‘Health reasons’: Chinese Foreign Minister Qin Gang to miss ASEAN meeting; Exclusive Insight: Consensus must be achieved among China's top brass
Xi Jinping, meeting Russian parliament head, vows more Beijing-Moscow cooperation; Biden Bets High-Level Diplomacy Can Cool Fiery Relations With China; US think tank founder charged as Chinese agent
Welcome to this issue of The China Brief. Today is July 11, 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: Consensus must be achieved among China's top brass
At this juncture, discussions on rescuing the real estate market and the macroeconomy might be premature, as previously stated. The "deleveraging" of the real estate industry and the "deflation of the bubble" are intentional moves by the Chinese government. However, when coupled with the Covid-19 pandemic, the economic problems have grown more complex, and local fiscal affairs have also fallen into a quandary.
To escape the current fiscal, financial, and economic predicament, the first requisite is for China's high-level officials to reach a consensus on halting the "deleveraging" and "bubble deflation" in the real estate market—a feat that is quite formidable.
Based on this, a combination of macroeconomic policies, structural reforms, and expectation guidance will be needed for the economy to gradually break free from its current impasse. The policy fine-tuning that just occurred last week, as well as the rumoured special national bonds, have very limited magnitude and efficacy. They simply indicate that the Chinese government has become aware of the economic issues.
Once this is clarified, my sole hope is that if there is a policy shift, there should be a clear and systematic plan, rather than a hasty turnaround like the sudden shift in the virus eradication policy last winter.
‘Health reasons’: Chinese Foreign Minister Qin Gang to miss Asean meeting
South China Morning Post
Chinese Foreign Minister Qin Gang will not attend the Association of Southeast Asian Nations (ASEAN) meetings in Indonesia this week due to "health reasons," according to China's foreign ministry. Qin has been absent from diplomatic events and meetings for the past two weeks. Wang Yi, China's top diplomat and Qin's predecessor, will attend the ASEAN meeting instead. The ministry declined to comment on whether Qin's health issues were related to COVID-19. Qin's absence has raised speculation and sparked questions about his health condition.
Xi Jinping, meeting Russian parliament head, vows more Beijing-Moscow cooperation
South China Morning Post
Chinese President Xi Jinping has pledged to deepen the country’s partnership with Russia, stating that the development of China-Russia relations is a strategic choice for both countries. Xi made the comments during a meeting with Valentina Matviyenko, the chairwoman of the Federation Council, Russia’s upper house of parliament. The meeting came shortly after US Treasury Secretary Janet Yellen’s visit to China, where she met with senior Chinese finance officials. Russia’s Tass news agency quoted Matviyenko as saying that Russia would continue to cooperate with China and could rely on China’s “firm and reliable friendly shoulder”.
Biden Bets High-Level Diplomacy Can Cool Fiery Relations With China
NY Times
President Biden's top aides are visiting China throughout the summer in an attempt to build a new foundation for US-China relations. The visits are expected to be the most consequential diplomatic push of Biden's presidency. Biden is betting that high-level dialogue can act as a ballast in a relationship that has been in a dangerous free fall for years. The US is looking to forge personal ties with Chinese officials in order to defuse crises between the two countries. However, the recent visits have highlighted the worsening structural problems in the relationship that could lead to armed conflict if mismanaged. The two nations are increasingly defining their relationship by military tensions.
US think tank founder charged as Chinese agent
BBC
Gal Luft, the head of a US think tank, has been charged with acting as a Chinese agent and attempting to broker the sale of weapons and Iranian oil. Federal prosecutors allege that Luft attempted to recruit a former US official to publicly support certain Chinese policies and lobbied the official to convince him to publicly support China. He is also accused of attempting to broker arms sales to customers in China, Libya, the UAE, and Kenya. Luft allegedly attempted to bypass US sanctions on Iranian oil by directing an associate to say that the oil was Brazilian. He is considered a fugitive and could face decades in prison if found guilty.
