Exclusive Insight: Lesson for China from the Silicon Valley Bank Crisis; Can China’s Middle East role extend to Israeli-Palestinian settlement?

Credit Suisse and the Crazy, Rich, Anxious Asians; China renews pledge for wider market access for foreign investors; China’s Consumption Conundrum

Welcome to today's issue of "The China Brief". In this edition, we cover a range of topics, including the Biden administration's push for TikTok's Chinese ownership to sell the app, Germany's warning to China not to use force to alter the Taiwan status quo, Credit Suisse's need to keep wealthy Asian clients happy, and much more. Read on for more insights into the latest news and developments in China.

And here’s today’s exclusive insight:

Exclusive Insight: Lesson for China from the Silicon Valley Bank Crisis

The recent run on Silicon Valley Bank underscores two critical vulnerabilities within the institution's financial framework, which may provide valuable lessons for China's city-level commercial banks. These two key susceptibilities include a high concentration of deposits and a high concentration of assets. By examining the underlying causes of the crisis and the implications for regulatory oversight, China can potentially avert similar scenarios in its own banking sector.

Primarily, the bank's deposit base was heavily concentrated within a relatively small group of high-tech companies in the Silicon Valley region. Consequently, any adverse impact on the tech industry or the region itself would lead to coordinated deposit or withdrawal actions, significantly affecting the bank's deposit base. Additionally, the bank's assets were predominantly invested in long-term US government bonds, which exhibit the most significant sensitivity to interest rate changes. The failure to adjust the asset structure in response to the shifting interest rates following the Russia-Ukraine war exacerbated the bank's vulnerability.

Similar risks are prevalent in China's city-level commercial banks, with deposits primarily originating from local governments, state-owned enterprises, and public institutions' employee salaries. Likewise, their loan portfolios are predominantly focused on local real estate mortgage loans and local government financing. This concentration makes these banks susceptible to runs in the event of a significant decline in housing prices and a subsequent deterioration in loan quality.

From a regulatory standpoint, the Silicon Valley Bank crisis reveals notable shortcomings in the US financial regulatory system. Firstly, deposit insurance, which serves as a safeguard against bank runs, is virtually non-existent due to insufficient coverage. In the US, deposit insurance only fully compensates deposits up to $250,000 in the event of a bank failure. This inadequacy renders the insurance essentially ineffective in preventing modern bank runs, which transpire rapidly through digital transactions. China's financial regulators must take heed of this lesson and ensure comprehensive deposit insurance coverage.

Furthermore, the crisis highlights the dangers of moral hazard arising from inconsistency in regulatory actions. When the US deposit insurance company opted to fully compensate Silicon Valley Bank depositors, including those with deposits exceeding $250,000, it inadvertently reinforced the belief that risky banking practices would ultimately be borne by deposit insurance, thus increasing the likelihood of future risks. Chinese financial regulators must be cognizant of the potential for secondary crises resulting from contradictory actions during crisis management.

Lastly, the root cause of the Silicon Valley Bank crisis can be traced back to the regulatory gaps and absences stemming from the United States' sprawling, multi-agency regulatory system, which fosters a race to the bottom in regulatory standards. The failure to address such fundamental issues early on and to implement pre-emptive supervision can have far-reaching consequences. China's financial regulators must strive for a unified financial regulatory framework, which is anticipated to be realized in the forthcoming institutional reforms.

In conclusion, by carefully examining the factors that contributed to the Silicon Valley Bank crisis and the inadequacies in the US financial regulatory system, China can glean valuable insights to fortify its own banking sector and regulatory oversight, thereby mitigating the risks of similar crises unfolding within its borders.

(The author of this article, Gu Huajing, is a banking professional and special analysis expert for "The China Brief.")

NYT: U.S. Pushes for TikTok Sale to Resolve National Security Concerns

The Biden administration has demanded that TikTok’s Chinese ownership sell the app to resolve national security concerns or face a possible ban. The new demand marks a significant shift in the administration’s position toward the popular video app, which has been under scrutiny over fears that Beijing could request Americans’ data from the app. TikTok is owned by the Chinese internet company ByteDance. The White House’s demand for a sale, coupled with its support for legislation that would allow it to ban TikTok in the United States, hardens the administration’s approach, harking back to the position of former President Donald J. Trump.

Nikkei: Scholz warns China not to use force to alter Taiwan status quo

German Chancellor Olaf Scholz has warned China against using force to alter the status quo in Taiwan, stating that Germany abides by the "One China" policy but that force must not be used to change the status quo. He also pledged to reduce Germany's economic reliance on China and avoid one-sided dependencies on individual countries, while opening up new sales markets. The shift in Germany's Asia policy is expected to be a boon for Japan. However, Scholz added that Germany will continue to work with China as it is an important state with great economic power.

