Lessons From a Law Firm’s Decision to Leave China; China goes for the jugular on strategic minerals
China tips into deflation as efforts to stoke recovery falter; Another Chinese Property Giant Teeters, Raising Worries About the Economy
Welcome to this issue of The China Brief. Today is August 9, 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.
Lessons From a Law Firm’s Decision to Leave China
NY Times
The Biden administration is set to announce new restrictions on investing in China, as the US government seeks to stop Beijing from accessing advanced technologies that could be used for military purposes. The measures will focus on high-tech sectors such as quantum computing, artificial intelligence and advanced semiconductors. The restrictions come amid a slowdown in the Chinese economy, which fell into deflation last month, and a decline in trade. In addition, several businesses are finding it increasingly challenging to operate in the country, with law firm Dentons announcing plans to separate from its Chinese unit and raise questions about its future in China.
The new restrictions highlight the growing challenges faced by global companies operating in China. The country's new counterespionage law, which bans the transfer of any information related to national security and allows for access to data and property, has made it difficult for foreign companies to follow legal industry standards. Dentons' decision to leave the country was due to provisions such as the requirement for Chinese firms to keep client and employee information secret from foreign entities, which posed problems for US lawyers seeking to check for conflicts with existing clients before taking on new ones.
While the Chinese market remains attractive, it is becoming more difficult to operate there, with standards diverging between China and Western economies. Chinese authorities have raided the offices of Western-linked consulting firms in recent months, and Sequoia, a US venture capital firm, closed its unit in China in June. However, given the size of the Chinese economy, foreign businesses will continue to operate there, albeit with increasing difficulty.
China goes for the jugular on strategic minerals
Telegraph
Gallium, a critical mineral essential for advanced weaponry and hi-tech production, has become a focal point of concern for Western countries due to China's monopoly on its production. Chinese production of primary gallium stands at 98% of the global supply, with the figure falling to 80% for purified gallium used in industry. The Chinese government has recently imposed export restrictions on gallium, leading to fears of a future embargo on unfriendly countries. The UK has been particularly lax in addressing this issue, allowing its last gallium processor to close in 2018. The Center for Strategic and International Studies (CSIS) in Washington believes that China's dominance over gallium is not a result of market forces alone, but rather a deliberate strategy to gain tech supremacy. China's control over gallium is seen as a threat to Western countries' national security and economic interests, as gallium nitride is vital for advanced defence technology and has numerous applications in electronics and clean tech. Western countries are now being urged to reduce their reliance on Chinese gallium supply and develop alternative supply chains. However, this process takes time and could result in China gaining a decisive advantage in the clean tech sector. The article argues that governments must step in with incentives to develop domestic gallium production and reduce reliance on China. While China's dominance over gallium is concerning, the article also points out that China itself relies on maritime imports of energy, raw materials, and food, which could be vulnerable to disruption. Nevertheless, Western countries cannot afford to leave the issue of gallium supply solely to the free market and must take action to secure their access to this critical mineral.
Another Chinese Property Giant Teeters, Raising Worries About the Economy
NY Times
Country Garden, China's largest property developer by sales, has missed two interest payments on bonds and had to scrap a plan to inject cash into the business, raising concerns about its financial stability and the health of China's economy. The company's value in the stock market has halved since the start of the year, and some of its bonds were being traded for as little as 10 cents on the dollar this week. Country Garden's financial difficulties have been exacerbated by a drop in sales of its apartment units and a decline in China's housing market more broadly.
China tips into deflation as efforts to stoke recovery falter
The Globe and Mail
China's consumer sector experienced deflation in July, with the consumer price index (CPI) dropping 0.3% year-on-year, the first decline since February. The producer price index (PPI) also extended its declines for the tenth consecutive month, falling 4.4%. This deflationary trend raises concerns about the country's economic growth and adds to worries about the impact on major trading partners. It also highlights the divergence between manufacturing and services in China's economy, as well as the slower-than-expected rebound from the pandemic. The data comes after weak trade figures and reports of debt troubles in the property sector. Worried consumers and companies are hoarding cash rather than spending or investing it, despite lower interest rates. The Chinese price data confirms that the country's economic recovery is losing steam, in contrast to the inflation seen in most major economies. However, there are signs that global inflation may be peaking and even reversing in some cases. For now, Chinese authorities are downplaying concerns about deflation and have set a consumer inflation target of around 3% for this year. Some analysts believe that the deflation in China will last for six to twelve months but will not follow Japan's history of prolonged price stagnation. Policymakers in China have announced measures to boost consumer spending, but some market participants believe more decisive stimulus is needed. Investors have been waiting for policymakers to take action following last month's Politburo meeting, but the lack of concrete action has left the stock market underwhelmed. It appears that the Chinese government will avoid rolling out large-scale stimulus and instead focus on targeted measures on the supply side.