China's Xia Baolong heads top office overseeing Hong Kong, Macau
Reuters
Xia Baolong has been named the head of China's Central Office for Hong Kong and Macau Affairs, according to an official statement. This office, which was created as part of institutional reforms earlier this year, reports directly to the ruling Communist Party and not to the State Council. The office was formed based on the existing Hong Kong and Macau Affairs Office under the State Council.
China’s state-owned group offers US$3.4 billion for Chindata to rival Bain
South China Morning Post
China Merchants Group, a state-owned conglomerate, has made a $3.4 billion takeover bid for Chindata Group Holdings, an Asian data centre operator. The bid of $9.20 in cash per American depositary share exceeds a rival offer of $8 from US private equity firm Bain Capital. Chindata's shares rose 12.3% in US trading following the announcement. Data centres have become attractive assets for investors, given their perceived stable returns and the increasing reliance on technology. Chindata operates carrier-neutral data centres in China, India, and Malaysia.
China Exports Far More Vehicles to Russia Than Anywhere Else
Bloomberg
Chinese automakers have become the largest exporters of vehicles to Russia, filling the void left by global manufacturers exiting the market due to the conflict in Ukraine. From January to May this year, China exported about 287,000 finished vehicles to Russia, almost twice as many as Mexico, the next highest destination. State-owned companies Chery Automobile, Geely Holding, and Great Wall Motor are the top three Chinese brands in Russia, accounting for a third of new car sales. Major international automakers, including Toyota and Volkswagen, pulled out of Russia as economic sanctions were introduced following the invasion in Ukraine.
Latest China mudslide kills two in persistent harsh weather
Reuters
A mudslide has hit a village in northwest China, killing two people and leaving two others missing. The incident occurred in Gansu province, which has been experiencing heavy rain and flooding. This mudslide is the latest in a series of landslides and avalanches that have occurred in the region in recent weeks. The Chinese government has launched emergency response measures to combat these disasters, and President Xi Jinping has called for greater efforts to protect citizens against extreme weather. Weather officials have also issued an alert for severe convective weather, including thunderstorms, gales, and hail, in several provinces.
China’s talent-strapped multinationals try to lure back overseas Chinese
South China Morning Post
Chinese companies are increasingly looking to hire Chinese people overseas to fill talent shortages. This is particularly true in sectors such as hi-tech and biotech, where the US has intensified tech curbs amid ongoing trade tensions. Chinese employers are interested in overseas Chinese candidates due to their top skills, native Chinese language ability, shared culture, and access to foreign business networks. The economic development of China has outpaced the growth of the educational system, resulting in a talent void. In addition, other parts of Asia are also experiencing a shortage of local talent due to ageing populations. Chinese employers have been recruiting from their diaspora offshore since at least last year and are offering good pay and benefit packages to attract talent. Some Chinese people living overseas are interested in returning to China to work due to the hard visa environment and anti-Asian violence in the US. However, not all Chinese people overseas are interested in returning, and some employers still prioritize local hires due to their knowledge of the local market and ability to adapt to the local environment.
Australians see benefits of strong China ties but want Chinese apps banned: poll
South China Morning Post
A survey conducted in Australia found that while many Australians support efforts by the government to stabilize ties with China, they remain wary of the security threat posed by the country. The survey revealed that 63% of respondents see the benefits of Australia's relationship with China, but also want to ban Chinese social media apps WeChat and TikTok. Additionally, a majority of respondents expressed concerns about China's military might and viewed China as a security threat to Australia. The survey also found that support for a stronger stance in dealings with China has decreased.
Why US and China Compete for Influence With Pacific Island Nations
Bloomberg
China and the US are vying for influence in the southern Pacific, with both countries seeking to build relationships with island nations in the region. China's increased attention to the Pacific islands is part of its efforts to raise its profile on the world stage and build a network of developing countries to support its positions in global forums. The US and Australia are concerned about China's growing influence in the region and the possibility of a Chinese military base in the neighborhood. This has prompted a flurry of regional diplomacy and aid pledges from Western countries.
