US tells China: ‘We’ll fight in outer space if we have to’; Exclusive Insight: The Precursors and Consequences of the Plaza Accord
China developers: the main quake is over but the aftershocks are not; Cathay Pacific Fights to Emerge From the Long Shadow of Covid; China Announces Plan to Land Astronauts on Moon by 2030
Welcome to this issue of The China Brief. Today is May 29, 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 Precursors and Consequences of the Plaza Accord
The collapse of the asset bubble in Japan's real estate and stock markets in the early 1990s, frequently cited in media, books, and a plethora of studies, served merely as a trigger for the prolonged economic malaise that Japan has experienced over the past several decades. This event was also intertwined with the "Flying Geese Paradigm".
Specifically, by the late 1970s, Japan had already become the second-largest economy in the world, successfully positioning itself as a following "wild goose" just behind the leading "wild goose". A multitude of Japanese products flooded the US market, exerting enormous pressure on domestic manufacturers, especially in fields such as textiles, steel, color television, numerically-controlled machine tools, automobiles, and semiconductors. The US trade deficit with Japan (US exports to Japan minus US imports from Japan) escalated year after year. The "side goose" began to infringe on the economic interests of the "lead goose" to an intolerable extent.
In September 1985, the United States, Japan, the United Kingdom, France, and Germany, the five industrially developed nations, signed the Plaza Accord in New York. The main content of this agreement was to jointly intervene in the foreign exchange market to significantly appreciate the Japanese yen to reduce the US-Japan trade deficit. Here is a simple explanation of the relationship between exchange rates and trade: Suppose the exchange rate between the US dollar and Japanese yen is 1:200 (1 US dollar equals 200 yen). In this case, a product priced at 200 yen in Japan costs 1 dollar in the US. When the yen appreciates and the exchange rate changes to 1:100 (1 US dollar equals 100 yen), a product priced at 200 yen in Japan would now cost 2 dollars in the US—like magic, the price doubles. Conversely, a product that cost 1 dollar in the US before the yen appreciated would now cost 100 yen in Japan—the price, as if by magic, has halved. Clearly, yen appreciation would reduce US imports of Japanese goods and expand US exports to Japan.
In September 1985, when the Plaza Accord was signed, the exchange rate of the US dollar to yen was 1:240. By the end of 1987, the exchange rate had changed to 1:120. Within just two short years, the prices of Japanese goods exported to the US doubled, their attractiveness declined, and the impact on the Japanese economy is evident. To offset the economic shock from the decline in exports, the Bank of Japan cut interest rates five times from 1986 to 1987 and maintained low rates for the next two years. This prolonged period of monetary easing in Japan triggered the world's largest asset bubble at that time. In 1989, Japan's population was about half that of the United States, but the value of Japan's real estate was four times that of the United States. Japan's land area accounted for less than 3% of the global total, but its land value constituted 50% of the global total. At the end of 1989, the Nikkei 225 index reached a peak of 38,916 points, a height it has yet to reclaim more than 30 years later (currently around 30,000 points), with a price-to-earnings ratio of about 80, compared to about 15 for the US stock market during the same period. That year, the Tokyo Stock Exchange accounted for 42% of the total value of stock markets worldwide.
(This article is part of a series entitled "Reasons for Japan's 30-year Economic Downturn". The author, Xin Jisi, is a guest economist for The China Brief.)
China developers: the main quake is over but the aftershocks are not
Financial Times Opinion
A sudden surge in court-ordered liquidations and debt defaults is challenging the assumption that the worst of China's property crisis is over. A year ago, homebuyers went on strike and developers struggled to borrow. However, in 2019, the central bank saved sagging financial foundations by your $29bn in loans, while local banks have extended debt deadlines. Chinese property companies KWG Group is the latest developer to default on its debt repayments, facing court-ordered liquidation in Hong Kong earlier this month. Meanwhile, a sharp drop off in sales has been predicted for April, being the 25 largest listed developers.
