Exclusive Insight: Addressing China's Local Debt Dilemma: An All-Encompassing Approach
US consultancy Mintz's executives leave Hong Kong after China raid-sources; Veteran China Fund Manager Bullish on Overlooked Consumer Stocks
Welcome to this issue of The China Brief. Today is May 19, 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: Addressing China's Local Debt Dilemma: An All-Encompassing Approach
Given the brevity necessitated by this format, I aim to succinctly delineate the core strategies to tackle the debt crisis:
Ascertain the non-occurrence of default in four categories of debt openly traded on the bond market.
Viewing from a standpoint of financial stability, local government debts in the 'Y' category present an elevated level of risk, due to their high interest costs and opaque product structures. An imperative reform requires these debts to undergo transparent restructuring to alleviate costs. Subsequently, these restructured debts should be converted into other categories of relatively transparent debts - or, as a bare minimum, into the 'X' category.
Adopt a temporary stabilizing approach to the real estate bubble, given its intricate interconnection with local government debt, macroeconomic growth, and financial stability. An abrupt collapse or a steep ascent followed by a sharp decline in housing prices could trigger an immediate outbreak of local government debt problems.
Implement stringent inspections of all banks, with an emphasis on small and medium-sized banks, to determine their exposure to local government debt and enable early intervention. Among China's more than 4,000 banks, especially the myriad of small and medium-sized ones, a substantial number are likely insolvent, mirroring situations akin to those of Silicon Valley Bank and First Republic Bank in the U.S., and Credit Suisse in Europe.
Carry out rigorous audits of the balance sheets of local government financing platform companies to identify potential default risks early for timely remedial measures. Concurrently, the multiplicity of financing platform companies, both large and small, at various tiers of local government should be amalgamated and shuttered.
The aforementioned points cater to managing short-term risks. To preclude future accumulation of local government debt at its root, an overhaul is necessary in the distorted tax distribution system and the performance evaluation mechanism for local government officials.
Supplementary to the strategies outlined, additional measures could encompass local or central governments divesting assets, local governments optimizing revenue and reducing expenses, and the central government - given its relatively low debt ratio - assuming some of the local governments' debts, if required.
Currently, the central government maintains the stance of "each to their own", signaling a lack of support in aiding local governments with their debt repayments. This insinuates that a holistic resolution to China's local government debt predicament is still a distant reality. The central government, however, is unlikely to dictate the timing of a potential debt crisis outbreak. A situation analogous to the "Lehman moment" may serve as a catalyst for the Chinese central government to tackle the local government debt issue more assertively.
(Excerpted from the series "Solutions to China's Local Government Debt Problems", Part II, penned by Li Weijun, a special contributor and economist for The China Brief.)
Canada to announce new Russian sanctions at G7 summit: source
The Toronto Star
Canada is expected to bring in new sanctions on Russia during the 2022 G7 Leaders’ Summit, targeting Russian companies involved in military technology and sanctions on human rights violations, particularly the transfer and custody of Ukrainian children in Russia. The International Criminal Court accused President Vladimir Putin and Russian children’s rights commissioner, Maria Lvova-Belova, of abducting children from Ukraine. The summit will address geopolitical threats caused by China and Russia, with Canada pushing for support for Ukraine. G7 countries are expected to announce further sanctions, including the US, which plans to blacklist around 70 entities and sanction more than 300 individuals, entities, aircraft and vessels involved in Russia's defense industry.
Exclusive: US consultancy Mintz's executives leave Hong Kong after China raid-sources
Reuters
Employees of the US consultancy Mintz Group based in Hong Kong have left the region following a raid by Beijing police in March. The move was to ensure worker safety and due to the uncertainty regarding the investigation by Chinese police. Such company crackdowns have unnerved firms in Hong Kong, which are still trying to figure out red lines with authorities before China has plans to introduce new anti-espionage laws in July. This has led to companies' re-considering their dealings in China and Hong Kong, as some staff members relocated as a temporary measure to ensure their safety.
