Montana bans TikTok. But can the US state enforce it? Exclusive Insight: The Genesis and Current State of Local Government Debt in China
Meituan Planning Hong Kong Debut as Soon as Monday, Sources Say; Ukraine shoots down ‘29 of 30 missiles’ launched by Russia
Welcome to this issue of The China Brief. Today is May 18, 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: The Genesis and Current State of Local Government Debt in China
The preceding articles have each explored the origins, evolution, current state, and potential harms of local government debt in China.
In this article, I shall initially provide a succinct overview of the fundamental causes that have led to the present issues surrounding local government debt, in conjunction with an analysis of the quantum of this debt and its subsequent ramifications. Following this, a brief discourse will ensue regarding the comprehensive systemic solutions that simultaneously treat both the symptoms and root cause of these debt issues.
The accumulation of local debt in China can be attributed to two equally significant causes. One is the fiscal reform of 1994, which resulted in local government revenue being insufficient to cover their respective expenditures. The deficit had to be compensated for either through borrowing, selling land, or through transfer payments from the central government. This provided fertile ground for the development of local government debt.
The other cause revolves around the benchmark for assessing local government officials: the GDP growth rate. This measure fails to account for the ability of local officials to enhance the GDP growth rate by borrowing, nor does it consider the potential for these officials to transfer their debt repayment obligations to future officials. As a result, borrowing by local governments is unregulated.
To put things into perspective with concrete data, at the end of 2022, China's GDP was approximately 121 trillion RMB. The central government's debt stood at around 24 trillion RMB, whereas the general debt of local governments was about 10 trillion RMB. The specific debt of local governments was around 25 trillion RMB, and the publicly issued bonds of local government financing platform companies in the bond market totalled around 14 trillion RMB. All these forms of debt are openly traded in the bond market, and a single default could trigger a chain reaction, leading to a debt crisis and banking crisis.
Excluding these four types of debt, local government financing platform companies have also directly borrowed from banks, with the total amount unknown. I will denote this as 'X'. These companies also raise funds through complex financial engineering products. The characteristics of this type of debt include opacity, high interest costs, intricate product structures, long debt chains, and poor quality projects. The total amount of this type of local government debt is also unknown, and I will mark this as 'Y'. According to estimates from the International Monetary Fund, by the end of 2022, the total of 'X' and 'Y' was approximately 56 trillion RMB, accounting for about 46.3% of the GDP. It is particularly worth noting that a significant portion of the 'Y' funds comes from shadow banking.
Furthermore, land, being the primary collateral for local government borrowing, contributes significantly to the income of local governments through sales. Houses serve as collateral for most families applying for real estate mortgage loans. These circumstances imply that China's real estate bubble is intertwined with local government debt, macroeconomic growth, and financial stability, making it incredibly difficult to resolve. No nation can sustain economic growth and fiscal revenue primarily reliant on asset bubbles, as bubbles are always destined to burst.
(This is one in the series "Solutions to the Problem of Local Government Debt in China" by Li Weijun, a guest economist for The China Brief.)
Microsoft Works to Fix Problem With Skype Calls to China
WSJ
Microsoft has announced it is working to resolve a technical issue preventing users of its Skype service from calling numbers in China. The problem began earlier this month, with hundreds of users reporting difficulties connecting to Chinese phone numbers. Skype acknowledged the issue started on May 5 and is attempting to remedy it. A Microsoft spokesperson attributed the problem to "changes made by local telecom operators" in China, without providing additional details. This incident comes amid Beijing's increased efforts to restrict information channels linked to the outside world and tighten control over foreign internet services. Microsoft's services, including LinkedIn and its search engine Bing, have had a fluctuating relationship with the Chinese government over the years.
Meituan Planning Hong Kong Debut as Soon as Monday, Sources Say
Bloomberg
Chinese food delivery firm Meituan is launching its KeeTa app as early as next week in Hong Kong, according to people familiar with the matter. It is marking the firm's first expansion outside of mainland China and it is unclear whether KeeTa will be rolled out beyond Hong Kong, though the company is offering prospective riders an app for Apple Inc's iOS system on the city’s store.
Ukraine shoots down ‘29 of 30 missiles’ launched by Russia
South China Morning Post
Russia launched a barrage of cruise missiles at Ukraine's capital, Kyiv, and Odesa after midnight on May 12, according to Ukrainian officials. The country said it had shot down 29 of the 30 missiles. One death was reported from the overnight attacks. The missile strike was seen as an escalation ahead of an anticipated counteroffensive. Most of the ground fighting is stalemated along the main front line in Ukraine's east and south, but both sides are targeting other territory with long-range weapons. Sophisticated Western air defense systems have spared Kyiv from the main front line's destruction. President Recep Tayyip Erdogan of Turkey announced an extension to an agreement between Ukraine and Russia to allow grain exports across the Black Sea, following the country's calls for further clarity and reassurance.