Cathay Pacific Fights to Emerge From the Long Shadow of Covid
NY Times
Hong Kong airline Cathay Pacific has still not recovered from the impact of the coronavirus pandemic. Its business was decimated by some of the industry’s most expansive flight bans and quarantine requirements, and the pandemic wasn’t the start of Cathay’s troubles. In 2019, when Hong Kong was centred by pro-democracy protests, Cathay Pacific was caught in the crossfire with Beijing. Flights were cancelled or delayed by airport sit-ins involving thousands of demonstrators, among them employees of the airline, Cathay Pacific. Turmoil grew inside Cathay Pacific. The airline’s CEO and chairman both resigned, and new leaders began cracking down on anything employees said or posted on social media that could anger China. Cathay Pacific said recently that it aims to return to 70% flight capacity and 80 destinations by the end of 2023, with 160 flights per week to 16 airports in mainland China. Whilst it reported an annual profit last year, its flights are only about 50% of their 2019 levels and analysts predict a difficult time ahead for the company.
China Announces Plan to Land Astronauts on Moon by 2030
NY Times
China has announced its plan to land humans on the moon by 2030. Although Chinese scientists suggested the plans earlier, this is the highest-level confirmation of China's ambitions for a crewed lunar landing. Speaking at a press conference, Lin Xiqiang, the deputy director of China's Manned Space Agency, said the moon landing program was recently initiated under China's Lunar Exploration Project, which also aims for short- to medium-term stays on the moon's surface, conducting research and collecting samples. Aimed to make China a “great space power,” President Xi Jinping has called for China to achieve front-runner status in space exploration. The US has also laid out goals of building a research station on the moon and landing people on Mars, with target dates for a lunar landing in 2024 under the Artemis program.
Philippines, U.S., Japan to hold first-ever joint coast guard exercise
Reuters
The US, Japanese and Philippine coast guards will hold a trilateral maritime exercise in the South China Sea from 1 to 7 June. The manoeuvres, which are designed to improve search and rescue collaboration and law enforcement, will be held in waters off Bataan province and include four Philippine ships, one each from the US and Japan, and Australian observers. The Philippines was approached by Japan and the US in February about holding joint maritime exercises since Manila had earlier accused China of aggressive activities in the South China Sea. The three countries have called for closer engagement with the Philippines since President Ferdinand Marcos Jr took over from his pro-China predecessor.
The road back to growth in China after COVID-19
Japan Times
China's economic growth was more than market expectations in Q1 2023 despite warning that the country had entered a deflationary period. China’s consumer price index rose by only 1.3% YoY in Q1 down from 1.8% in the previous quarter, however its GDP grew by 4.5%. The Chinese government still has a growth target of “around 5%” for 2023 but in order to avoid a self-fulfilling prophecy of weakening confidence, China should aim for a 6% growth, according to Yu Yongding, a former president of the China Society of World Economics.
AI means everyone can now be a programmer, Nvidia chief says
Reuters
Nvidia CEO Jensen Huang has declared that AI has ended the "digital divide" by making all users into programmers. The executive, speaking at a Computex forum in Taipei, described how the "programming barrier is incredibly low" thanks to natural language interfaces. He also demonstrated some of the programs built atop Nvidia's chips, including an AI-created song praising the company. Nvidia recently revealed that it expected a huge surge in Q2 revenue, based on rising demand for its AI chips.
US tells China: ‘We’ll fight in outer space if we have to’
The Independent
The US is preparing for conflict in outer space as China seeks to become the dominant space power by mid-century and Russia engages in aggression in the arena, according to Brigadier General Jesse Morehouse, the deputy director of strategy, plans, and policy at US Space Command. Morehouse was in London last week to discuss the combined space capabilities of the two countries at a conference called the Space Operations Summit 2023. US Forces, including those of its allies, are “ready to fight tonight in space if we have to,” said Morehouse.
According to Colonel Ben Ogden, an assistant professor of strategic space studies at the Center for Strategic Leadership, “space power enables our way of life.” The importance of space in advances in science and technology cannot be understated, and its value for national security and defence is critical. The US Space Command was re-established under president Donald Trump in August 2019 and has responsibility for conducting military operations in space.
Analysts have suggested that Russia and China already have the capability to spy on and destroy satellites of other countries. The US has previously condemned Russia’s “irresponsible” activities in orbit, including its launch of a satellite that appeared to have a “space apparatus inspector” onboard, which was exhibiting “very abnormal behaviour”.
Vice President Kamala Harris has accused other countries of conducting “reckless” and “irresponsible” anti-satellite missile tests. The UK government has recently invested £10m ($13.5m) in the UK’s first Space Command Centre to be based at the Royal Air Force (RAF) base in the southwest of England.
China says it wants peace in Ukraine, but is it only on Russia’s terms?
