Exclusive Insight: All eyes on Li Shangfu, China's new defense minister; A Look at Evergrande’s Restructuring Scenarios as Key Date Looms
Biden says Xi talks expected 'soon'; Xi Reboots Statesman Image in Push to Counter US on World Stage; To Rein in China’s Banks, Xi Uses Familiar Playbook;
Welcome to today's issue of the China Brief, bringing you the latest news and analysis on China's economy, politics, and society. In today's edition, we cover Chinese President Xi Jinping's efforts to counter the US on the world stage by rebooting his image as a global statesman, the prospect of high-level military talks between the US and China, and the lifting of all remaining restrictions on Australian coal imports. We also delve into China's plans to raise its retirement age to deal with its rapidly aging population, its growing military exports to Africa, and its domestic submarine program. In addition, we examine China's regulatory restructuring and the implications of its travel resurgence. Lastly, we look at the progress of China Evergrande's restructuring and Taiwan's military drone capability.
And here’s today’s exclusive insight:
Exclusive Insight: All eyes on Li Shangfu, China's new defense minister
The recent appointments in China have drawn considerable attention, particularly the promotion of Li Shangfu to the position of Defense Minister, and concurrently as a State Councilor, a second-tier national leader, similar in rank to a Vice Premier.
While it was expected that Li Shangfu would assume this post, what was surprising was the Wall Street Journal's exclusive report, just a week ago, which predicted that He Weidong would be appointed as the Defense Minister instead.
If He Weidong, the Vice Chairman of the Central Military Commission, were to assume the position of Defense Minister, it would imply a significant change in China's military system. Over the past few decades, the Defense Minister in China's system has been a position without any real command of the military, responsible only for internal mobilization and conscription, as well as external communication and cooperation.
In contrast, Li Shangfu is a much more sensible choice. He is familiar with international military technology, and his promotion to a member of the Central Military Commission at the 20th Party Congress makes it clear that he is well-suited for the role of Defense Minister.
When Li Shangfu served as Director of the General Armament Department, he was sanctioned by the United States. At that time, such sanctions surprised me. The United States rarely targeted officials above the rank of deputy minister. I speculated then that Li Shangfu was the most likely candidate for Defense Minister. Shouldn't the United States have any concerns?
However, it is essential to note that Li Shangfu's appointment as Defense Minister is not China's attempt to challenge the United States, but rather a personnel arrangement according to China's original plan, without factoring in U.S. sanctions.
Another noteworthy aspect is Li Shangfu's ranking, which is at the top among State Councilors. A similar scenario occurred in 1998 when Chi Haotian was appointed as Defense Minister, but Chi was already a member of the Politburo at that time.
Li Shangfu's ranking ahead of Secretary of the Secretariat Wang Xiaohong and Minister of Public Security implies that, as the only military minister in the State Council, he has a special, elevated status. This is, of course, linked to the United States' growing military pressure. What everyone is still interested in is whether the United States will lift its sanctions to resume high-level military-to-military talks with Beijing.
(Authored by Ho Pin, an expert analyst for China Brief)
Bloomberg: Xi Reboots Statesman Image in Push to Counter US on World Stage
Chinese President Xi Jinping is seeking to counter the US on the world stage by rebooting his image as a global statesman. After securing a third term as president, Xi's government hosted the signing of a landmark deal between Saudi Arabia and Iran to restore diplomatic ties, which adds credibility to his push to broker peace between Russia and Ukraine. Xi is expected to meet Russian President Vladimir Putin in Moscow soon, hold his first-ever call with Ukrainian President Volodymyr Zelenskiy, and possibly speak once again with President Joe Biden. China has found a more receptive audience for its diplomatic efforts elsewhere, most notably in Ukraine, with Brazil President Luiz Inacio Lula da Silva expected to visit China in the coming weeks to discuss peace efforts.
SCMP: Are US sanctions on China’s new defense chief the real barrier to dialogue?
According to analysts, the possibility of high-level military talks between the US and China appears doubtful as Washington shows no indication of removing China's new defense minister from a sanctions list. The sanctions on General Li Shangfu were imposed in 2018 for allegedly helping to transfer Su-35 fighter jets and S-200 air-defense missile systems to China from Russia. While Beijing considers lifting the sanctions on Li necessary for resuming talks, one analyst argues that it is more an issue of political sensitivities than a legal barrier. The Chinese defense minister can engage the US defense secretary if desired, but China has declined proposals to engage at various levels over the past several months.
Reuters: Taiwan says it hopes to bring back soldier who went to China
Taiwan is investigating the disappearance of a soldier serving on an offshore island, who was found in China, said Taiwan's Defence Minister, Chiu Kuo-cheng, on March 14. Chiu added that the government is pursuing alternative channels to bring the soldier back to Taiwan. The minister denied rumors that the soldier fled due to abusive treatment by the military and said that there was no risk of the missing soldier disclosing classified military deployment and location information. The soldier was serving on Erdan islet close to the Chinese coast and went missing last week before being found on March 14.
