CICC Cuts Pay 40% as China Crackdown Roils Broker Bonus Season; Exclusive Insight: The Fragility of Guizhou
Analysis: China was reducing Micron chip purchases years before ban; Factbox: US-China tensions intensify over tech to Taiwan flashpoints; Russia, China sign economic deals despite Western criticism
Welcome to this issue of The China Brief. Today is May 24, 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 Fragility of Guizhou
As reported by The Wall Street Journal, the government of Guizhou Province in China is faced with the risk of debt default and is seeking assistance from the central government. Whenever such significant occurrences take place, I habitually reflect in a humble manner - what are the underlying causes behind them? Could this incident represent a turning point in a certain historical process?
In several of my previous articles concerning the debts of local Chinese governments, I mentioned that according to IMF estimates, by the end of 2022, the total debt of both the central and local governments of China constituted 107% of GDP. This level, when compared to the scale of government debt in major economies worldwide, is not considered high: the United States stands at 123%, Japan at 226%, the United Kingdom at 106%, France at 113%, and Germany at 69%.
However, equally significant to the question of total debt is the issue of vulnerability. To illustrate, if a class of students has an average test score of 90, this does not imply that there are no students struggling academically or failing their exams (scoring below 60). Guizhou happens to be one of the most vulnerable provinces in the country:
It has high levels of debt, ranking among the top in the nation. By the end of 2021, the debt-to-GDP ratio of Guizhou's local government was approximately 137%, which is now likely over 150%.
The dependency of local finance on land sales income is also among the highest in the country. With the real estate market currently sluggish, the income from land sales by local governments is declining. For provinces like Guizhou, which heavily rely on such income, fiscal revenues are significantly impacted, and the problem of debt default becomes more visible.
The interest rates on local debts are also among the highest in the nation. High costs reflect not only the inferior quality of the debt but also severe corruption among local officials, who pocket substantial interest profits.
The combination of high total debt, high interest rates, and a strong local fiscal dependence on land sale revenue has brought Guizhou to its current predicament, becoming the first province unable to sustain its debt. There are several other provinces as vulnerable as Guizhou, which will likely encounter similar issues in the future. The unfolding crisis in Guizhou implies that even with not exceptionally high total debt levels, the susceptibility of China's government debt is enough to trigger a crisis.
As for the second question I pondered at the start of this article: does Guizhou's local debt problem represent a turning point in a historical process? I humbly yet firmly believe it indeed does. The era of high-speed growth in China driven by debt, investment, real estate, and infrastructure construction (with Guizhou being the province with the fastest average GDP growth in the past decade) has come to an end. The next step should involve a swift transition to an economy driven by innovation and consumption, resolving the accumulated debt issues gradually in a period of moderate growth, all the while ensuring no financial risk outbreaks.
(Li Weijun, contributing economist for The China Brief.)
Analysis: China was reducing Micron chip purchases years before ban
Reuters
Chinese requests for Micron Technology’s chips dropped dramatically from 2022, and instead memory chip purchases have gone to domestic providers including Huawei and surveillance giants Uniview and Hikvision, according to a Reuters review of government tenders. While geopolitical tensions between China and the US have played a role in the change, analysts suggest that China had been limiting its use of the US firm’s products for some years, since most of Micron Technology’s chips can be obtained from Chinese companies or foreign providers.
Factbox: US-China tensions intensify over tech to Taiwan flashpoints
Reuters
China and the US continue to escalate tensions over trade and security issues. The US has targeted numerous sectors, from technology to consultancy, whilst China has pushed its sovereignty agenda via increased military and diplomatic pressure on Taiwan. Beijing has also faced scrutiny over its efforts to extend its influence beyond its borders, whilst Washington has accused China of considering direct weapons supply to Russia in relation to the ongoing war in Ukraine.
Russia, China sign economic deals despite Western criticism
Deutsche Welle
Russia and China have increased economic cooperation as Western nations criticize the alliance amid the ongoing Ukrainian conflict. Russian Prime Minister Mikhail Mishustin met Chinese Premier Li Qiang, and further plans to meet President Xi Jinping, amid the signing of agreements on investment, agriculture and sports cooperation. This comes after bilateral trade hit a record $190bn last year, with the latest Chinese customs data showing $70bn reached this year alone. The nations have continued to deny claims that international norms are being breached in their relationship.
