Taiwan opposition picks mayor with cautious China stance for presidential race; Exclusive Insight: The Detrimental Implications of the Accumulation of Local Government Debt in China
The joke that cost $2 million: China imposes huge fine for comedian’s army-themed quip; China's Tencent marks return to revenue growth in first quarter
Welcome to this issue of The China Brief. Today is May 17, 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 Detrimental Implications of the Accumulation of Local Government Debt in China
The accumulation of substantial local government debt in China poses a significant threat to the stability of both the macroeconomy and the financial system.
Macroeconomic Impact
Drawing a parallel to a household, if it accumulates a large amount of debt, most of its income would be dedicated to debt repayment, thereby diminishing the portion available for consumption and investment. This situation ultimately lowers the current standard of living. Even when attractive investment opportunities arise, they may have to be bypassed, thereby negatively affecting future living standards.
A similar situation arises when Chinese local governments grapple with mounting debts. They are often compelled to cut various types of public expenditure. Instances like the reported shrinkage in social health insurance (managed by local governments), the suspension of public buses, and delayed salaries for local government officials all resonate with this pattern. These austerity measures invariably impact the basic livelihood of the people, particularly their consumption.
Moreover, a significant portion of infrastructure development is managed by local governments. The accumulation of debt forces these governments to prioritize debt repayment over infrastructure investment, thereby impacting the future growth of the Chinese economy. The reduction in both consumption and investment not only decreases the short-term growth rate but also undermines the long-term economic growth potential.
Financial Stability
The previous analysis mentioned two types of local government debt: the debt reflected in the government's balance sheet and the debt acquired through "local government financing platform" companies, which does not appear on the balance sheet. Any default on either type of debt could lead to bank insolvency (posing the greatest risk to smaller banks), causing a bank run—a scenario recently observed in Silicon Valley Bank and First Republic Bank. This could trigger a financial crisis, leading subsequently to economic recession and political instability.
It is worth noting that the financing platform companies, through various complex financial engineering products, raise funds of an uncertain amount. The quality of the corresponding assets is unpredictable, the interest on the debt is high, and the debt chain is long. This signifies that the risks associated with local government debt intertwine with those of shadow banking. A local crisis could easily incite panic contagion, leading to a systemic financial risk outbreak, as no one knows the extent of such "toxic" products in each bank's balance sheet.
Furthermore, a significant portion of local government revenue in China comes from land sales. This signifies that the current local government debt issue and the real estate bubble problem are intertwined and mutually causative. On one hand, when house prices decline, land prices also drop, reducing the income from land sales for local governments and increasing the likelihood of a local government debt crisis. On the other hand, as local government debt accumulates, macroeconomic growth will likely slow down as previously discussed, triggering a decline in house and land prices and exacerbating the local government debt issue.
In conclusion, while China's government debt-to-GDP ratio is not high compared to major Western economies, default risks have already occurred in certain provinces due to the impact of the past three years' pandemic control. The intertwining of local government debt with shadow banking and real estate bubble issues could trigger systemic financial risks even when the debt scale is not particularly large. The only way to prevent a risk outbreak is to take precautionary measures and resolve issues as early as possible, which will be the focus of the next analysis.
(This article is authored by Li Weijun, a guest economist for The China Brief.)
Taiwan opposition picks mayor with cautious China stance for presidential race
Financial Times
Taiwan’s main opposition party, Kuomintang (KMT), has selected the current mayor of the country's largest municipality, Hou Yu-ih, as its presidential nominee for the national elections in January. The founder of Foxconn, Terry Gou, who is the world’s largest assembler of iPhones was defeated for the nomination. Hou has taken a much more cautious approach to Beijing than Gou and is more likely to appeal to Taiwanese voters who overwhelmingly reject unification with China. Although China claims Taiwan as part of its territory, the island has run its own affairs for more than 70 years, and Beijing has not controlled it since the end of the Chinese civil war in 1949. However, China has threatened to take Taiwan by force should it resist unification forever. The KMT continues to identify with China, which is Beijing's preferred choice, but Taiwanese voters have tended to alternate between the KMT and the Democratic Progressive Party.
The joke that cost $2 million: China imposes huge fine for comedian’s army-themed quip
CNN
A Chinese entertainment firm has been fined $2m due to a joke made by a comedian which loosely referenced a slogan used to describe China’s military. The incident highlights how comedians must tread a delicate line given censorship in China. Li Haoshi, known by his stage name House, was performing at the Century Theater in Beijing when he used a phrase associated with the People’s Liberation Army (PLA). The Beijing Municipal Bureau of Culture and Tourism stated that the company was “seriously insulting” the military and “causing bad social impact”.