NYT: To Rein in China’s Banks, Xi Uses Familiar Playbook
Chinese leader Xi Jinping is tightening the Communist Party's control over the country's financial sector through sweeping changes to the regulatory framework. Xi's goal is to ensure that the financial sector complies with his vision for the economy, which includes preventing domestic funds from moving overseas, allocating capital according to China's priorities, and exercising caution to avoid overextending loans. The regulatory changes include the creation of a new entity called the State Bureau of Financial Supervision and Administration, which will oversee China's $57 billion financial system. Xi has also appointed allies to key regulatory roles and issued warnings to bankers who neglect the party's leadership. The changes are consistent with Xi's tendency to seek greater centralization to the party when confronted with a problem. They reflect growing concern about the adequacy of China's financial regulation in light of missteps and scandals that have tested the party's ability to maintain order. Some analysts argue that the changes were long overdue and reflect the challenges of local governments supervising financial institutions that they rely on. The Communist Party is also expected to resurrect a policy-setting committee that will report directly to top leadership, confirming that all roads in China lead to Xi.
Bloomberg: China Assets Stand Out as Oasis of Calm Amid SVB Fallout
China's onshore bond yields have remained stable despite the global fallout from the US banking failures. Investors are betting on China's economic recovery, and yuan assets are seen as a safe haven. The yuan may strengthen as the US turmoil puts the Federal Reserve closer to the peak in policy rates, narrowing the rate differential with China and increasing the appeal of yuan assets. Furthermore, China's growth and policy consistency make its assets attractive. The Chinese market has been unperturbed by the recent banking failures in the US. Chinese equities are likely to benefit from a weaker dollar and a greater appetite for risk from a more supportive policy regime onshore.
Reuters: Taiwan says submarine program going to plan despite difficulties
Taiwan's domestic submarine program is progressing according to plan despite facing many difficulties, according to Taiwan's Defence Minister, Chiu Kuo-cheng, following a recent Reuters report that showed a sharp increase in British exports of submarine parts to the island. Taiwan has engaged foreign submarine technology vendors for its new fleet to bolster its defenses in the face of a rising military threat from China. The military tensions between Beijing and Taipei are at their highest point in decades as China tries to force Taiwan into accepting Chinese rule.
SCMP: AUKUS deal: Australia has a lot to do in Southeast Asia to calm concerns over submarines, analysts say
Analysts warn that Australia's acquisition of US submarines as part of the Aukus pact could fuel US-China tensions and trigger a regional arms race. While the Association of Southeast Asian Nations (ASEAN) has "cautiously welcomed" Aukus as a developing reality, Australian diplomacy has "a lot of work to do" to explain the new situation to Southeast Asian governments "like Indonesia and Malaysia, worried about the risks involved in provoking China," according to Joshua Bernard Espeña, a resident fellow at the Manila-based International Development and Security Cooperation. ASEAN is "increasingly divided" over the differences between the US and China, as "all member states need economic ties with China but rely on the US for stability and security."
WSJ: China Reopens to Foreign Tourists, Lifting Covid Visa Suspensions
China's Embassy in Washington has announced that foreign tourists will again be allowed to visit the country, lifting Covid-19 travel restrictions. China has allowed more foreigners to enter the country in recent months, including making it easier for business travelers to enter and allowing Chinese citizens to travel overseas again. However, tourist travel has been virtually shut down since March 2020. The latest move suggests that previously suspended visas will be accepted as long as they remain within the validity date. China no longer requires foreign visitors to quarantine, but Monday's statement did not mention any specific Covid-19 policies.
Bloomberg: China Self-Driving Startup WeRide Files for $500 Million US IPO, Sources Say
According to people familiar with the matter, Guangzhou WeRide Technology, a Chinese self-driving start-up, has filed confidentially for a US IPO and is looking to raise as much as $500m. The firm was valued at about $4.4bn in a March 2022 fundraising round and is backed by the Renault-Nissan-Mitsubishi Alliance, Guangzhou Automobile Group, engineering company Bosch and private equity firm Carlyle Group. WeRide develops autonomous driving technology and produces vehicles such as robotaxis, minibusses, vans, and street sweepers.
Nikkei: China's regulatory restructuring will show value in crisis
China has created a new national regulatory body to oversee all areas of the financial industry, which will take over responsibility for consumer financial protection and day-to-day supervision of financial holding companies. The new regulator will also acquire the investor protection portfolio previously held by the China Securities Regulatory Commission. China's financial sector is now the largest in the world, with some $60 trillion in assets. The concentration of regulatory and supervisory power in fewer hands has come with little clarity on new reporting lines and what role President Xi Jinping will have in overseeing the new agency. The move comes as China's debt level has continued to rise since Xi declared a "crusade" against shadow banking in 2017.