Veteran China Fund Manager Bullish on Overlooked Consumer Stocks
Bloomberg
Investors should look beyond a stumbling Chinese economy and take advantage of opportunities in retail and travel services, according to Tiffany Hsiao from Artisan Partners Asset Management. The rebound in China's economy looks to have been hit by the re-emergence of Covid, with consumer retail stocks leading the way down, and some are "completely overlooked", Hsiao said. She's more interested in platform advertising stocks, such as Focus Media Information Technology, and travel shares, arguing that Chinese consumers don't immediately jump back into discretionary spending as quickly as their American counterparts. Hsiao looks at alternative data to guide her decisions, including foot traffic in China's main cities, which suggests the economy is "recovering just fine".
G7 tightens screws on Moscow as Zelenskyy set to visit Hiroshima
Japan Times
G7 leaders meeting in Hiroshima have pledged fresh measures to rein in Moscow’s “war machine”, hoping to increase the cost of the conflict for Russia and those supporting it. The bloc intends to tighten restrictions on Russia’s access to G7 economies and build on previous measures including export bans on items essential to Russia’s aggression, and the targeting of key sectors including manufacturing, construction, transportation and business services. The G7 will continue to pursue their demand for the unconditional withdrawal of Russian troops and equipment from Ukraine, whilst also reiterating their commitment to hit the assets of individuals connected to Moscow’s aggression.
BlackRock’s Wei Li Says the ‘Goldilocks’ Era is Over for Markets
Bloomberg
Wei Li, the global chief investment strategist for BlackRock, has attributed her success in the financial sector to maths skills that she honed as a teenager competing in the International Mathematical Olympiad. Li, who is based in London, explained to Bloomberg Markets that she had initially stumbled into finance, attracted by the "fast pace of markets" and the sense that "an individual can soak all of that in and respond". She has also cultivated an awareness of her introverted tendencies and how to play to her strengths in dealing with her more assertive colleagues. Her advice to younger colleagues is to "be replaceable".
In the interview, Li expressed doubts about the effectiveness of central banks over the longer term. She said that although the banking crisis of March 2020 had "stabilized", the cost of the supply-side tools of central banks, specifically measures to address the impact of Covid-19, was higher than for demand-side tools, leaving economies vulnerable. Growth would slow down and financial "cracks", such as unfunded tax cuts and funding stress on commercial real estate, could appear.
Although cautioning against a focus on the longer term, Li said she was preoccupied by "building depth and expertise" and "putting in place a very rigorous process for generating views in a whole portfolio context". Notably, she said that the net-zero transition and the "structural forces like aging demographics" required closer attention. BlackRock is one of the world's largest asset managers, with over $9tn in assets under active management.
G-7 latest: Ukraine peace only possible with full Russian exit, leaders say
Nikkei Asia
The Group of Seven (G7) summit in Hiroshima is expected to highlight the Ukraine war, the growing power of China and the threat to Taiwan. Leaders from India, South Korea, Indonesia, Vietnam and Australia will also be attending the summit, which opens today. Discussions will also focus on matters involving supply chains, economic and energy security. The Indian presence at the summit is expected to create a focus on the developing world within the G7, while the recent overtures of Russia and China towards Central Asia are also set to feature prominently. Yesterday, the G7 leaders released a statement ahead of the summit stressing their support for Ukraine which “will not waver”, and detailing “new steps” to be taken to ensure Russia's aggression fails. Sanctions imposed on Russia are also likely to be discussed, as well as their impact on trade of agricultural, medical and humanitarian products.
Shanghai exchange undertakes efforts to help banks improve their valuations
South China Morning Post
The Shanghai Stock Exchange has proposed plans to increase the valuation of Chinese state-backed banks, which are currently discounted by around 36% to their book value. The exchange's General Manager, Cai Jianchun, outlined the plans to executives at a recent meeting, which included the suggestion of businesses holding more investor relations events and the development of index-based fund products. China's banking sector remains one of the most distressed industry groups. Despite a 5.3% gain for 43 banks on the exchange, and a 16% climb in the shares of China's largest listed banking organizations this year, ICBC is trading at 44% below its net asset value.
Albanese confirms Beijing invite, says China must remove trade bans
The Sydney Morning Herald
Australian Prime Minister Anthony Albanese, who will be attending the 2021 G7 summit, has called for China to remove restrictions on trade between Australia and China. Although China lifted bans on Australian timber, it has maintained sanctions on wine, seafood, and other industries as concerns over human rights and national security remain. Albanese stated that it was crucial "that any of the impediments to trade between China and Australia be lifted". The G7 leaders are expected to discuss sanctions on Russia over the country's invasion of Ukraine. The summit will also feature discussions of China's use of economic coercion.