China's Tencent marks return to revenue growth in first quarter
Reuters
Chinese technology giant Tencent Holdings reported an 11% rise in Q1 revenue due to a recovery in its advertising and gaming businesses that had been disrupted by pandemic restrictions last year. The Q1 revenue figure rose to $21.7bn, beating analyst expectations, while its net profit increased to $3.98bn, up around 11%. The firm revealed a long pipeline of new games including seven releases to go online this summer.
Ex-Apple engineer charged with stealing self-driving car technology
The Independent
Weibao Wang, a former Apple engineer, has been charged with the theft of trade secrets relating to technology used for the design of self-driving cars. The US Justice Department alleges that he took large quantities from the company before resigning and moving to China. Wang allegedly waited some four months before telling Apple he was moving to "Company One", reportedly a US-based subsidiary of a Chinese firm, to work as a staff engineer on the development of autonomous vehicles. Once in China, he purchased a one-way ticket to Guangzhou. The former employee has not yet been arrested, as he has been living in China since 2018. Two other former Apple employees have been charged in separate cases with trade secret theft relating to China and car technology.
Chinese ship capsizes in Indian Ocean with 39 on board, Xi orders rescue efforts
South China Morning Post
Chinese President Xi Jinping has launched a search and rescue operation after a Chinese fishing boat, with 39 crew on board, capsized in the Indian Ocean south of the Maldives. The boat is operated by Penglai Jinglu Fishery, which is based in the eastern Chinese province of Shandong, and exports mainly to Japan, the United States and the European Union. According to the ship-tracking website FleetMon, the boat left Cape Town, South Africa on 3 May and appeared to be heading to Busan, South Korea. China has the world’s largest distant-water fishing fleet, with almost 3,000 boats.
With China in mind, economic security a G7 priority amid coercion worries
Japan Times
The Group of Seven (G7) is discussing "economic coercion" ahead of the Hiroshima summit with China in mind. A central theme in the upcoming conference is increasing economic security with greater international cooperation to reduce dependence on China for supplying strategically important goods, such as semiconductors, materials for electric vehicle batteries, and pharmaceuticals. China has increasingly adopted this tactic, putting import tariffs on Australian produce following its call for an independent inquiry into the origins of COVID-19, and blocking trade with Lithuania after the opening of an office in Taipei. The G7 meeting is expected to result in policy documents on specific policies, including economic security.
Ukraine Recap: China’s Envoy Expected in Kyiv, Talks on Grain
Bloomberg
A Chinese envoy has arrived in Ukraine as part of a European tour aimed at bolstering President Xi Jinping’s peacekeeping credentials. The envoy will travel to Ukraine ahead of this week’s annual Group of Seven meeting and ahead of talks to export grain from Ukraine, while Russia threatens to withdraw from the pact. Meanwhile, Ukrainian troops have advanced into the suburbs around Bakhmut in the face of heavy fighting, while Russian forces press on despite artillery and reinforcement. It is unclear if the Chinese envoy will meet Ukrainian President Volodymyr Zelenskiy.
Biden Abruptly Cuts Short an Asia-Pacific Visit, to China’s Benefit
NY Times
President Biden’s cancellation of his trip to Papua New Guinea in order to attend to domestic matters could damage Asia-Pacific relations. The intended visit, which would have been the first by a US president to a Pacific Island nation, has been postponed in order that Mr Biden can focus on debt ceiling negotiations. Analysts warn that the failure to keep the commitment could undermine recently established diplomatic efforts to counter the influence of China in the region. China was dominant when President Obama cancelled an appearance at the Asia-Pacific Economic Co-operation meeting in 2013 due to the Republican government shutdown: doubts about the US commitment have persisted ever since. Although the Biden administration has reopened embassies and counter-china policies have been implemented, the size of Beijing’s diplomatic corps worldwide has surpassed the US. In addition, China has the world’s largest navy, coast guard and state-owned construction and mining companies, which have ploughed money into construction and mining industries in many developing countries in the region, especially Papua New Guinea and Fiji.
Missions in China warned over 'propaganda' displays after Ukraine flags raised
Reuters
China has ordered foreign embassies and international organizations not to display "politicized propaganda" on their buildings, an instruction diplomats claim is directed at those who have showcased the Ukrainian flag since Russia's invasion. Several foreign embassies in China raised the Ukrainian flag or displayed its image in the form of posters and lights following the February 2022 invasion. Ukrainian authorities expressed support for the demonstrations. However, the Chinese foreign ministry has called on representatives not to display propaganda on building exteriors due to the potential to incite disputes between countries.
