the slowest pace in nearly eight years.
China seeks lower mortgage rates, down payments to aid housing market recovery
South China Morning Post
The Chinese government is set to introduce measures to encourage more residents to make their first home purchases and help revive the ailing housing market. The measures include guiding mortgage financing rates lower, reducing down payment ratios and exempting some homebuyers from paying taxes for home purchases. The Politburo, the Communist Party's top decision-making body, announced on Monday that it would enforce a series of policies to engineer a gradual recovery of the industry through 2025.
Sri Lankan port could be China’s top choice for next naval base: report
South China Morning Post
A report by the AidData research project at William & Mary university in Virginia has identified Sri Lanka as the most likely nation to host a Chinese naval base in the coming years. The report states that China's largest port investment is in Sri Lanka's Hambantota port, which Beijing exercises direct control over. Other potential locations for Chinese naval bases in the next two to five years include Equatorial Guinea, Pakistan, and Cameroon. China has the world's largest navy by number of warships and has been investing heavily in port facilities around the world. The report also highlights a high concentration of Chinese port investments in Africa, with Bata, Equatorial Guinea, being identified as the second most likely spot for a naval base.
China warns citizens in Niger to ‘be vigilant’ amid military coup
South China Morning Post
The Chinese embassy in Niger has advised Chinese citizens to "be vigilant" and avoid going out following a military coup that removed the country's president on Wednesday. The embassy has not reported any casualties or injuries of Chinese citizens. Niger's military claimed to have seized power and suspended all institutions, but stated that the country's ministers would continue to work. The military has not specified who is leading the coup. Niger is rich in uranium and petroleum, and China is a major investor in the country. The United Nations has suspended support to Niger due to the coup.
Hong Kong's leader may be barred from a key economic summit. The city says that breaks conventions
The Independent
The Hong Kong government has called on the US to invite its city leader to the Asia-Pacific Economic Cooperation (APEC) meeting in November, after reports that the US would bar Hong Kong Chief Executive John Lee from attending the summit. The move is likely to intensify tensions between China and the US. Lee is one of the Hong Kong officials sanctioned by the US in 2020 after the enactment of a Beijing-imposed national security law. The US has launched diplomatic missions to restore dialogue suspended by Beijing, including meetings between top US officials and their Chinese counterparts.
Chipmakers signal supply glut easing but demand recovery still slow
Reuters
The global semiconductor supply glut is starting to ease as production cuts and improved demand begin to take effect. The oversupply of commodity chips caused a combined operating loss of $12bn for Samsung and SK Hynix in H1 2022. However, the decline in PC shipments has slowed to 11% in Q2 compared to 30% in each of the previous two quarters, while smartphone shipments fell 8% in Q2 compared to 14% in Q1. Demand for chips to support AI has risen but still only accounts for a small fraction of overall chip demand, leading to reduced corporate spending on servers.
Typhoon Doksuri lands in China's southeastern Fujian province
Reuters
Typhoon Doksuri has hit China's southeastern Fujian province and is expected to continue moving north-west with weakening intensity.
U.S. Secretary of Defense attacks China's 'bullying behaviour' in Pacific
Reuters
U.S. Secretary of Defense Lloyd Austin has stated that the United States will defend its allies against "bullying behavior" from China in the Pacific. Austin made the comments during a meeting with his Australian counterpart, expressing concern over Chinese coercion in the East China Sea, South China Sea, and Southwest Pacific. He emphasized that the U.S. and Australia are both committed to upholding international law and supporting their allies and partners in defending themselves against China's actions.
Biden meets Italy’s Meloni to talk China, Ukraine
Al Jazeera
US President Joe Biden praised Italian Prime Minister Giorgia Meloni for her support of Ukraine during a meeting at the Oval Office. While the White House downplayed differences over Meloni’s hard-right government’s stances on China, immigration, abortion, and LGBTQ rights, Biden commended Italy for its support of Ukraine. Meloni, whose government has been criticized as Italy’s first far-right administration since World War II, said she was “proud” of Italy’s support for Ukraine and emphasized the importance of Western nations relying on each other. The two leaders also discussed Italy’s participation in China’s Belt and Road Initiative (BRI), with Biden stating that Washington’s approach was not to dictate. The joint statement after the meeting pledged to continue support for Ukraine and strengthen dialogue on the “opportunities and challenges posed by the People’s Republic of China.”
China’s concertgoers splurge, but will revenge spending rock the economy?
South China Morning Post
Concerts and music festivals are experiencing a significant boom in China as fans seek to make up for lost time due to the Covid-19 pandemic. In the first half of 2023, more than 500 large-scale gigs and music festivals were held, generating CNY2.5bn ($350m) in ticket sales. The number of for-profit performances in the same period increased by 400% to 193,300, with ticket sales up 673% and attendance up over tenfold. However, the concert market stands as an outlier to the broader economic recovery, which has been losing steam. Concerns have been raised about whether consumption alone can drive China's economic recovery.
The stark contrast in the recovery of the concert market and other sectors reflects the uneven path to recovery across industries. While sectors such as entertainment, restaurants, and tourism are experiencing a boom in demand, other industries such as consumer durables and real estate are struggling to recover. Concerts are seen as high-end consumption targeting the urban middle class, whose income was less affected during the pandemic. However, frequent and high levels of spending may not be sustainable, and there are concerns that consumption alone cannot drive China's economic recovery.
The recovery of consumption is dependent on factors such as income growth and consumer confidence. Rising uncertainties in the job market, age discrimination, and fears of widespread lay-offs have caused residents to cut spending. Despite the government's efforts to boost consumption through tax cuts and discount coupons, the results have been inconspicuous. Policymakers are likely to let the recovery run its course, with limited support provided, and consumers will rely on their own means.
Senate passes defense bill with bipartisan support, but clash looms with House over social issues
The Independent
The Senate has passed a $886bn annual defence bill that would deliver a 5.2% pay raise for service members and keep the nation's military operating. The bill sets up a clash with the House, which passed its own version of the annual defence bill along party lines after repeated clashes over social issues like abortion access and diversity initiatives.
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