China and the West take a step to ease Africa’s debt crisis
Economist
China and Western governments may have found an answer to the problem of restructuring billions of dollars of African country debt by reaching a compromise over test case Ghana. The IMF agreed a $3bn bailout for Ghana last month, with a $600m first tranche released, following assurances from China and the Paris Club of mainly Western countries that they would take losses on their loans. However, worries remain that other countries facing high levels of debt will be unable to obtain the write-downs they require, with cuts to education and health funding undermining progress. African government debt in most countries is the highest in two decades, and the average cost of servicing external debt now consumes 17% of government revenues. Donors may need to help with concessional loans and grants, and debts must be restructured to prevent a repeat of past austerity.
Joe Biden’s global vision is too timid and pessimistic
Economist
The Biden administration's new foreign policy doctrine, outlined by national security adviser Jake Sullivan, has a number of flaws that could ultimately weaken US global leadership, according to The Economist. The doctrine fuses domestic prosperity, defense and climate change under a framework of a greater government role in society and an emphasis on national security. However, the combination of state-led industrial policies and protectionism underlying the plan may end up undermining the country's international strength, the magazine argued. The policy of balancing the management of the US-China relationship with a militarily cautious approach reflects a belief that establishing "strategic maturity" can make America safer and keep the world on a virtuous path, but this is flawed, as the US economic influence is far from in decline and its involvement in global economic rules is essential, warned the magazine.
China woos Central Asia as Ukraine war weakens Russian influence
CNN
Leaders from Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, are meeting in Xi’an, China, to discuss trade, regional stability and security. It is the first in-person meeting of the Central Asian heads of state together with China since the establishment of diplomatic relations after the fall of the Soviet Union. China hopes to expand its influence over the region, which has long been considered Russia’s sphere of influence. China presents these meetings with the Central Asian leaders as the “first major diplomatic activity” it has hosted this year and an opportunity to draw a “new blueprint” with the post-Soviet states that lie between its western borders, Europe and the Middle East. Beijing and Central Asian nations are expected to sign agreements on economic cooperation, as the region suffers from the knock-on economic effects of Russia's war in Ukraine. The leaders will also discuss security cooperation and ensuring stability in the wake of unrest and militant threats, with China seeking to ensure security but not take up Russia's broader regional security role.
Ukraine tells China envoy it won't cede territory to Russia to achieve peace
Telegraph
China's special envoy to Europe, Li Hui, has visited Ukraine in an effort to ease the country's conflict with Russia. The visit followed a discussion between Chinese leader Xi Jinping and Ukrainian President Volodymyr Zelensky, in the first contact between the two heads of state since Russia invaded Ukraine in February. Ukraine has warned China not to tacitly approve of Moscow's action by refusing to call it an invasion or war and saying that it will only accept a peace agreement respecting Ukraine's sovereignty and territorial integrity. Li will also visit Russia, Poland, France and Germany.
'Big money never buys cheap': Why investors are waiting on Japan
Reuters
Japan's stock market rose to multi-decade highs this week, and is being driven by strong corporate earnings, a weak yen and buybacks. While both the broad Topix and the benchmark Nikkei index have reached vertical milestones that have not previously been seen since 1990, some investors are choosing to stay out; many foreign asset allocators are reluctant to enter the market due to stock stagnation over the past few years, and some are wary of the possibility the central bank may withdraw its monetary stimulus.
Beijing, Asean agree on next step for delayed South China Sea code
South China Morning Post
China and ASEAN negotiators have agreed to hasten a review of the code of conduct to maintain peace in the South China Sea, the Chinese foreign ministry announced. The agreement comes a year after the legally binding code was supposed to be enacted. There are multiple claims and disputes over the area, with China enhancing its presence considerably in recent years. The US considers the South China Sea to be critical to its Indo-Pacific policy and has sent navy vessels to carry out exercises and maintain freedom of navigation close to Chinese-controlled islands and reefs in the area.
China to resume Australian timber imports, talks under way for PM visit
Reuters
China has resumed imports of Australian timber after suspending them last year, according to China's ambassador to Canberra, Xiao Qian. The Australian government had raised concerns over a series of unofficial Chinese bans and tariffs in 2020. Talks about a visit to Beijing by Australian Prime Minister Anthony Albanese are underway, Xiao said.
Visiting Ukraine, China's envoy urged all sides to create space for peace talks
Reuters
China's special envoy for Eurasian Affairs, Li Hui, has urged all parties to create conditions for peace talks relating to the Russia-Ukraine conflict during a visit to Kyiv. Hui exchanged views with President Zelenskiy and the Ukrainian foreign minister in an effort to end the conflict through a political settlement. China is willing to promote the international community to resolve the Ukrainian crisis, making its own efforts to stop the fighting and (establish a) ceasefire and restore peace as soon as possible.