China's BYD beefs up autonomous driving credentials with new unit, hiring spree
Reuters
Chinese electric vehicle (EV) manufacturer BYD has launched a new division and begun hiring between 4,000 and 5,000 software engineers specializing in autonomous driving to address the company's perceived shortcomings in related technologies. BYD has also sought to close the gap by partnering with Horizon Robotics and NVidia to develop its Dynasty and Ocean series of cars. In the first quarter of this year, the company sold 510,000 pure EVs and plug-in hybrid cars in China, nearly four times more than Tesla.
China shuts 100,000 fake news social media accounts, ramps up content cleanup
Reuters
China's Cyberspace Administration has removed more than 100,000 online accounts over the past month for impersonating state-controlled media and spreading "fake news". The administration launched a campaign to clean up misinformation on social media in April. It is not the first time that the authorities in China have attempted to control online discussion, with sensitive topics regularly censored. The regulator said it had closed fake news units and news anchors, as well as eradicating 835,000 pieces of false information. Countries worldwide have attempted to tackle the problem of disinformation.
Has Ukraine’s counteroffensive actually begun?
South China Morning Post
It is unclear whether Ukraine's counteroffensive against Russia has begun. Analysts suggest that while Ukraine is conducting local counteroffensives in and around the city of Bakhmut, it is still engaging in shaping operations to position itself better before the real action starts. Russia's forces had taken a defensive posture in Bakhmut, which means Ukraine risks losing equipment and soldiers. Kiev has been securing military support from European allies like France and Germany, hoping that a successful campaign could force Russia to negotiate peace terms.
VW talks to Huawei about licensing software for cars in China
Financial Times
Volkswagen is reportedly discussing using Huawei's software in its electric cars in China as it seeks to gain a greater share of the country's EV market. The German carmaker's own software division Cariad has faced problems that have delayed the launch of new models and necessitated the removal of many of its top executives. VW sells more cars than any other automotive company in China, but it ranks ninth for EV sales. It recently announced plans to win back ground by developing "In China, for China" products and upgrading its existing platform, offering advanced entertainment and driving assistance features.
China property recovery slows, sparking hopes of more easing measures
South China Morning Post
China's property market showed signs of slowing growth, with data revealing house prices rose in April for the third consecutive month but at a slower rate. According to the National Bureau of Statistics, the average price of a new home in 70 cities rose 0.3% in April, less than March figures of 0.4%.
Decoupling Is the Ultimate Missed Expectation
Bloomberg
The pandemic has created the wrong sort of decoupling for emerging markets, hurting their performance over the past three years, warns John Authers in Bloomberg Opinion. However, he added "none of this means that there won’t be a decoupling; but it’s not going to be the panacea that many have long wanted it to be". If China becomes the pole of what is effectively a different financial system, reshoring and deglobalization will create opportunities in the emerging world, but it will also make them much harder to take advantage of, warns Authers. Nevertheless, these markets are experiencing some signs of recovery after a decade of underperformance, following the brief bull market which came to an end in the Global Financial Crisis in 2008.
Meanwhile, there is concern over the budget strategies of the US. Ted Decker, CEO of Home Depot, expects comparable sales to drop as much as 5% this fiscal year — the first annual decline in 14 years. Despite problems so far being driven by unusual conditions such as the price of lumber falling, according to Authers, if the recession risks loom larger over the US economy, and workforces normalize with new return-to-office policies, then support will fade for such firms that have been doing so well during the pandemic's economic conditions. This would spell the end of the trends that Authers calls the home-building boom, e-commerce, and working from home.
Can China Thread the Needle on Ukraine?
Foreign Affairs
China is attempting to persuade both sides of the Ukraine conflict to resume negotiations, casting itself as a neutral and helpful global leader. This move comes as China becomes increasingly pessimistic it can prevent the deteriorating US-China relations. While Beijing wishes to preserve its relationship with Russia, it fears that its position viewed as pro-Russia will poison its reputation in Europe, further harming its security environment. As a result, China has attempted to be neutral and offer its good offices to bring both sides to the negotiating table.
The Ukrainian conflict presents complicated challenges for China, potentially strengthening US alliances in Europe and beyond. As a result, Beijing has begun to offer its good offices to resolve the crisis, articulating a vision for global security and becoming more involved diplomatically. China aims to position itself as neutral and limit its support for Russia, even as it prioritizes its partnership with its closest strategic partner.
