Don’t Be Too Quick to Write Off Xi-Putin Summit; Exclusive Insight: Credit Suisse's and Silicon Valley Bank’s Fallout: Implications for China's New Financial Regulatory Framework
China Investigates Former High-Profile Chip Leader; How to understand the ‘elevation’ of Beijing’s top office for Hong Kong affairs? Former Taiwan president to pay historic visit to China
Welcome to today's edition of "The China Brief". In today’s news, China investigates former Tsinghua Unigroup Chairman Zhao Weiguo, the latest high-profile figure ensnared in an industry-wide corruption dragnet. This comes as China has allocated more than $100 billion to build up its domestic chip sector to break its dependence on the West. In other news, Chinese President Xi Jinping's state visit to Russia will test his diplomatic skills as he tries to balance China's strategic partnership with Russia while maintaining ties with Europe and presenting China as a neutral mediator in the Ukraine war. Chinese exports of integrated circuit chips to China and Hong Kong have also declined, while Chinese tourists are staying away from Europe despite lifting COVID-19 restrictions. These and other stories are in today's newsletter.
And here’s today’s exclusive insight:
Credit Suisse and Silicon Valley Bank’s Fallout: Implications for China's New Financial Regulatory Framework
The Credit Suisse and Silicon Valley Bank crises in the US and Europe were initially attributed to insufficient liquidity and liquid assets that could be immediately converted to cash, leading to a liquidity crisis as investors and depositors could not withdraw their funds. However, such liquidity crises often stem from a solvency crisis where institutions' debt levels to depositors, investors, and other financial entities exceed their managed assets' market value, leading to insolvency and a rush of depositors/investors to withdraw their funds.
Central banks' monetary policies can impact both liquidity and solvency of financial institutions. For instance, since the global financial crisis in 2008, low-interest rates in many countries have fostered a loose liquidity environment, allowing easy access to credit for businesses and households, and enabling financial institutions to expand operations rapidly, making it unlikely to experience a liquidity crisis.
However, the Russia-Ukraine conflict led to global inflation, prompting major central banks worldwide, led by the Federal Reserve, to counter it by raising interest rates rapidly. This led to a sharp increase in the cost of funds, the disappearance of the loose liquidity environment, and a higher likelihood of a liquidity crisis. Raising interest rates significantly impacted asset prices, leading to a solvency crisis where banks absorbed deposits in a loose environment, investing in assets at a considerable discount, posing risks.
The financial institution crises occurring and impending in the global financial system result from a combination of liquidity and solvency crises. The fundamental reason behind these crises is that major economies' monetary policies have ignored financial system stability for the past decade. Central banks' main goal in formulating monetary policies has been to maintain price (economic) stability without considering factors beyond prices.
After the 2008 financial crisis, major central banks worldwide created a long-term, low-interest-rate monetary environment to stabilize the economy. However, any financial institution blindly expanding its business scale and taking risks would be defeated in the competition. Any form of regulation cannot resist macro-level risk accumulation, and the large number of projects financed through financial intermediaries like Credit Suisse and Silicon Valley Bank during the past decade of loose monetary policy have laid the foundation for financial instability in the future.
After the Russia-Ukraine conflict, major central banks worldwide raised interest rates significantly to stabilize inflation (the economy), igniting the problem due to long-term loose monetary policies, resulting in financial instability. This has significant implications for China's new financial regulatory framework, and policymakers must consider the trade-off between price and financial stability when formulating monetary policies.
("Monetary Policy from the Macro-Prudential Perspective: The Implications of the Credit Suisse and Silicon Valley Bank Crises for China's New Financial Regulatory Framework," by Jin Huabin, a financial professional and a special analysis expert for The China Brief.)
Bloomberg: China Investigates Former High-Profile Chip Leader in Latest Graft Probe
China's top anti-graft watchdog is investigating former Tsinghua Unigroup Chairman Zhao Weiguo, who becomes the latest high-profile figure ensnared in an industry-wide corruption dragnet. The investigations sent shockwaves through an industry long accustomed to top-level support: Xi Jinping’s government had allocated more than $100 billion to build up a domestic chip sector so the country could break its dependence on the West. Senior officials are angry at how tens of billions of dollars funneled into the industry over the past decade haven’t produced the sorts of breakthroughs that emerged from previous national-level scientific endeavors.