China's Xi pledges billions in loans to Central Asian nations
Nikkei Asia
Chinese President, Xi Jinping, has pledged $3.7bn in fresh loans and grants to five Central Asian neighbors, in an attempt to fill Russia's void in the resource-rich region. Jinping announced the funding at the end of a two-day summit in Xian, where he outlined a broader plan to increase cooperation with the former Soviet states in infrastructure development, trade, energy and military exchanges.
Chinese Nobel laureate Mo Yan used ChatGPT for recent speech
The Independent
Chinese Nobel Prize-winning author Mo Yan has revealed that he used OpenAI's GPT-3 language model to help write a speech honoring author Yu Hua at a recent award ceremony. While introducing Hua during the event, Yan admitted to having struggled to write the commendation before seeking the assistance of a doctoral student. South China Morning Post reported an “audible gasp” from the audience when they found out that the Nobel laureate had used artificial intelligence to craft his speech. In China, use of AI is subject to strict regulation, and Yan could face legal repercussions for revealing his use of the language model.
China says it will work for better solution of Zambia's debt issues
Reuters
The Chinese foreign ministry has stated that it takes Zambia's debt issues seriously and will work towards finding a solution together. This statement was made in response to Zambian President Hakainde Hichilema's desire to meet with President Xi Jinping to address the issue of Zambia's debt restructuring.
China’s economy is growing again. So why are investors getting out?
CNN
Chinese companies around the world have lost about $540bn in value since China released figures on its first-quarter economic output on 18 April. Analysts said investors have trimmed their exposure to China amid the combined pressures of rising geopolitical tensions, uncertainty over the prospects for the Chinese economy and Beijing’s crackdown on consulting firms. China’s Nasdaq Golden Dragon China Index fell by almost 5% since 18 April. Hong Kong’s Hang Seng Index also lost 5%, while the Shanghai Composite Index and the Shenzhen Component Index fell by 3% and 6.5% respectively during the same period. Meanwhile, the yuan, a barometer of investor sentiment, has fallen over 2% during April. Concerns are focused on the country’s “fundamental investability", according to Brock Silvers, CEO of Hong Kong-based Kaiyuan Capital. This refers to Chinese policy risk and geopolitical worries, including tensions between China and the US and Beijing’s clampdown on foreign consultancies.
Russian PM to meet Xi in China next week
Reuters
Russian Prime Minister Mikhail Mishustin will travel to China on May 23-24 to meet with Chinese President Xi Jinping, the Russian government has announced.
China ‘Welcomes’ Taiwan Tourism in Symbolic Push for Closer Ties
Bloomberg
China is to allow tour groups from Taiwan to visit, in a move aimed at increasing exchange with the island. The proposal was given a cautious welcome, with tourism associations in Taiwan planning to open up discussions about the possibility of reciprocal measures. The move comes before a crucial Taiwanese presidential election next year, with the Kuomintang party being more China friendly and the Communist Party keen to woo them. The ban on Chinese individuals visiting Taiwan remains in place.
G7 nations unveil new sanctions against Russia
Deutsche Welle
The G7 is set to further tighten the screws on Russia with fresh sanctions over the conflict raging in Ukraine. Ahead of discussions between heads of state and government, the group laid wreaths at the Peace Park in the Japanese city of Hiroshima, scene of the first wartime atomic bombing in 1945. Each country from the group will make individual announcements. Britain said it was planning to target Russian diamonds, while US actions are set to include cutting off around 70 companies from Russia from doing business with America. European Council President Charles Michel also said the bloc is keen to limit trade in Russian diamonds.
To invest or cut loose: western carmakers’ China conundrum
Financial Times
Foreign automakers are being hit by China's improved domestic competition, which is pushing prices down and lowering their market share. Car companies are looking at different courses of action, with some such as Volkswagen doubling down on China, while others, such as Ford, are adopting a more focused approach, pulling back to commercial vehicles to concentrate on specific areas of development and listening to consumer trends. The US firm's move underlines the need for carmakers to act judiciously when attempting to lay down roots in regions with different sales tendencies.