Geely, Renault to develop gasoline engines, hybrid technology
Nikkei Asia
Chinese automaker Geely and French carmaker Renault have announced plans to invest up to €7bn ($7.71bn) in a joint venture (JV) to develop gasoline engines and hybrid technology. The JV aims to manufacture more efficient internal combustion engines and hybrid systems, at a time when the industry is focusing on transitioning to electric vehicles. The new company will employ 19,000 people across 17 engine plants and five research and development hubs, and is expected to supply multiple industrial customers including Volvo, Proton, Nissan, Mitsubishi Motors and Punch Torino. The JV will have an annual production capacity of up to five million internal combustion, hybrid and plug-in hybrid engines and transmissions.
China joins global hunt to diversify mineral supplies: IEA
Nikkei Asia
China's dominant position in refining and processing raw materials is making the nation a strong competitor in the global fight for mining assets, the International Energy Agency (IEA) said. The report said China is heavily reliant on imports for large volumes of raw materials. It is therefore seeking ways to diversify its raw material supply portfolio. China has been investing in mining assets in Africa and Latin America, and started investing in overseas refining and downstream facilities, with an aim to secure strategic access to raw materials.
Taiwan drills to involve civilian airports, practice keeping sea lanes open
Reuters
Taiwan is set to include defending its main international airport and practicing how to keep sea lanes open in its annual military drills for the first time. China, which sees Taiwan as its own territory, has increased military pressure in recent years to assert its sovereignty claim. In April, China conducted drills involving precision strikes and blockades near the island after Taiwan's President met with a US congressman. The upcoming exercises will involve defending Taoyuan international airport from an airborne assault and simulating a backup airport at Taitung's civilian Fengnin airport. At sea, Taiwan's armed forces will practice "saturation attacks" on enemy ships and "anti-blockade escorts".
Foxconn pulls out of $19 billion chipmaking project in India
CNN
Foxconn, the world's largest contract electronics maker, has announced that it is withdrawing from a $19.4 billion joint venture with Indian conglomerate Vedanta to help build one of India's first chip factories. The move is seen as a blow to the Indian government's plans to make the country a major tech manufacturing hub. However, Foxconn has reaffirmed its commitment to invest in Indian chipmaking and explore other development opportunities in the country.
JPMorgan Says HK Property Market Has Pool of Undervalued Assets
Bloomberg
The Hong Kong property market is currently experiencing a 30-year low in valuations, presenting an opportunity for cash-rich tycoons to take advantage of the cheap prices. JPMorgan analysts have noted that the majority shareholders of property companies may engage in bargain hunting, such as buying assets, conducting share buybacks or taking out minority shareholders. The property sector in Hong Kong has been struggling due to falling home transactions and sluggish economic growth in China. As a result, the MSCI gauge tracking Hong Kong developers has lost over 16% year-to-date. JPMorgan has stated that the property sector is currently trading at a combined market cap of HK$1.1tn ($141bn), while the aggregated net asset value amounts to HK$3tn, creating a large pool of undervalued assets that majority shareholders can choose from. Some families, such as Li Ka-Shing-backed CK Asset Holdings, may be more active than others in taking advantage of this valuation dislocation.
What lies behind China’s unconventional approach to diplomacy?
Japan Times
China's diplomatic strategy of pushing its own narratives to the international community has been met with mixed responses. While China aims to enhance its discourse power and shape the international order, it faces challenges at home, including a struggling economy and rising unemployment. Chinese diplomats have been making provocative remarks, which have been criticized by other countries and seen as diplomatic faux pas. However, this aggressive approach may be a result of the Chinese Communist Party's strengthened control within the Foreign Ministry and its aim to enhance the country's international discourse power. China is also seeking to become an agenda-setter in global security, using its influence to shape discussions on international issues. The Xi administration is attempting to change the definition of what is right in the global community and gain legitimacy. However, there are limits to attracting supporters by fueling anti-US sentiment, and China's aggressive approach may lead to diplomatic setbacks.