Beijing's flooding death toll rises to 33, with 18 still missing
CBC
Flooding in China's capital, Beijing, has resulted in a death toll of 33 people, including five rescuers, with another 18 people still missing. The heavy rainfall, which has also affected other parts of northern China, caused the collapse of tens of thousands of homes, damage to hundreds of thousands of others, and flooding of thousands of hectares of cropland. Numerous roads and bridges were also damaged. The city's vice-mayor stated that given the extent of the damage, it could take up to three years to restore full functionality. The affected areas are located kilometers away from the city center, where the country's leaders and top administrative and business centers are situated. Other parts of China have also experienced heavy flooding, including Hebei province, just outside Beijing, and the southwestern province of Sichuan. Additionally, some areas are suffering from scorching heat and drought. In the Inner Mongolia region, firefighters are battling wildfires, while in the northeastern province of Jilin, heavy rainfall has caused rivers to overflow their banks, resulting in six deaths and the evacuation of tens of thousands of people. China has a history of devastating floods, with the most deadly occurring in 1998 when 4,150 people died, mostly along the Yangtze River. In 2021, over 300 people died in the central province of Henan due to record rainfall.
China’s property crisis deepens as another huge developer risks default
CNN
Shares in China's Country Garden, once the country's largest developer, have plunged 16% after reports that the company missed interest payments on two US dollar-denominated bonds. Several of Country Garden's yuan-denominated bonds were suspended from trading in Shanghai and Shenzhen after they dropped by more than 20%. The collapse in market confidence shows investors are worried about the company's future. If Country Garden, the biggest privately owned developer in China, were to go down, it could trigger a crisis of confidence in the property sector, said Edward Moya, a senior market analyst for Oanda.
China consumer prices swing into decline as deflation risks build
Nikkei Asia
China's consumer prices fell 0.3% in July from a year earlier, the first decline in two years and five months. This was primarily driven by a drop in sales of cars and other durable goods. Car and motorbike prices fell 4.4%, while those of smartphones and other communication gear dropped 2.6%. Furniture and appliances were 1.8% cheaper due to slumping condominium sales. The price of food also fell, with pork prices tumbling nearly 30%. The decline in consumer prices has raised concerns about a potential deflationary mindset spreading among consumers.
US reports big interest in $52 billion semiconductor chips funding
Reuters
Over 460 companies have expressed interest in winning government semiconductor subsidy funding in the US, according to the Commerce Department. This comes after the "Chips for America" legislation was signed by President Joe Biden last year, providing $52.7bn in subsidies for US semiconductor production, research, and workforce development. The Commerce Department began accepting applications for the $39bn subsidy program in June, and awards are expected to be announced in the coming months. The legislation also includes a 25% investment tax credit for building chip plants, estimated to be worth $24bn.
China targeting German tech 'through back door' with licences - report
Reuters
Chinese companies are seeking licences to gain access to German technology due to increasing difficulties in acquiring companies in the sector, according to a study by the IW economic institute. The study found that German licence revenues from China more than tripled in 2022 compared to 2014, and increased by about half compared to 2020. The German government is pursuing a "de-risking" policy on China and is planning tougher rules to protect critical infrastructure from foreign influence.
China’s Economy Faces Yet Another Threat: Falling Prices
NY Times
China is facing the threat of deflation as consumer prices fell in July for the first time in over two years, and wholesale prices paid by businesses to factories have been down for 10 consecutive months. Falling prices can depress household net worth and make it difficult for borrowers to repay loans, which is particularly concerning for China given its high debt levels. The Chinese government has denied the possibility of deflation, but economists are worried. The country's economic growth has started to slow, and policymakers are under pressure to take action to revive the economy. The prospect of sustained deflation adds to China's challenges, especially as geopolitical tensions are leading countries like the US and Germany to seek alternatives to China for manufactured goods. China's weak export demand from domestic and foreign buyers is also a challenge, driven by slowing demand and efforts to diversify supply away from China. The standard remedy for deflation is for the government to pump up the money supply, but companies and households have shown little interest in borrowing.
China to require all apps to share business details in new oversight push
Reuters
China's Ministry of Industry and Information Technology (MIIT) has announced that all mobile app providers in the country will be required to file business details with the government. The new rule, which aims to combat online fraud, will come into effect in March 2022 and is expected to impact both domestic and foreign-based developers. Developers will need to either have a company in China or work with a local publisher in order to comply with the regulations. The requirement could affect the availability of popular social media apps such as Facebook and Instagram in China.