Bloomberg Opinion: Don’t Be Too Quick to Write Off Xi’s Awkward Putin Summit
Chinese President Xi Jinping's diplomatic skills will be tested on his state visit to Russia from March 20 to 22. Xi will attempt to balance China's strategic partnership with Russia while maintaining ties with Europe and presenting China as a neutral mediator in the Ukraine war. Despite the futility of presenting China as a neutral actor in the war, Xi may try to hold an unprecedented virtual meeting with Ukrainian President Volodymyr Zelenskiy shortly after he visits Moscow. Xi's biggest liability today -- close ties to Putin -- might then be an asset used to shepherd an armistice agreement to fruition.
NYT: Why China and Russia Are Closer Than Ever
Chinese leader Xi Jinping is visiting Russia this week in the latest high-profile meeting between the two nations as their strategic partnership continues to deepen. While not formal allies, China and Russia have become close partners with a goal of weakening American power and influence. The partnership has been strengthened by their mutual support for each other in the face of Western sanctions, particularly after Russia invaded Ukraine. China is building infrastructure in Central Asia, which Russia has traditionally seen as its sphere of influence. The leaders of both countries have developed a close personal relationship, with Xi calling Putin his best friend. Russia needs China to help bolster its economy, while Xi wants Putin to join him as a like-minded ally in confronting US and Western dominance.
Bloomberg: Taiwan Chip Exports to China Sputter on Tensions, Falling Demand
Taiwan's exports of integrated circuit chips to China and Hong Kong dropped 31.3% YoY in February, marking the fourth consecutive month of decline, while total exports worldwide fell 17.3% YoY. The declining demand for the pivotal components and the simmering tensions between the US and China contributed to the worst decline since 2009. China's share of Taiwanese IC exports plunged to the lowest level since February 2019, based on Bloomberg's calculation of official data.
WSJ: Putin Proves an Unpredictable Partner for Xi as Nations Cement Ties
Chinese leader Xi Jinping's state visit to Russia is aimed at cementing ties with Moscow, but it is also fraught with risk because of Vladimir Putin's unpredictability. China's leverage over Putin is limited, and Russia has been advancing its own goals in Ukraine and other areas, despite the two nations sharing an interest in challenging the US-led world order. The state visit risks further straining Beijing's relations with the US, its largest trading partner. China has increased its budget for diplomatic travel by 12% this year as it steps up its diplomatic push.
Reuters: Putin to offer 'clarifications' on Russia's position on Ukraine during Xi visit
According to a Kremlin spokesman, during Chinese President Xi Jinping's visit to Russia, Russian President Vladimir Putin will provide him with detailed "clarifications" on Russia's point of view on the Ukraine conflict. China's 12-point peace plan for Ukraine will also be discussed. While Ukraine cautiously welcomed China's peace plan, the US dismissed it due to China's refusal to condemn Russia's invasion. Putin and Xi will hold "informal" talks on Monday, followed by dinner, with formal talks scheduled for Tuesday. The Kremlin spokesman did not directly address whether China could become an intermediary between Moscow and Washington.
Bloomberg Opinion: The West Can't Afford Hubris About Russia's War in Ukraine
The West should be more cautious in its foreign policy towards Russia's war in Ukraine and try to understand why many do not support the West's campaign for Ukraine's freedom. Western nations must recognize that many people worldwide view the US and Russia as morally indistinguishable and do not want to fall under American hegemony. The Western world's perception of itself as the "good guys" is not shared by everyone, and Western diplomacy can often be clumsy. Successive US ambassadors in Cuba acted arrogantly before Fidel Castro's rise to power, and the US and UK were prominent supporters of South Africa's apartheid government. The West's efforts to export democracy by force have also backfired, leading to the resurrection of colonialism memories. In conclusion, the West needs to be more cautious in its foreign policy and understand why others resist its crusade.
Reuters: Europe's hopes for busy post-COVID summer dim as Chinese tourists stay away
The number of Chinese tourists visiting Europe this summer remains low despite lifting COVID-19 restrictions, disappointing many tour operators who relied on Chinese high-spending travelers who typically spend between €1,500 and €3,000 per person. Chinese outbound flight bookings to Europe during March and August are only 32% of pre-pandemic levels. Chinese tourists choose to travel closer to home due to visa restrictions, long passport wait lines, and more expensive airline tickets to Europe. European tour operators are looking to attract American travelers, who are coming to Europe in large numbers. The second summer since Europe’s COVID restrictions ended is a test for airports and airlines scrambling to hire staff and avoid a repeat of last summer’s chaos.
SCMP: How to understand the ‘elevation’ of Beijing’s top office for Hong Kong affairs? Is the city more ‘special’ now? Analysts unpack the meaning behind the move.