TikTok crackdown bill in US faces changes after ByteDance lobbying, senator says
South China Morning Post
US lawmakers are considering amendments to proposed legislation that would grant the Biden administration new powers to ban Chinese-owned TikTok. Democratic Senator Mark Warner, who co-sponsored the bill, said that lobbying efforts by TikTok's parent company, ByteDance, had slowed momentum for the legislation. The proposed bill, called the Restrict Act, has faced criticism for potentially impacting individual Americans and expanding government power. Warner said that lawmakers are working on amendments to address these concerns in a fair way. The legislation would grant the Commerce Department new authority to review and block transactions involving foreign technology that pose national security risks.
Meituan Faces Battle with ByteDance to Revive Shares
Bloomberg
Chinese food-delivery firm Meituan has seen its share price slide by 30% so far this year as it faces increasing competition from rival ByteDance. The owner of TikTok is aiming to gain a greater share of Meituan's retail business via its short video platform Douyin, which has built-in e-commerce features. ByteDance is also moving into Meituan's key food-delivery sector. Meituan has announced plans to hire up to 10,000 staff this year to fend off ByteDance.
Bain ‘Warmly Welcomes’ Visit From Shanghai Officials After Probe
Bloomberg
Top Communist Party officials in China have visited the Shanghai office of consulting firm Bain & Company, marking their first known trip to the office since the government crackdown on the sector. The officials, including the party secretary of Shanghai’s Jing’an district, were briefed on business developments at Bain. The visit is seen as a positive shift in government relations, as it signals a commitment to creating a sound business environment for enterprises. The clampdown on consultancies earlier this year had raised concerns about the potential outcome for foreign investors. The government accused global expert network Capvision Pro Corp. of encouraging specialists to leak state secrets, and authorities questioned staff at Bain’s Shanghai office. The visit by officials to Bain’s office came just days before US Treasury Secretary Janet Yellen travelled to Beijing to help improve ties between the US and China. Yellen raised concerns over the treatment of American companies during her meetings with US businesses operating in China. Neither Bain nor the Shanghai government commented on the visit.
China Stocks Need Reform More Than Stimulus, Allianz Global Says
Bloomberg
Allianz Global Investors has stated that China's monetary and fiscal stimulus measures will only have a limited effect on lifting its stock market, and that structural reforms are necessary for a long-term boost. The firm believes that reforms to the property sector and listed companies are needed to restore consumer and corporate confidence in spending and investing. AllianzGI has held an underweight position on mainland China and Hong Kong equities this year, and is waiting for reforms and more supportive measures before increasing exposure to Chinese real estate and consumer stocks. The firm suggests that curbing property supply and completing stalled projects would help stabilize prices, and that the government could promote investing in property rather than speculating on it. AllianzGI also suggests that authorities could push companies to increase returns on equity, similar to the Tokyo Stock Exchange's directive earlier this year, which has contributed to gains in the MSCI Japan Index.
China’s mistakes could cost Australia dearly
The Sydney Morning Herald
China is facing the threat of deflation and the possibility of long-term economic stagnation, a situation known as "Japanification." Inflation data for China showed consumer price inflation at zero last month, and factory gate prices fell by 5.4% YoY, marking the ninth consecutive monthly decline. The country has not experienced deflation since the 2008 financial crisis. The main issue contributing to the economic challenges is debt, with China's debt-to-GDP ratio standing at around 280%, compared to an average of 256% for developed economies. Local governments and businesses have driven up the debt levels, particularly due to reliance on property sales for revenue. The crackdown on property developers by President Xi Jinping has exacerbated the situation. The construction sector, which accounted for 30% of China's growth in the past, is now depressed, and local government finances are increasingly stressed. Households and businesses have also retreated due to the trauma in the property sector and weak demand. The global economic slowdown and the restructuring of global supply chains following the pandemic and other geopolitical events have further impacted China's external demand for manufactured goods. While authorities have taken some measures to stimulate growth, they are cautious about implementing a major stimulus program due to past experiences and high levels of unproductive debt. However, some stimulus is expected, particularly in the property sector and measures to stimulate consumer demand.