Top Thai Hotel Group Projects Record Year on China Tourism Boom
Bloomberg
Minor International, one of Asia's leading hotel resort operators, predicts a record year for its hospitality business due to pent-up travel demand and an expected resurgence of Chinese tourist travel. Minor expects bookings to remain high across all of its markets, particularly in Europe and Thailand for 2023, following a strong recovery at the beginning of the year. This year will also see the return of Chinese tourists, which is believed to support further demand for accommodation from the fourth quarter onwards. The firm faces competition, with global peers including Marriott and Hilton also reporting a boost in room rates. The tourism industry is also excitedly anticipating the return of Chinese tourists, although flight capacity is still slow to recover. The Thailand tourism authority predicts that arrivals from China will return to pre-pandemic levels of one million visitors per month from October.
Despite supply chain risks, China remains high-priority market, Panasonic says
Reuters
Despite concerns over geopolitical risks, Panasonic Holdings views China as a high-priority market, according to the group CEO, Yuki Kusumi. The G7 has heightened the importance of companies "de-risking" their China operations, but not completely decoupling from the world's second largest economy.
Sri Lanka finds 14 bodies inside capsized Chinese fishing boat
South China Morning Post
The Sri Lankan navy has located 14 bodies inside a capsized Chinese fishing boat last week, one day after a preliminary Chinese-government probe concluded there were no survivors. The vessel had 39 crew on board when it overturned with 17 Chinese, 17 Indonesians and five Filipinos within Australia’s vast search-and-rescue region 5,000km west of Perth. The Sri Lankan navy statement came a day after a preliminary probe by the Chinese transport ministry concluded that all those onboard had died. The vessel was owned by the Penglai Jinglu Fishery Company, one of China’s major state-run fishing firms.
Export Controls Emerge as a Favored US Tool Targeting Russia and China
Bloomberg
The US Department of Commerce’s blacklist, known as the Entity List, has been key to the Biden administration’s response to China, but the focus on export controls also relates to Russia’s invasion of Ukraine. It signals that it will be harder for those who ignore the restrictions to avoid consequences under the watchful eye of the Bureau of Industry and Security (BIS), which administers the list and has already issued a series of fines this year to companies that have provided technology to Russia. US shipments of all goods to Russia have plunged about 90% by value since the start of the war.
China says NATO's plan for Japan office not welcomed in Asia-Pacific
Reuters
China has said that the Asia-Pacific doesn't welcome NATO's plan to open a liaison office in Japan, following Japan's previous acknowledgement of NATO's plan. "We want to say that the Asia-Pacific does not welcome group confrontation, does not welcome military confrontation," stated Chinese foreign ministry spokesperson Mao Ning. Japan has also said it has no plans to become a NATO member.
Roubini Warns US-China Cold War Risks Worsening After G-7 Summit
Bloomberg
Often lost amid the current crisis as to whether China's economy is growing at 6% or 5%, is that the biggest threat to global growth remains geopolitical. In particular, discussion over China might miss the key point that the cold war between China and the US is likely to get even colder yet, according to Roubini Macro Associates's boss, Nouriel Roubini. Speaking in Doha, he singled out the threat of a "geopolitical depression" amongst the biggest risks facing markets, citing Russia's invasion of Ukraine and the potential for escalations between Israel and Iran, amongst others.
Chinese supermarkets hit speed bumps in post-COVID recovery
Nikkei Asia
China's largest supermarket operators are facing declining sales in the first quarter of 2023 due to weakening demand caused by the pandemic. Seven out of 14 publicly traded supermarket chains reported a year-on-year decline in first-quarter sales, with four posting a net loss during the first three months. This is impacting the sector's recovery efforts after a difficult 2022.
On Beijing visit, Russian prime minister says pressure from West is strengthening ties with China
The Toronto Star
Russian Prime Minister Mikhail Mishustin and his Chinese counterpart held a meeting, with Mishustin praising the partnership between the two countries as being at an "unprecedented high level". The visit comes as Western pressure promotes closer ties between Russia and China economically and diplomatically, with China serving as a support network given Russia's growing isolation. Though Russia's recent invasion of Ukraine was not mentioned, the eventual peace in the region will ultimately depend on China's involvement, given its important national economic interests in Russia and Ukraine.
HK Leader Slams Cathay Pacific Over Discrimination Row That Irked China
Bloomberg
This week, Cathay Pacific fired three crew members after a recording was made of them making disparaging remarks about mainland Chinese passengers during a flight from Chengdu to Hong Kong. Hong Kong's leader, John Lee, expressed his disappointment and concern, and met with Cathay's CEO, Ronald Lam, over the issue. The Chinese Communist Party's People's Daily criticised the airline via social media for "hurting the feelings of compatriots" and warned that it's "old sickness" would prevent it from flying far. Following involvement in Hong Kong's pro-democracy protests in 2019, Cathay has come under scrutiny from the Chinese authorities.