Chinese EV maker Nio invests in nuclear fusion startup
Reuters
Chinese electric vehicle (EV) maker Nio has invested $150m in Neo Fusion, a start-up that is developing technology toward bringing commercial controlled fusion to market globally within two decades. Nio and affiliate Nio Capital have taken a 19.9% stake and 10.1% stake respectively in the company, with $689m and $349m from other sources. Neo Fusion is 50% owned by China's Anhui provincial government, according to a company registration filing seen by Reuters. Fusion technology could help the world curb emissions linked to climate change, according to market observers.
Away from the G-7, non-Western powers seek peace in Ukraine
Washington Post
Global actors have been seeking their own solutions to the Ukrainian conflict, given concerns of differing views within the Group of Seven, the bloc composed of Canada, France, Germany, Italy, Japan, the United Kingdom, and the US. While Western states have vowed to provide huge amounts of military aid to Ukraine, countries elsewhere have been pushing for cessation of hostilities and a negotiated peace. Many politicians hope to give diplomatic initiatives a chance and have put forward peace plans with Russia and Ukraine. This includes China’s initiative, as China has significant leverage over Russia, but it has been deemed by analysts as working to preserve Russia’s advantage and undermine Ukraine, whereas Brazilian President Luiz Inácio Lula da Silva has touted a nonaligned “peace club” to mediate a truce, irritating Washington DC further when accusing the West of helping to fuel the conflict with its shipments of weapons.
China Ramps Up Safety Checks on Old Ships as Dark Fleet Grows
Bloomberg
China is reportedly clamping down on the use of old vessels to ferry oil into the country. Both Titan, a 20 year-old tanker, and Ocean Peri, another ageing ship carrying Russian oil, were unable to unload cargoes in the Chinese port of Qingdao due to the stricter checks being implemented in Shandong province. Industry experts warn that there has been a surge in purchases of old tankers to transport sanctioned oil from areas like Iran, Venezuela, and Russia in recent times, with China's crackdown on these measures believed to have prompted greater scrutiny of older vessels.
Foreign Affairs
China's belligerence on a global scale is becoming more commonplace, especially as it accuses the US of hypocrisy and double standards while responding in kind to Washington's moves. Nations such as China (and Russia) are more likely to challenge or seek to reform institutions that do not put them on an equal footing to the US. The durability of the international order, therefore, depends on whether or not its core institutions, and their architect, the US, can create incentives for China to cooperate with them. When the balance of power in geopolitics shifts, rising and established powers tend to find themselves on a collision course known as the “Thucydides trap.”
This is the situation being played out between the US and China, causing analysts to warn that the outlook for global stability and security is grim. A rancorous administration in Washington is viewed as having declared open season on the rise of China, while in Beijing, Xi Jinping has emerged as the world’s most vocal proponent of globalization and is also increasingly forceful: a potentially combustible mix. The open question now is how this escalating rivalry will impact the Indo-Pacific along with a global order that many citizens around the world continue to rely on for prosperity and peace.
It should be noted that rising powers always seek to join exclusive clubs that would be diluted by their admission. There is also a risk in conducting international relations without the basics of decorum, which leads to a lack of trust and that, in turn, can lead to very grave consequences.
Post-Covid, more Chinese put health, family above professional success: survey
South China Morning Post
Around two-thirds of China's population believe they will live healthily until they reach 80 years old, according to a study of 5k residents in 13 Asian markets by Prudential. However, while mainland China boasts a mostly content populace, rapid aging in the country could place further stress on its pension system, which has been propped up by government donations since 2013 as revenues failed to meet the deficits. China's National Health Commission has said the country will be "a severely old society" by 2035, with 400 million people expected to be aged 60 and older.
EU's Michel calls for 'stable and constructive' cooperation with China
Reuters
European Council President Charles Michel has warned G7 leaders that China has a special responsibility to play by international rules and has urged it to use its influence over Russia to end military aggression in Ukraine. The G7 leaders have convened in Japan to consider China's economic coercion and other related topics and are expected to issue a statement about a section on China covering a wide range of concerns revolving around supply chain threats and economic security; the EU are keen to de-risk and diversify trade so that over-dependencies and unfair practices, particularly by China, can be addressed.