Recent remarks by the Chinese ambassador to France that the status of Crimea depends on how the problem is perceived provoked widespread condemnation, and 80 European lawmakers urged the French government to expel the ambassador. The Chinese government tried to downplay the situation, stating that the ambassador was only expressing his personal views. China is likely to do just enough to cast itself as a helpful and responsible global leader but not enough to be held accountable for achieving an end to the Ukraine conflict on terms that would be fair and acceptable to both sides.
Smaller consultancies eye opportunities as China crackdown hits sector leader
Reuters
Smaller Chinese consultancy firms are predicted to gain from the country's increasing demand for expert knowledge, particularly after the shock delivery of the Beijing crackdown on firms supplying too sensitive information for Chinese consumption. Many of these firms are now working to reduce risk. For the long-term, the sector will become more regulated, becoming more popular for investors and firms who need greater insight into China. US-based Frost and Sullivan has predicted the Chinese market for expert information will grow from $1bn in 2015 to $1.9bn by 2025.
China Restarts GDR Approvals With New Rules on Registration
Bloomberg
China’s securities regulator has unveiled new rules for global depositary receipts (GDRs) that could renew listings in Europe. The China Securities Regulatory Commission now mandates the registration of companies within three days of GDR applications' submission. Further, any subscription size must be reasonable, pricing must be aligned with regulations, while lockup periods for investors must also conform with guidelines. The identity of subscribers in the GDR issue must be part of a report submitted 15 days after a sale.
China's new home prices rise at slower pace in April
Reuters
China's new home prices rose by 0.4% MoM in April, compared to March's growth of 0.5%, marking a fourth straight rise. However, analysts note that April's increase was lower than expected, adding to concerns about the recovery of the property market. Prices declined by 0.2% YoY in April, marking the 12th consecutive month of decline. Despite government efforts to stabilize the sector, such as stimulus policies introduced since November, falling sales and property investments led to bearish data on Tuesday.
Quad summit in Australia canceled after Joe Biden shortens Asia trip
CNN
A summit of Quad leaders from the US, India, Australia and Japan has been cancelled after US President Joe Biden pulled out, according to Australian Prime Minister Anthony Albanese. Biden was set to meet Albanese, Indian Prime Minister Narendra Modi and Japanese Prime Minister Kishida Fumio in Sydney for the informal security dialogue, seen as a counter to China’s activism in the region. Cancelling late due to ongoing debt ceiling negotiations, Biden is still heading to Japan this week instead. The Quad meeting may still take place when the leaders are in Japan, with no date confirmed.
How energy is powering China’s relationships with Central Asia
South China Morning Post
China is looking to Central Asia for a new energy partner source to offset growing tensions between it and the US-led West. Leaders from Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan join President Xi in China, where the main focus will be the joint projects between the nations aimed at pushing forward cooperation in other areas from the economy to security and politics. Beside abundant reserves of traditional fossil fuels, there is huge untapped hydropower potential in Tajikistan and Kyrgyzstan. Piped natural gas from Central Asia to China is traditionally considered to be more secure and cheaper than other countries, especially the US. Central Asia supplied over two-thirds of China's pipeline gas imports in 2017, with the bulk of it coming from Turkmenistan, which has the world's fourth-largest gas reserves after Qatar, Iran and Russia.
China holds the cards as the world faces a dark economic future
The Sydney Morning Herald
Following the release of China's economic data for April, which came in below expectations, and Germany's growth rate which has flatlined, concerns about the global economy are rising. If there is no resolution for the negotiations over the US debt ceiling, this could compound issues for the global economy and even a quota deal may result in the Federal Reserve Board throttling the growth rate in the world's largest economy due to its determination to stamp out US inflation and recent bank collapses that have impacted the availability of credit. All three of these issues could have an impact on China's contribution to global growth as well.
Wall Street is split on cutting China’s GDP after April’s data miss
South China Morning Post
Standard Chartered and UBS economists have stuck with their forecast that China's GDP will rise by 5.8% this year despite weak economic data in April. Retail sales, industrial output and fixed investment grew more slowly than predicted in the country during the month. Meanwhile, JP Morgan Chase and Barclays lowered their forecasts due to a loss in economic momentum. JP Morgan put its full-year expected GDP growth at 5.9%, down from 6.4%, while Barclays set a target of 5.3%, down from 5.6%. It also cut its Q2 GDP estimate to 1%, from the previous three months, at an annualized rate. The Bank of China also withheld applying economic policy measures.
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