G7 weighs new sanctions on Russia to end Ukraine war
Al Jazeera
The G7 will meet in Japan and there are increasing expectations that the group will tighten economic sanctions against Russia. Despite the reality that sanctions have affected Russia with a heavy toll, it is widely believed they have not succeeded in their geopolitical aims. The sanctions have instead driven Russia deeper into the embrace of emerging-market nations such as China, India and Turkey, providing leverage for Russian foreign policy and making nonsense of Western compliance efforts. There is even wider concern related to the potential that sanctions could collapse an already weak global economy. The EU has also recently announced that it was considering penalties for EU firms that help Russia evade Western sanctions, such as providing financing, investing in sanctioned sectors, or sharing technologies that could aid the energy sector.
Chinese envoy asks Australia to increase search for 39 aboard capsized fishing boat in Indian Ocean
The Toronto Star
A Chinese envoy to Australia has asked for increased efforts from the Australian authorities to search for any survivors of a capsized fishing boat; 39 individuals are still missing. Equipped with four airplanes and three ships, the search area covers some 5,000 km of the center of the Indian Ocean, although no survivors or life rafts have been located. Coordinating with “friendly countries”, including Australia, Indonesia, Sri Lanka and the Maldives, China is keen to invest resources to help support the search and rescue initiative and has urged Australia to do the same.
Montana bans TikTok. But can the US state enforce it?
South China Morning Post
Montana has signed into law what is believed to be the first-ever ban on TikTok, which will come into force in 2022. The legislation will impose a $10,000 fine per day on stores offering TikTok downloads, in addition to making it illegal for the platform to operate in the state. Some 200,000 Montanans use TikTok, along with 6,000 businesses, according to a company spokesperson. The ban echoes influential opinions shared by US lawmakers and security chiefs that TikTok could present a national security risk as Chinese technology companies are subject to government control via laws on intelligence work.
China’s Xi hosts Central Asia summit as Russian influence wanes
Al Jazeera
China's President Xi Jinping has hosted his first-ever summit with the leaders of five Central Asian countries. The event brings together the leaders of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan whose countries are important to China’s Belt and Road Initiative. China already has agreements to build infrastructure to develop a new Silk Road in Central Asia, including newly added aims of a $3bn high-speed rail line through Uzbekistan, which would be the first cross-border bullet train in Central Asia. China is the largest trading partner for most of these countries so there is incentive to expand opportunities even further. The summit is prompting analysts to suggest that it underlines the shifting patterns of influence in former Soviet states where Russia has long been influential: “China is pushing out Russia as the largest hegemon in the region,” said Bradley Jardine, Managing Director of the Oxus Society for Central Asian Affairs in Washington DC.
Chinese Police Arrest Woman Who Defended Comic’s Military Joke
Bloomberg
Police in Dalian, China have arrested a woman for posting "inappropriate" comments about the military on social media after she defended a comedian's joke about a military slogan used by the country's President, Xi Jinping. Comedian Li Haoshi was suspended and the company that represents him, Shanghai Xiaoguo Culture Media, was fined $1.9m for an inappropriate joke on his talk show that included an obscene adaptation of a well-known military slogan. China issued a law in 2021 criminalizing insults against its military, resulting in a hard line for attacks on the People's Liberation Army (PLA). The backlash has also had an impact on China's performance industry: at least two comedy club operators have canceled some shows.
Economic anxiety on show as mouthpiece focuses on China’s population for 3 days
South China Morning Post
Three consecutive editorials in China's People's Daily have expressed concern that the country's demographic crisis could hit its economic growth. It follows China's population falling to 1.41 billion last year, marking its first decline in six decades after a record-low birth rate of 6.77 per 1,000 people. The editorials supported President Xi Jinping’s vision to create a “talent dividend” by ensuring the development of individuals and boosting education. However, Professor Yuan Xin of Nankai University's School of Economics said there is a growing disadvantage in terms of population size and migration, optimization of human capital, “will finally become quiet”.
Japan, UK renew security ties, aircraft carrier to deploy in 2025
Al Jazeera
The UK and Japan are set to deepen their security ties and sign a new accord called the "Hiroshima Accord," covering areas such as defense, trade and investment, science and technology, and joint initiatives to tackle global issues such as climate change. As part of the deal, the UK, which is looking to deepen relationships with countries outside Europe after leaving the EU, has committed to deploying an aircraft carrier strike group to the Indo-Pacific in 2025. The two countries will also agree on a formal "Consult Clause," while trade and investment as well as science and technology programmes will be supported under the agreement.
Micron expected to get US$1.5 billion from Japan for next-gen chips
South China Morning Post
The Japanese government is offering roughly 200 billion yen ($1.5bn) in financial incentives under the guise of improving domestic semiconductor production to Micron, according to people familiar with the matter. The company will utilize the money to install advanced, extreme ultraviolet chip-making equipment from ASML at its Hiroshima facility to make DRAM chips. The investment comes amid intensifying tensions between the US and China. The deal is also a retaliatory move against Beijing, which is undertaking a cybersecurity review after the Biden administration placed sweeping restrictions on chip-related exports to China.
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