Bloomberg: Credit Suisse and the Crazy, Rich, Anxious Asians

Credit Suisse needs to come up with a strategy to keep wealthy Asian clients happy or risk losing more money from this key group of clients. The region contributed one-third of the profit growth in Credit Suisse's wealth management division between 2016 and 2020. However, the Swiss bank faces hurdles in the region, including wealthy Chinese clients' concerns about Swiss banks due to the nation's tough approach to applying sanctions. To stem outflow in Asia, the lender recently raised its three-month deposit rates for new deposits of $5 million and above to as much as about 6.5%. However, the bank needs to address client queries, including sanctions risk and the safety of deposits, and appeal to clients recently traumatized by China's sudden U-turns.

Reuters: Apple supplier Foxconn wins AirPod order, plans $200 million factory in India

Apple supplier Foxconn has won an order to produce AirPods and plans to build a factory in India to manufacture the wireless earphones. The company will become an AirPod supplier for the first time as it looks to diversify production away from China. Foxconn will invest more than $200m in the new India AirPod plant in the southern Indian state of Telangana. Shares in the Foxconn unit rose nearly 9% after the news was reported.

Bloomberg: China Blames US Bank Woes on Bad Regulation, Political Bickering

Chinese state media, Xinhua News Agency, has blamed poor financial regulation and political infighting in the US for recent bank failures, as tensions between the two countries continue to simmer. The report also stated that other countries are "footing the bill" for the collapse of US banks, as central banks come under pressure to safeguard financial stability. Meanwhile, officials at the People's Bank of China vowed to manage the pace of credit extension well, ensure reasonable credit growth, and stabilize growth, employment and prices. The report also suggested that more than 90% of respondents in a CGTN poll believed the US government's oversight of the financial system had "practically no function".

Nikkei: China decoupling spreads to software development

Fears over cyberattacks are leading developers to avoid using Chinese software components, causing a decoupling in software development between China and the US and Japan, and raising concerns that it could hamper tech companies as they develop new products. Many apps and systems are built using open-source software components from across the world, which can compromise an entire app if one component has weaknesses that are exploited by hackers. The trend is combined with China's increasing footprint in software development, and US lawmakers introduced legislation last year to ensure the security of software used by federal agencies.

Reuters: China renews pledge for wider market access for foreign investors

China's commerce ministry has stated that it will continue to push for relaxed market access for foreign investors, renewing efforts to attract foreign capital to its economy that grew at its slowest rate in half a century last year. The ministry will help foreign companies to deepen their presence in China and steadily expand institutional openness. The move comes as global uncertainties push foreign investors to search for new safe havens. On Tuesday, Goldman Sachs raised its forecast for China's gross domestic product growth this year to 6% from 5.5%.

Bloomberg: Threats to Grand Plans Sent Saudi Prince to Seek Iran Deal

Saudi Arabia's decision to restore diplomatic ties with Iran was motivated by the desire to offset security risks to its multi-trillion-dollar economic transformation plans, according to sources with knowledge of formal talks between the two countries that began two years ago. The kingdom's de-facto ruler, Crown Prince Mohammed bin Salman, had reportedly approached both the US and China for assistance amid concerns over Israel's nuclear work. With Washington rebuffing requests for a normalization of ties with Israel, the crown prince then turned to China, which offered to bridge differences between Saudi Arabia and Iran.

Reuters: Can China broker peace between Russia and Ukraine?

Chinese President Xi Jinping may soon visit Russia's Vladimir Putin and hold a virtual meeting with Ukrainian President Volodymyr Zelenskiy after China proposed a 12-point plan for peace in Ukraine. China's traditional stance is not to interfere in other countries' conflicts, but it has been mediating Saudi Arabia and Iran's peace talks. China's plan for peace called for a gradual de-escalation leading to a comprehensive ceasefire, but it did not condemn Russia for its invasion of Ukraine. While analysts say it will be hard for China to get Russia and Ukraine to the negotiating table, Xi could act as a backchannel to start momentum towards talks.

Bloomberg: CK Hutchison Profit Rises as Global Assets Offset Covid Woes

CK Hutchison Holdings, the conglomerate founded by billionaire Li Ka-shing, reported a 10% increase in net income to HKD 36.68bn ($4.67bn) for 2022, thanks to a diversified global portfolio and major deals that helped the company weather the Covid-19 headwinds. The group’s real estate arm, CK Asset Holdings, reported a net income of HKD 21.7bn in the same period. CK Hutchison earns more than half its revenue from Europe and around 20% from China. It is finalizing talks with Vodafone on a potential merger of their UK mobile businesses.

Bloomberg: Chip Globalization Is Over and Sanctions Work, Says TSMC Founder

Morris Chang, founder of Taiwan Semiconductor Manufacturing Co. (TSMC), has said that globalization in the chip industry is over and that he supports US efforts to restrict China's tech advancement through export curbs and company sanctions. At an event in Taipei, Chang praised US policy to slow China's progress, adding that "free trade is dead" and The global chip supply chain will become even more bifurcated as the US acts to restrict China's access to advanced technology, he added. However, he cautioned that Taiwan should not be naive about its position relative to the US, which has voiced concerns about reliance on Taiwan.