Beijing's top official overseeing Hong Kong affairs will report directly to the Communist Party's central leadership instead of the State Council, according to a restructuring plan announced last week. The move is seen as a way to streamline the chain of command and increase the central government's control over Hong Kong. The newly formed Hong Kong and Macau Work Office of the Communist Party Central Committee will investigate, research, coordinate, and supervise the implementation of "one country, two systems". While the restructuring is expected to improve efficiency, some are concerned about its impact on Hong Kong's high degree of autonomy.
Caixin: China's automaker price war threatens profitability: analysts
Analysts warn that China's automaker price war, sparked by depressed car sales and a rush to clear inventories ahead of new national emission standards in July, could further squeeze manufacturers struggling with slowing demand. Fitch Rating believes the price war could extend into Q2 and erode profitability across the automobile value chain in 2023. Chinese consumers may hold off buying in anticipation of steeper price cuts. The price cuts could also accelerate industry consolidation, spurring a reshuffle that could drive out weaker carmakers, particularly joint ventures, Ping An Securities said.
Nikkei Opinion: China's foreign policy must get more pragmatic for economy's sake
China seeks to revitalize its economic ties with long-standing partners in the West but must address concerns over its geopolitical priorities and strategies. To do so, China must recognize that the EU is driven by both economic interests and common principles and values and tone down its incendiary language towards countries it views as having infringed on its core interests. China should also play a more constructive role in resolving the Ukrainian crisis, leveraging its influence over Russia to help bring a peaceful war end. China must find a way to assure the international community of its peaceful intentions towards Taiwan and commit to greater openness in courting prospective investors.
Reuters: Switzerland wakes to a new era after historic bank merger
UBS has agreed to acquire Credit Suisse in a deal worth $3.23bn, brokered by Swiss regulators. The package includes UBS taking on up to $5.4bn of Credit Suisse’s losses. The two banks have been pillars of global finance for decades, with combined assets of up to 140% of the Swiss GDP. The Swiss Bank Employees Association has demanded that UBS keep job cuts to an “absolute minimum” and expressed unease about the dominant position of the newly merged entity. Swiss media has also reacted with shock.
SCMP: Former head of Google China joins ChatGPT frenzy by starting own venture
Former president of Google China and current head of Sinovation Ventures, Lee Kai-fu, has announced plans to establish an AI company called Project AI 2.0, which he hopes will become a global tech firm building AI 2.0 platforms and productivity applications. He emphasized that it would be more than just “a Chinese version of ChatGPT.” Several of China's big tech firms, including Baidu, Alibaba, Tencent, and NetEase, have rushed to develop similar AI products since February. Lee noted that AI 2.0 is expected to be "the most significant enabling technology to boost social productivity in the 21st century".
FT: Former Taiwan president to pay historic visit to China
Former Taiwanese President Ma Ying-jeou will visit China this month in what will be the first-ever visit to the Communist country by a sitting or retired Taiwanese president. Starting on March 27, the ten-day trip will highlight the differences between Taiwan’s two main political parties over their relations with China, just as they gear up to campaign for next January’s presidential and parliamentary elections. Ma’s visit to China will coincide with Taiwan’s President Tsai Ing-wen’s scheduled visit to the US. While Tsai’s Democratic Progressive Party sees Taiwan as an independent country, Ma’s opposition Kuomintang sees Taiwan as part of a Chinese nation, albeit not the People’s Republic of China. China claims Taiwan as part of its territory and threatens to attack if Taipei refuses to submit to its control indefinitely. China’s ruling Communist Party seeks dialogue with the Kuomintang while refusing to engage with Tsai’s government. Ma oversaw a detente with Beijing during his two consecutive presidential terms from 2008 to 2016, mainly because he agreed to the formula that Taiwan was a part of China although the two sides’ concepts of China differed. He cut defense spending and took a low-key approach to foreign relations and sovereignty.
Foreign Affairs: The Case for a Security Guarantee for Ukraine How to Protect the Country—Without NATO Membership
The authors argue that a new security mechanism is needed to protect Ukraine from future Russian aggression. They propose the creation of the Atlantic-Asian Security Community (AASC), which would include many NATO members, Ukraine, its allies, and any neutral states that wish to join. Its main task would be to supervise and legitimize the presence of Western military troops on Ukrainian soil to monitor Russian troop activity, help train Ukraine’s armed forces, assist with demobilization, monitor any future peace deal, and act as a tripwire to prevent fresh Russian aggression. Ideally, this force would be headed by a general from a nation such as India that has managed to maintain passable relations with Western countries and Russia. In time, the AASC could perhaps even exceed NATO’s importance for European security. The authors argue that such a security mechanism is necessary to protect Ukraine but also to offer Russia a path to redemption and peaceful coexistence.