How the end of ‘Made in China’ is crippling the world’s second largest economy
Telegraph
China's export and import figures are falling, with July exports down 14.5% YoY in dollar terms and imports down 12.4% for the fifth consecutive month. The slump in global demand, geopolitical tensions, tariffs and China's zero-Covid policy are all contributing factors, as well as President Xi Jinping's increasingly authoritarian regime. The decline in investment in China, China's increasing lack of competitiveness as a production location, rising wages and a shrinking labour force are all barriers to growth. Coupled with geopolitical pressures, this has led to almost 70% of US imports from China being subject to an average tariff of 20%, according to the Peterson Institute for International Economics. One in five UK importers have made changes to their supply chains due to geopolitical pressures, with a further 15% considering doing the same. Experts predict that China's economic growth will slump to between 2% and 3% over the next decade, far below the levels of previous decades and well below Xi's 5% target for this year.
More Chinese graduates return to hometowns in depressed economy - state media
Reuters
According to state media, almost half of Chinese undergraduates returned to their hometowns within six months of graduation last year, an increase from the previous year. The rising cost of living and a sagging job market have led jobless Chinese youth to leave major cities and return to their hometowns. The proportion of undergraduates returning home six months after graduation rose to 47% in 2022 from 43% in 2018. The trend varied across regions, with the east seeing the highest percentage of returnees. The youth jobless rate in China reached a record 21.3% in June, and increasing rents in major cities have also contributed to the decision to return home. The rental market is expected to heat up in August as fresh graduates look for accommodation in big cities.
Panda skeleton discovered in 2,000-year-old Chinese emperor’s tomb
Washington Post
Chinese archaeologists have discovered the first complete skeleton of a giant panda in an ancient emperor’s tomb, revealing burial rituals from more than 2,000 years ago. The panda was found in a group of animal sacrifice pits near a sprawling mausoleum belonging to Emperor Wen of the Han dynasty. It is the first time that a complete panda skeleton has been identified from an emperor’s burial site. The team also found a complete skeleton of a Malaysian tapir, which became extinct in China about 1,000 years ago.
China issues national guidelines to catalyse hydrogen energy industry
South China Morning Post
China has released its first national-level guidelines for establishing standards for the hydrogen energy industry in an effort to support the sector’s development, as the clean fuel plays an increasingly important role in the country’s carbon-neutral ambitions. The government hopes the standards will help to realise the full potential of hydrogen energy’s role in China’s energy consumption-side decarbonisation and in China’s new energy system, where renewable energy is expected to play a dominant role, according to the guidelines.
‘Buy the dip’ as stronger China stimulus could power multi-month rally: BofA
South China Morning Post
Chinese stocks could rally in the coming months as Beijing rolls out stronger stimulus that will aid sentiment, but longer-term outlook remains gloomy because of structural challenges, according to Bank of America (BofA). The MSCI China Index, which tracks over 700 companies listed at home and abroad, has retreated 4.5 per cent this month as investors booked profits after a rebound in late July on expectations of further stimulus measures after the Politburo meeting.
Joe Biden to visit Southeast Asia as ‘head of Vietnam desperately wants to meet’
South China Morning Post
US President Joe Biden has announced his plans to travel to Vietnam "shortly" in order to elevate the relationship between the two countries and make Vietnam a major partner. The announcement came during a political fundraiser in New Mexico, and the White House has not provided any further details at this time. In April, Vietnamese Prime Minister Pham Minh Chinh and US Secretary of State Antony Blinken expressed a desire to deepen ties between the two countries, particularly as the US seeks to counter an assertive China in the region. The US has been working to elevate its partnership with Vietnam to a "strategic" level, but Vietnam has been cautious due to its relationship with China and Russia. Biden's announcement suggests that Vietnam is now ready to change the dynamic of their relationship and become a major partner.
The closer relationship between the US and Vietnam could include increased military cooperation and US weapons supplies. The US has openly expressed its desire to bolster military supplies to Vietnam, as the country seeks to diversify away from Russia, its current main supplier. However, potential hurdles include Vietnam's human rights record, which could lead to criticism from US lawmakers. The South China Sea remains a point of tension between China and Vietnam, and there are concerns that a miscalculation or accident could lead to a military conflict. Despite this, the US has continued to conduct patrols in the region to ensure freedom of navigation.
It is worth noting that the US is also seeking to improve relations with China, as evidenced by Blinken's visit to China in June. The US has a complex relationship with China, as it seeks to counter its assertiveness in the region while also engaging in economic and diplomatic discussions. Biden's planned visit to Vietnam suggests that the US is actively seeking to build partnerships and alliances in the Asia-Pacific region in order to counter China's influence.
Overall, Biden's announcement of his plans to travel to Vietnam and elevate the relationship between the two countries highlights the US's commitment to strengthening partnerships in the Asia-Pacific region. Vietnam's willingness to change the dynamic of its relationship with the US suggests that it sees the US as an important ally in countering China's influence in the region. The US's focus on strategic partnerships in Asia is part of its broader strategy to maintain stability and promote its interests in the region.
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