Reuters: US regulators to visit Hong Kong for fresh round of audit inspections

The US Public Company Accounting Oversight Board (PCAOB) will conduct a new round of inspections in Hong Kong on auditors of Chinese firms next week, according to sources. Officials from EY, Deloitte, PricewaterhouseCoopers and other audit firms in both Hong Kong and mainland China have been selected for the audit. A group of officials from the China Securities Regulatory Commission and the Ministry of Finance will be dispatched to Hong Kong to assist the inspection. The move comes after a successful visit by US regulators in 2022, following a long-running dispute over auditing compliance of US-listed Chinese firms.

Bloomberg: Baidu Plunges After Recorded Demo of AI Chatbot Disappoints

Baidu shares fell 6.4% in Hong Kong after founder Robin Li presented a scripted video of interactions with the company's AI chatbot, Ernie Bot, instead of a live demo. The chatbot can be registered for by consumers and cloud clients starting Thursday, but it is unclear when they can use the service. The omission raises questions over Ernie's ability to match OpenAI's ChatGPT, which has impressed and worried users since its November launch. However, Baidu is regarded as a leader in a race with Alibaba and Tencent to create the next-generation platform for China's internet market.

SCMP: Can China’s Middle East role extend to Israeli-Palestinian settlement?

China's special envoy to the Middle East has visited Israel to promote a resolution to the Palestinian issue. Zhai met with senior officials from Israel and the Palestinian Authority and pledged China's support for UN-led mediation and the "two-state solution"” His visit coincided with Beijing's success in helping to restore diplomatic ties between Saudi Arabia and Iran. A Middle East affairs expert with Fudan University said that "the Palestinian and Saudi-Iran issues have in common is that both conflicting sides consider China a reliable and trustworthy partner"”

Reuters: Chinese suppliers race to Vietnam as COVID let-up opens escape route from Sino-U.S. trade war

Chinese companies and suppliers are flocking to Vietnam following China’s end of its zero-COVID-19 policy. Vietnamese government data showed that Chinese firms spent the first 50 days of 2023 investing in 45 new projects in Vietnam, with many smaller suppliers now joining major players such as Samsung, Canon, Apple device assembler Hon Hai Precision Industry, and Luxshare Precision Industry. Increasing costs in China, tit-for-tat tariffs resulting from the Sino-US trade war, and expanded US restrictions on high-tech-related trade with China have added to the appeal of Vietnam. So far this year, Chinese firms have tripled spending on new building sites in Vietnam to $250m versus the same period a year earlier, official data showed.

Bloomberg: EU Poised to Stake Claim in Clean-Tech Race, Pushing Back at US

The European Commission is set to announce regulations aimed at ensuring the EU produces 40% of its clean-tech needs in key sectors like solar panels and batteries by the end of the decade, according to draft documents seen by Bloomberg News. The proposals have stoked fears of a clean-tech arms race and have been described as "unabashedly protectionist" by a Brussels-based think tank. The plans still need to be approved by the parliament and member states and could be amended before they’re implemented. The 27-member bloc is seeking to reclaim a share of industries where it once had the ascendancy but lost out to China.

Reuters: Didi to expand services in China after regulators end probe

Chinese ride-hailing firm Didi Global has announced plans to expand its services and offer more subsidies to passengers and drivers after a regulatory probe by Beijing authorities ended. In an online statement, Didi said it will work with industry partners to cover more cities and offer more services. The company was the subject of China's clampdown on the tech sector last year, which saw it banned from taking new users and removed from app stores until January.

SCMP: China’s US Treasury holdings fall to US$859 billion, lowest since 2010, amid rate hikes and tensions

China's holdings of US government bonds fell to $859.4bn in January, marking a 13-year low and the sixth straight month of decline. Analysts suggest that Beijing is looking to diversify its portfolio, reduce dependence on the US dollar, and guard against the risk of sanctions. It is also seen as a sign of unease with Washington's financial policies, and is accompanied by growing tensions between the two countries. The decline occurred before the US Federal Reserve raised interest rates on 1 February. Meanwhile, Japan's holdings of US Treasuries rose by $28bn to $1.104tn in January.

Foreign Affairs: China’s Consumption Conundrum

China's economic growth is unlikely to rescue the global economy. Its vulnerabilities include a lack of domestic demand, local government finances being increasingly starved of revenue, and an ailing property sector. China's export sector, which accounts for 15% of the world's goods, may also become a liability during a global recession. Boosting consumption among China's 1.4 billion citizens is challenging as Chinese households are big savers, putting away one-third of their income. However, to achieve its goal of becoming the world's largest economy, China needs to transform its international reputation by shifting toward greater consumption, helping stabilize the U.S.-Chinese economic relationship. Nonetheless, executing a pro-consumption plan will be difficult given domestic political constraints and the need for a thriving private sector.