Bloomberg: China Removes All Remaining Curbs on Australian Coal Imports
China has lifted all remaining restrictions on Australian coal imports, allowing all domestic companies to import the commodity. High-quality Australian coal is in demand by China's steelmakers and power plants, and imports could reach 1 million tons in the first half of March alone. China is the world's largest producer and consumer of coal, with fuel imports exceeding 290 million tons last year. The end of the coal ban signals a thaw in relations between the two countries, which had escalated as political hostilities rose. The move is welcome news for other Australian exporters hit by a raft of restrictions, including lobster, beef, barley, and wine.
Reuters: China to raise the retirement age to deal with the aging population
China is planning to gradually raise its retirement age to deal with the country's rapidly aging population, according to Jin Weigang, president of the Chinese Academy of Labor and Social Security Sciences. The retirement age will be delayed initially by a few months and subsequently increased. The reform aims to allow people to choose when to retire according to their circumstances and conditions. Pressure on pension budgets is escalating in China, creating more urgency for policymakers to address the situation.
Nikkei: China travel resurgence raises the prospect of higher wealth outflows
The lifting of border restrictions in China has led to a surge in travel, with almost 40 million entries and exits recorded in the first two months of 2023. While travel has been used to circumvent China's capital controls, French investment bank Natixis warned that the discrepancies in travel spending figures between China and destination countries reflect individuals ferrying money overseas. Such outflows could rise this year. Experts predict that the capital will go into insurance and wealth management products, foreign currency deposits, and real estate due to high global interest rates.
Caixin: Why China set 2023 GDP growth target at 'around 5%'
China has set a gross domestic product (GDP) growth target of "around 5%" for 2023, which many consider moderate following a low base in 2022 and stronger-than-expected economic activity this year. However, the country's new premier, Li Qiang, has said that achieving the growth target will not be easy, as China's GDP surpassed CNY 120tn ($17.8tn) last year, which is a high base, and that the economy will face new challenges this year. Multiple economists and analysts consider China's growth target moderate and pragmatic, as the world's second-largest economy will likely grow faster than 5% this year.
Reuters: After unveiling submarine deal to counter China, Biden says Xi talks expected 'soon.'
U.S. President Joe Biden has stated that he expects to speak to Chinese President Xi Jinping soon but declined to specify when, after recently unveiling details of a major submarine deal with Britain and Australia to counter China. China has condemned the AUKUS agreement as an illegal act of nuclear proliferation. U.S. national security adviser Jake Sullivan has previously said that the United States wants to re-establish regular communications with China. Biden is expected to speak with Xi by telephone sometime after China's annual National People's Congress, which ended on Monday.
FT: Brussels seeks new controls to limit China acquiring high-tech
The European Union (EU) is reportedly exploring new measures to limit China's ability to acquire high-tech European products. The move comes as Brussels looks to prevent companies from circumventing EU export bans on sensitive technology by manufacturing it elsewhere. While officials admit the plans are still in the early stages and could take years to implement, they reflect a growing trend towards greater economic security across Europe. In 2020, new rules obliged EU governments to notify Brussels of inbound foreign direct investment that could threaten security or public order. Last year, member states submitted 414 notifications under the EU's FDI Screening Regulation.
Bloomberg: A Look at Evergrande’s Restructuring Scenarios as Key Date Looms
China Evergrande, the troubled developer at the center of China's broader property debt crisis, faces a March 20 court hearing on a winding-up petition in Hong Kong. The hearing is putting attention on the scenarios for how one of China's biggest-ever restructurings may move ahead in the coming week. If the company demonstrates that it is pushing the talks forward and if the ad-hoc group of creditors expresses support, it is possible that the March 20 hearing could lead to an adjournment. But if Evergrande doesn't unveil any more details and the ad-hoc creditor group doesn't support continuing talks, that could increase the risk of the company being ordered to wind up.
SCMP: China arms sales cement its economic and security ties in Africa: study
According to a study by the Atlantic Council think tank, China has sold more advanced weaponry to African countries than the US over the past decade. The research found that China accounted for 22% of total arms exports to sub-Saharan African (SSA) countries south of the Sahara, and almost three times the amount exported by the US. The report also revealed that the top five buyers of Chinese arms were the same countries that have benefitted the most from China’s infrastructure spending in SSA. Researchers noted that China’s growing military exports to Africa coincided with the launch of the Belt and Road Initiative.
Reuters: Learning from Ukraine, Taiwan shows off its drones as key to 'asymmetric warfare
Taiwan showcased its new domestically-produced military drones, including the Albatross II surveillance drone and combat drones, stating that they are essential to their "asymmetric warfare" capability to make their forces more agile if they face a far larger Chinese military. The National Chung-Shan Institute of Science and Technology (NCSIST) exhibited the drones, and the military has announced a partnership with companies to produce 3,000 drones next year. President Tsai Ing-wen has championed the idea of "asymmetric warfare" to make Taiwan's forces more mobile and harder to attack. In contrast, the defense ministry has warned that China is quickly building up its combat capacity with drones.