China's Lenovo revenue falls for third consecutive quarter as PC demand slumps
Reuters
Lenovo, the world's largest PC maker, reported a 24% fall in revenue for Q1 2023, meeting market expectations. The company's Q1 revenue of $12.63bn marked the third consecutive quarter of year-on-year decline, with global PC shipments across the industry declining 29% in January-March to 56.9 million units. To improve profit margins, Lenovo is expanding its non-PC businesses, such as smartphones, servers and information technology services. However, overall net income attributable to shareholders in January-March fell 72% to $114m.
Exclusive: Chinese hackers attacked Kenyan government as debt strains grew
Reuters
Chinese hackers have spent years targeting Kenya's government, according to three sources. Research reports from cybersecurity companies, combined with a Reuters analysis of technical data, suggested the hacks were specifically aimed at acquiring information on the debt owed to China by Kenya. This would have allowed the Chinese government to adjust repayment plans as necessary. China's Belt and Road Initiative, which seeks to create a global infrastructure network, requires Kenya's input, which can be supported by the cyberattacks. Boston University says China has carried out almost $160bn-worth of loans and investments across Africa between 2000-2020.
Chinese premier: Willing to work with Russia to take pragmatic cooperation to new level
Reuters
Chinese Premier Li Qiang has said that China is keen to deepen its pragmatic cooperation with Russia in various fields. The premier and Russian Prime Minister Mikhail Mishustin discussed investment between their countries in a meeting in Beijing, noting that such cooperation has a “good” development trend. Mishustin was the highest ranking Russian official to visit the Chinese capital since Russia’s troops entered Ukraine this year.
US reluctance on trade deals sends Latin America towards China
Financial Times
As China continues to develop trade and invest in Latin American nations, the US and EU are being left behind as neither can offer a better alternative. Latin America has become China's biggest trading partner, with trade volume skyrocketing from $12bn in 2000 to $495bn in 2022. Chile, Costa Rica, and Peru already have free trade deals with China, while Ecuador and Uruguay are soon to follow. Meanwhile, the EU has so far not ratified its agreement with the South American Mercosur bloc despite 20 years of negotiations. Officials in Washington DC are frustrated by a lack of an active trade agenda. The US has a variety of free trade agreements with 12 Latin American nations, but this has led to difficulties in integrating regional value chains. While the US and EU have been focusing on corruption, democracy, the environment, and human rights, China has won friends in the region by building roads, bridges and airports, and providing loans, with 20 nations joining the Belt and Road initiative. However, the US and Europe are still urging Latin America to avoid Chinese tech giant Huawei's 5G phone networks.
Half of US public approves of Washington’s arms deliveries to Ukraine in war’s 2nd year
The Toronto Star
A recent survey conducted by the University of Chicago's Harris School of Public Policy and NORC shows that half of US citizens approve of the Pentagon’s ongoing supply of weapons to Ukraine. This level is almost unchanged in the past year, although concerns are expressed over the ongoing economic sanctions against Russia. The poll found that big majorities among both Democrats and Republicans believe that Russia's attack on Ukraine was unjustified, and three in four people in the US support the US in playing at least some role in the conflict. Despite concerns previously expressed by policymakers that material support for Ukraine could fall if the war took time and that heavy assistance to Ukraine would become a partisan issue, such concerns have yet to be seen. Samuel Charap, a senior political scientist at RAND Corp. research center, commented, “There’s no ground-swelling of American Ukraine fatigue here, and that has always been the fear…”
Siemens chief vows to ‘defend and expand’ market share in China
Financial Times
Siemens CEO, Roland Busch, has stated that he will expand the company's market share in China when German companies are under increasing pressure to diversify away from China. Busch argues that the market is crucial for innovation and growth within the industrial conglomerate, as China's increasingly technologically advanced factories are key for pulling the company into the next level of innovation.
Big drop in German exports to China raises fears over EU’s economic powerhouse
Financial Times
German exports to China fell by 11.3% in the first four months of 2022, compared with the same period the previous year, highlighting challenges faced by Europe’s industrial powerhouse. Carmakers lost market share to domestic companies, while German chemical producers suffered from high power prices, and the euro’s appreciation made German goods less competitive. The country’s energy-intensive companies are also reeling from high power prices. Exports to its second-largest market outside Europe comprised just 6% of Germany's total exports in Q1 2023, a drop from more than 7% in the same period for the past four years.