Bloomberg Opinion: China’s Secret to Preventing a Banking Crisis
Despite being one of the world's most indebted nations, China has remained relatively calm during the current global banking crisis. Beijing's success in averting chaos is attributed to a new financial regulation regime emphasizing risk control. China is establishing a new national regulator to oversee all financial sectors except the securities industry, leaving the People's Bank of China to take care of traditional monetary policies. By consolidating fragmented governmental divisions, officials will have no excuse when the next online lender or insurer blows up, and local watchdogs are having their power taken away, too. While these regulatory changes may make China's financial services industry less fun to work in, the government's excessive caution is well-placed, given the havoc a banking crisis can create to the economy.
Nikkei: Chinese companies seek crypto opportunities in Hong Kong
Hong Kong's campaign to become a regional cryptocurrency hub has attracted interest from Chinese securities companies and banks, despite Beijing's crackdown on virtual assets. Lawyers and consultants say Chinese financial firms are attracted by the possibility that Hong Kong will allow retail trading in bitcoins and Ethereum coins. While for the time being, only professional investors can trade crypto on licensed exchanges in Hong Kong, the Securities and Futures Commission proposed changes last month that would clear the way for retail crypto trading in the city.
FT: WHO urges China to share more data on possible Covid link to raccoon dogs
The World Health Organization (WHO) has called on China to make all data about the Covid-19 pandemic's origins globally available. WHO Director-General Tedros Adhanom Ghebreyesus said data suggesting the virus arose from animals in Wuhan’s wet market should have been shared with the world three years ago, and that the findings "do not provide a definitive answer" as to the origin of the virus. WHO officials stressed that all origin hypotheses, including an accidental lab leak, remained on the table. The comments come after a study found molecular evidence that animals including raccoon dogs being sold in late 2019 at Wuhan’s Huanan market were susceptible to being infected by Sars-CoV2, the virus that causes Covid-19.
Bloomberg: China-Russia Gas Talks to Show How Much Xi Is Embracing Putin
Chinese President Xi Jinping is set to visit Moscow this week to strengthen China's ties with Russia amid rising tensions with the West. The two nations are expected to discuss energy cooperation and sign long-term gas deals. However, there is no indication whether a deal on the Power of Siberia 2 gas pipeline will be on the agenda. Energy supplies are a key source of cash for Russia to sustain its war in Ukraine. China is Moscow's most important diplomatic and economic partner and the world's largest oil importer. However, over-dependence on Russian energy supplies could create risks for China's future energy security.
FT: Xi Jinping to test limits of friendship with Vladimir Putin on Russia state visit
Chinese President Xi Jinping’s state visit to Moscow this week is expected to demonstrate his commitment to Russia’s president Vladimir Putin. Still, it is also set to show the red lines in their “no limits partnership”. Xi’s three-day visit comes days after Putin was hit with an international warrant for alleged war crimes in Ukraine. Putin will be hoping that the visit lends legitimacy to his invasion of Ukraine and that China might pledge material support to help his military fight it. However, there are signs that Xi will remain guarded over the potential costs of friendship with Russia’s leader, particularly in Europe, as Beijing tries to boost trade after its zero-Covid policy savaged its economy last year. And despite warnings from the US that China was considering sending arms to Russia, there is as yet little evidence of substantial weapons flows between the two countries. After his trip to Moscow, Xi may call Putin’s nemesis, Ukrainian president Volodymyr Zelenskyy, according to one person familiar with the matter. It would be Xi’s first direct contact with Zelenskyy since the full-scale invasion and a sign of the constraints China sees on its alliance with Russia at a time when Beijing wants to assert credentials as a potential peacemaker.
Reuters: China Evergrande to detail debt restructure plan on Wednesday
China Evergrande Group, the world's most indebted property developer, is expected to publish on Wednesday an offshore debt restructuring term sheet agreed upon with a key offshore bondholder group. This comes as part of its liabilities of over $300 billion. Evergrande plans to sign a deal with general creditors by the end of March, with the restructuring taking effect from Oct 1, 2023. The company expects to release its overdue financial reports for 2021 and 2022 in April and May. The firm's shares have been suspended since March 2022, pending release.
FT: Longtime China investor Anatole to open ‘outpost’ in Singapore
Hong Kong-based asset manager Anatole is reportedly preparing to shift a key part of its business to Singapore after significantly reducing its exposure to China. The firm, renowned for betting on China's growth, is opening an office in the city-state and may move key functions and decision-making there. The company has registered in Singapore, and it is expected to keep a smaller presence in Hong Kong. Its focus on proximity to China through a Hong Kong base has become less crucial as it diversifies into fast-growing southeast Asia, with Singapore as a regional financial hub.
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