China’s Economy Is Slowing. Here’s Why that Matters
Bloomberg
China's economy is facing a range of challenges, including sluggish consumer spending, a shaky property market, flagging exports, record youth unemployment, and high levels of local government debt. These strains are starting to be felt globally, impacting commodity prices and equity markets. China's official target is for growth of around 5% this year, but when accounting for the low base of comparison due to Covid-19 restrictions in 2022, growth for 2023 will likely be closer to 3%. Furthermore, China's consumer inflation rate is flat and factory-gate prices are falling, raising concerns about the risk of deflation. The country's economic troubles have global implications as many countries depend on China's market and production. China is expected to be the top contributor to global growth over the next five years, and its economic expansion affects businesses worldwide through trade. The slowdown in China's economy is particularly impacting mineral-exporting countries and high-tech goods exporters. Additionally, Chinese travelers have yet to resume traveling abroad in large numbers, further hurting tourism-dependent countries. The combination of China's economic troubles and the risk of a US recession has raised concerns about a simultaneous slump in the world's two economic powerhouses, compounding the pain for everyone.
China’s middle class squeezed by job cuts and falling home prices
SCMP Opinion
The concept of the middle class in China is a politically sensitive topic, and the government instead uses the term "middle-income group" to refer to this segment of the population. Estimates vary on the size of China's middle-income group, with some suggesting it comprises around 460 million people, or about a third of the total population. However, this definition is often criticized as being detached from reality, as families require a much higher income to achieve a middle-class lifestyle, particularly in large cities. The real size of the middle-income group may be smaller than official calculations suggest.
The more important question is how much the middle-income group can grow. China's economic rise has already created a sizable middle class, and there are hopes that more Chinese people will become modern consumers. If we look at other developed economies as a reference, such as Japan, where middle-income people account for two-thirds of the population, then China's middle-income group has the potential to double from its current size. This would make China an irresistible market for multinational companies.
However, there are doubts about this optimistic forecast, especially in light of the economic impact of the COVID-19 pandemic. Consumer spending, which was expected to be a strong engine for growth, has instead become a weak link. The middle class in China is also bearing the brunt of economic changes, as job cuts and falling incomes make it difficult for households to maintain a middle-class lifestyle. It is easy for an existing middle-income household to fall out of the group, and hard for a poor household to join in.
One factor that is exacerbating the challenges faced by China's middle class is falling housing prices. Property accounts for a significant portion of average household wealth, and mortgages make up a large portion of total household debt. While China is not currently facing a subprime crisis, there are cases of foreclosures pushing middle-income households into poverty. As their income prospects decline and family wealth is endangered, middle-income families are becoming more cautious in their spending.
In the long run, a shrinking and timid middle class will hinder China's ability to overcome the "middle-income trap" and achieve its vision of common prosperity. It is crucial for China to find ways to expand its middle-income group and boost its confidence. This may require addressing the challenges faced by the middle class, such as job insecurity and falling housing prices, and creating an environment that supports their economic growth and upward mobility. Only by doing so can China ensure a sustainable and inclusive economic development.
China to Use Offset Market Revival to Support New Climate Action
Bloomberg
China is considering small-scale solar projects and afforestation as sectors to generate new emissions reduction credits under a revival of its stalled offsets market. The issuance of new China Certified Emissions Reduction credits (CCERs) halted in 2017 to prevent a supply surplus. Utility-scale renewable energy projects are expected to be excluded from generating new credits, with officials focused on using the system to help bolster the viability of smaller projects or new sectors. The CCER issuance system will reopen to a small number of project types this year, including rooftop solar systems smaller than 6 megawatts.
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