South Korea asks US to review China rule for chip subsidies
Reuters
South Korea has asked the US to review the criteria used to assess new subsidies for semiconductor investment, following worries about the impact of rules that could limit investment in countries such as China. In March, the US commerce department suggested measures that would prevent nations such as China from tapping the $52bn earmarked for semiconductor manufacturing and research under the CHIPS Act. As we highlighted last year, Samsung and SK Hynix have invested billions of dollars in chip factories in China, while SK Group is planning to invest $15bn in US chip investment.
The U.S.-Chinese Economic Relationship Is Changing—But Not Vanishing
Foreign Affairs
The Biden administration's approach to de-risking rather than decoupling from China is viable but will fundamentally rewire Western economic ties with China, according to an article in Foreign Affairs. De-risking involves limiting China's abilities in strategic sectors, reducing Beijing's leverage over the West by eroding Chinese dominance of the market for certain essential inputs and diversifying corporate economic exposure more broadly to reduce the potential costs of a sudden disruption in trade between China and the West. A targeted approach to de-risking may not succeed, however, and could lead to the same result as broader decoupling, some analysts warn.
The United States and its allies are promoting an approach to China based on de-risking, not decoupling, with the G-7 leaders' communiqué endorsing the strategy. While the private sector, rather than policymakers, is likely to drive much of the process, the United States needs to coordinate its de-risking strategy with those of its allies to ensure they work in unison to cordon off potentially dangerous areas of economic activity with China.
Under the hood, a shift is underway: the United States is exporting more in agricultural goods to China and less in manufactured goods, including advanced electronics, with US exports of semiconductors and semiconductor manufacturing equipment declining considerably in 2022. Meanwhile, the nominal value of US agricultural exports to China (soybeans in particular) has surged. Investment flows are also being impacted, with foreign direct investment into China plummeting by around half in 2022 as corporations shied away from the country due to COVID-19 lockdowns and concern about geopolitical risk.
Japan won't join NATO, but local office considered, PM Kishida says
Reuters
Japanese Prime Minister Fumio Kishida has stated that the country has no plans to join NATO, but acknowledged the security alliance’s plan to open a liaison office in Japan. Earlier this month, the Japanese ambassador to the United States said that the US-led military pact was planning to establish a Tokyo office, the first in Asia, to facilitate consultations in the region.
CICC Cuts Pay 40% as China Crackdown Roils Broker Bonus Season
Bloomberg
China International Capital Corp. (CICC) has disclosed that some senior bankers are having their compensation for 2023 cut by over 40%. The move, which can be attributed to President Xi Jinping’s push for "common prosperity" aimed at limiting pay for the elite, comes as CICC's profits take a sharp drop. The bank deliberated for months on how to comply with the president's directive, seeking guidance from government shareholders. Rivals Haitong Securities and Citic Securities have not yet provided details of their payouts.
Chinese Stocks Close to Erasing 2023 Gain as Headwinds Intensify
Bloomberg
The CSI 300 Index fell by up to 1% amid concerns about China's growing economic problems. The benchmark index is one of the worst performers in Asia this year having already fallen since the reopening rally at the end of January. This comes as concerns about the escalating US-China trade war continue to hurt sentiment while worries over growing debt levels affecting developers are also weighing heavily on investors. On Wednesday, several local government financing vehicles were hit with major financial woes when they struggled to pay debt.
China-based AIIB aims to launch emergency relief fund
Nikkei Asia
The Asian Infrastructure Investment Bank (AIIB) is looking to establish an emergency relief fund for its member countries that have been affected by natural disasters and climate change. This facility would provide financial assistance to its members, as the AIIB’s COVID-19 recovery facility is set to finish this year. The bank is currently in discussions with its members regarding the proposed crisis response facility.
Dutch Foreign Minister Sees ‘Pivotal Role’ for China in Ukraine
Bloomberg
The Dutch Foreign Minister, Wopke Hoekstra, has emphasised the need for China to have a more balanced trading relationship with the Netherlands, as well as calling for the country to use its unique relationship with Russia to help resolve disputes globally. Speaking to reporters during a trip to Beijing, Hoekstra also expressed shared concerns with his Chinese counterpart about human rights issues in the far western Xinjiang region. The Chinese Foreign Minister Qin Gang said that China has “serious concerns” about current Dutch export restrictions on export controls on equipment critical to the production of advanced chips.
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