U.S. agrees on Taiwan trade terms, clouding plans for China talks
Japan Times
The US and Taiwan have announced a new agreement to strengthen trade ties, marking the first tangible results of an initiative announced last year. The deal, which is not a formal free-trade agreement and doesn't cover tariffs, was announced shortly after China's embassy in Washington said Chinese Commerce Minister Wang Wentao was due to meet the US Commerce Secretary Gina Raimondo and US Trade Representative Katherine Tai in Detroit. Beijing has criticised US efforts to formalise ties between the US and Taiwan. The latest agreement will streamline customs, reduce wait times for trucks and vessels and improve regulation.
Micron-Japan Deal Counters China ‘Coercion,’ Rahm Emanuel Says
Bloomberg
Ambassador Rahm Emanuel, the US envoy to Japan, said Micron Technology's deal with Japan for financial aid to produce next-gen memory chips, has set a precedent for countering Beijing's "coercion", and shows that Japan and the US will act in unison to help secure supply chains from being targeted by China's coercion. The financial aid from Japan is reportedly worth around $1.5bn. China rejected those claims and accused the US of starting trade wars and bullying nations. Emanuel cited examples of China trying to intimidate companies, including US consultancy Bain & Company, Micron and Mintz Group. Discussions on how to respond to China's growing influence will feature at G7.
Alibaba’s disappointing results put Hong Kong stocks on course for weekly loss
South China Morning Post
Hong Kong stocks, including Alibaba, Tencent Holdings, and Baidu, fell following disappointing revenue growth of 2% for the fourth quarter at Alibaba, and concerns that China's post-Covid recovery is losing momentum. The Hang Seng Index slumped by 0.9%, with the Tech Index falling by 1.8%. While the Shanghai Composite Index was little changed. Goldman Sachs warned that rising government debt levels would limit China's ability to roll out additional pro-growth policies through fiscal policy. Major Asian markets were trading higher, however, with Japan's Nikkei 225 up by 1% and South Korea's Kospi rising 0.7%.
China overtakes Japan as world's top car exporter
BBC
China has become the world's largest exporter of cars, surpassing Japan in the first quarter of 2022. This was driven by an increase in demand for electric vehicles and rising sales to Russia, which has seen a surge in Chinese exports since the Ukraine war. Chinese carmakers, including Tesla's China arm, SAIC, BYD, Geely, Chery, and Great Wall, have benefitted from the shift towards electric vehicles and the opportunities offered by Russia's sanctions. Tesla's Gigafactory in Shanghai is currently capable of producing 1.25 million vehicles a year, and the company is planning to further increase capacity.
RMB’s Biggest Weekly Loss in Three Months Tests PBOC Tolerance
Bloomberg
China's yuan is experiencing its fastest depreciation in three months. The country's central bank has not intervened to stop the decline as the offshore yuan sunk to 7.075, potentially marking the biggest loss in three months. China's data releases have shown disappointing results which have impacted the yuan. It is suggested that the currency's fall may be indicative of China's acceptance of the new psychological threshold. At present, China's authorities have allowed the currency to adjust to the dollar, however, it will push back if the currency pushes lower than agreed levels.
South Korea tells China ambassador it hopes for continued economic cooperation
Reuters
South Korea's finance minister, Choo Kyung-ho, has discussed economic co-operation with China's ambassador to South Korea, as diplomatic tensions – stemming mostly from China's policies towards Taiwan – cast a pall over South Korea's economy. South Korea's sluggish economy and its export industry, which accounts for nearly 40% of its economy, have already been hit by low global demand for Korean technology products. South Korea's ambassador to Washington announced earlier this month that Seoul would soon open senior-level dialogues with Beijing.
Stay informed about the latest news, analysis, and policy briefs from across the globe related to China with the China brief. Our team aggregates, synthesizes, and summarizes the most important information from various sources, including media outlets, think tanks, government agencies, and industry experts.
Our mission is to provide you with easily accessible and critically valuable information tailored to your specific field of interest. We understand the significance of staying up-to-date on developments related to China and aim to make this information comprehensible for our readers.
Join the conversation and stay informed about the latest news and developments related to China by visiting our website at www.6dobrief.com