CNN
China's envoy for the war in Ukraine, Li Hui, has completed his two week European tour where he stopped in Moscow to indicate alignment with Russia on the matter. Chinese special representative Li Hui met with officials in Poland, France, Germany, the European Union and Ukraine to discuss the peace settlement. The tour came as China attempts to repair its relationship with Europe. Though China has said they are interested in promoting communication towards resolving conflict, concerns were highlighted over the alignment with Moscow and Chinese willingness to protect their important relationship with the country. On the issue of peace, China has called for building "consensus" towards peace talks and strengthening Europe's own "security architecture", referencing that Europe should not protect itself through NATO in its fear of Russia. China's refusal to criticise or call for the withdrawal of Russian troops from Ukraine's territory has horrified most of Europe, as such a move to equalise the status of Russia as the aggressor and Ukraine as the victim is not acceptable. European officials have urged Beijing to align more with their views.
Malaysia detains Chinese ship linked to suspected illegal salvage of British WW2 wrecks
Reuters
Cannon shells believed to originate from WWII have been found on a China-registered bulk carrier ship, which had anchored without permission off the coast of Malaysia. The discovery follows reports that scavengers have been targeting two British WWII wrecks off the Malaysian coast. The wrecks of the HMS Prince of Wales and the HMS Repulse were sunk by Japanese torpedoes in 1941, just days after the attack on Pearl Harbour. The Royal National Museum of the Navy has said it is distressed by the "vandalism for personal profit". Malaysia’s Defence Ministry has condemned what it describes as the "desecration" of military graves at sea. The Chinese ship that was detained was also found to be carrying scrap metal. Last week, police in nearby Johor confiscated several pieces of unexploded WWII artillery, believed to have been scavenged from the HMS Prince of Wales.
13 go on trial over 2019 storming of legislature by pro-democracy protesters
Guardian
A Hong Kong court has started the trial of 13 individuals charged with storming and ransacking the city’s legislature in 2019. The protest was unprecedented in its challenge to Beijing-backed authorities and was the most violent moment of the initial stage of extensive pro-democracy demonstrations that ensued. Hundreds of protesters broke into the legislature on the 22nd anniversary of Hong Kong’s handover from Britain to China, smashing windows, and spray-painting graffiti. Rioting is among the charges, with a 10-year jail sentence being the maximum penalty. The trial will run for 44 days, and experts predict around 2,900 people have been prosecuted for offences linked to the 2019 demonstrations.
China Considers Tax Breaks for Manufacturers as Economy Cools
Bloomberg
China is reportedly considering new tax incentives for high-end manufacturing companies as it seeks to boost the economy and encourage more innovation in technology to counter US competition. The tax policy could save advanced manufacturers hundreds of billions of yuan. Although Beijing is under pressure to ramp up monetary and fiscal stimulus, most analysts don't expect policymakers will open the floodgates. Instead, they may opt for more targeted measures, like tax incentives, to boost business confidence. The planned tax breaks for high-end manufacturers also provides further evidence that Beijing is prioritising support for a sector that's key to supply chain security, particularly in semiconductors, as tension with the US and its allies intensified.
Number of prosecutions rises 12% in five years, report shows
Guardian
Chinese courts prosecuted 8.3 million people in the five years to 2022, according to figures from the supreme people’s procuratorate (SPP), a 12% increase on the previous period. The data showed a nearly 20% increase in the number of protests against court rulings, while prosecutions for violent crimes decreased by 31.7% and prosecutions for internet-based crimes increased by 43.3%. A previous SPP report that stated 1,400 national security prosecutions between 2018 and 2022 were omitted from the official work report. Prosecution leniency was responsible for a drop in the number of pre-trial detentions.
China, Japan Commerce Ministers Trade Protests at Meeting in US
Bloomberg
Japan and China exchanged protests over Japan's chip export controls and the detention of Japanese citizens, respectively, at a meeting last week. According to an official statement, Japanese Trade Minister Yasutoshi Nishimura called on Chinese Commerce Minister Wang Wentao to release an employee of Japanese pharmaceuticals firm Astellas Pharma who was detained in China in March. The meeting comes amid strained ties between China and Japan, which hopes to maintain business relations with China while supporting policies from the US, its only formal security ally.
America’s Best Bet in the Indo-Pacific
Foreign Affairs
The United States has sought to establish a strong partnership with India over the past two decades as a means to counterbalance China’s growing influence in the Indo-Pacific. While India has a history of conflict and competition with China and shares the United States’ interest in preventing Chinese hegemony in Asia, it is not a treaty-bound defender of U.S. interests and will not rush to Washington’s side in the event of a security crisis with Beijing unless its interests are directly threatened. The occasional divergences between New Delhi’s and Washington’s interests should not undermine the U.S. investment in the bilateral relationship, as India has never pretended to behave like a treaty ally of the United States.
However, the United States can make an even better bet when it comes to its partnership with India by focusing on deepening cooperation in three specific arenas in which India is willing and potentially able to assist it in constraining Beijing’s expansive regional ambitions. First, the United States should support India’s efforts to extend its military posture in the Indian Ocean region, including by upgrading its base infrastructure and military equipment. The United States should invest in further combined military activities with India in the eastern Indian Ocean, bolstering both countries’ capacities to track and, if necessary, target Chinese forces. This would severely complicate Beijing’s military planning for any invasion of Taiwan. Second, the United States should support India’s development of high-value niche military capabilities. India should tailor its capabilities to repel specific types of enemy aggression in specific theaters, and the United States should help it do so. Finally, the United States should enhance its diplomatic coordination with India, as India brings well-developed connections to countries of the global South, mostly in Africa and Asia. Washington has traditionally neglected such states, and India’s influence is devoid of Washington’s alien-sounding appeals to a global contest between democracy and autocracy.
Overall, partnerships are about more than planning for emergencies, and a stronger India that is more capable of resisting Chinese coercion serves U.S. interests. The United States should focus on realistic policy goals and deepen cooperation with India in specific arenas to advance shared interests in a free and open Indo-Pacific.
Wuhan Names and Shames Hundreds of Debtors Amid Financial Woes
Bloomberg
Wuhan city in China has named 259 of its debtors with unpaid bills as part of its efforts to collect more than CNY300m ($41m) in outstanding payments. The local finance bureau, struggling with fewer revenues and a growing list of unpaid bills, published the list in the Yangtze River Daily. The largest debtor was a car maker that owed the government CNY23.5m. The move is indicative of the wider debt problem faced by China's provinces, with 31 of them now having exceeded a threshold that signifies disproportionately high debt risks.
China urges Japan to stop imposing chip export controls
Reuters
China's Commerce Minister Wang Wentao has asked Japan to revoke its export controls on chips, claiming such measures seriously defy international trade laws. Wang reportedly made the comments during a G20 meeting in Japan, in talks with the country's Trade Minister Yasutoshi Nishimura on May 26. The Chinese diplomat added its claim "strongly opposes" Japan and Chinese industry itself had opposed such practices. He added that China would work alongside Japan to advance cooperation in key commerce and economic spheres.
It’s Not a Good Time to Be a Steel Mill or Coal Mine in China
Bloomberg
China's steel mills, metals smelters, chemical companies and coal miners are feeling the effects of increasingly poor demand and price deflation as the nation's economy stalls. While April's rate of decline for raw materials' producers eased compared with a year earlier due to base effect comparisons, there was a hastening of the decline in coal miners' profitability, which hit a historic low at the beginning of this year. The drop in coal prices is uncharacteristic of the season and is expected to further the expansion of the dark spread, analysts at BOCI Research said.
‘Genshin Impact’ maker aims for Tencent’s China gaming crown
Financial Times
Chinese game developer miHoYo is betting on its new release, Honkai: Star Rail, to rival the success of the company’s previous game, anime-inspired RPG title Genshin Impact, which has raked up $4.8bn in revenues on mobile after launching in September of last year. Despite the dominance of Tencent and NetEase in China’s gaming market, miHoYo has proved to be a competitor and Honkai: Star Rail is its next potential market disruptor. The launch coincides with China’s regulatory relaxed approach to gaming licences after a nine-month suspension following the government’s move to limit minors’ time spent online.
ByteDance and CNPC take over Hong Kong offices vacated by foreign companies
Financial Times
Mainland Chinese companies have been occupying premium office space vacated by foreign companies in the wake of the pandemic. ByteDance is taking over 16,000 square feet of office space in one of Hong Kong's second-tallest buildings from Switzerland's Julius Baer. Meanwhile, a China National Petroleum Corporation affiliate could take up a nearly 14,000 square-foot office in Hong Kong's Central business district, which had been vacated by workspace provider Regus, owned by IWG. Hong Kong has also seen many multinational companies downsize or move staff from the central business area to other areas as they cut costs and consolidate their offices.
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