Why Global Investors Keep Unloading China Stocks; Merck discontinues some cancer drug development with China's Sichuan Kelun; China Plans Twice-a-Decade Financial Policy Conference Next Week
China detained employee of Japanese trading firm; China’s special envoy is on a Middle East mission. Peace is just part of the picture
Welcome to this issue of The China Brief. Today is October 23, 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.
Why Global Investors Keep Unloading China Stocks
Bloomberg
Chinese equities have experienced a $3 trillion equity rout after a year of disappointing economic news and growing US-China tensions. Foreign funds have been steady sellers, which could make it harder for China to raise overseas funds for future growth. Factors contributing to the decline in investor sentiment include trouble in the property sector, local government debt stress, and low trust in the government. China's economic landscape and demographics are also resembling Japan's post-bubble era, leading to concerns of "Japanification" of Chinese equities. Government efforts to stabilize the market have provided only short-term relief.
Merck discontinues some cancer drug development with China's Sichuan Kelun
Yahoo US
Chinese drugmaker Sichuan Kelun Pharmaceutical has announced that Merck & Co is abandoning the joint development of two candidate cancer drugs. The move comes just days after Merck agreed to pay Daiichi Sankyo $5.5bn to jointly develop three candidate cancer drugs. The co-developed drugs by Kelun and Merck belong to a class called antibody drug conjugates, which are designed to target only cancer cells, potentially reducing damage to normal cells. Kelun said that its cooperation with Merck on seven other antibody drug conjugates, including three in clinical trials, is unaffected.
China’s special envoy is on a Middle East mission. Peace is just part of the picture
CNN
China's special envoy to the Middle East, Zhai Jun, recently embarked on a diplomatic tour of the region aimed at promoting peace talks between Israel and Hamas, despite Beijing's refusal to condemn the Palestinian militant group. Experts view the trip as an opportunity for China to tilt the global balance of power further in its favor. China seeks to strengthen its position as a champion of the Arab world and the Global South, which has long been sympathetic to the Palestinian cause and dissatisfied with the American-led world order. The diplomatic mission also allows China to demonstrate solidarity with Arab causes and promote its vision of the region, which differs from that of the US. China and Russia have taken a position that contrasts with that of the US, which has thrown its weight behind Israel. China has not condemned Hamas for its attacks on Israel but has criticized Israel for its retaliation. Experts do not expect China's mediation efforts to be successful, as China lacks experience mediating the long-running conflict and does not have a meaningful political and security presence in the region.
China’s stock market drops to pre-pandemic low
Financial Times
Chinese shares have fallen to their lowest level since before the Covid-19 pandemic, as efforts by Beijing to support the stock market failed to stem a sell-off driven by economic slowdown, a liquidity crisis in the property sector, and geopolitical tensions. The CSI 300 index of large and liquid Shanghai- and Shenzhen-listed stocks fell as much as 1.3% on Monday to about 3,463, marking the equity benchmark’s lowest level since 2019. The gauge has fallen about 15% so far this year in dollar terms.
Chinese drug firms backed by global banks found using leopards and pangolins parts, group says
CNN
Three major Chinese pharmaceutical companies are using endangered animal parts in their medicines, according to the Environmental Investigation Agency UK (EIA). The organisation identified 72 companies licensed by China's drug regulator using leopard and pangolin parts, with three traditional Chinese medicine giants - Beijing Tong Ren Tang, Tianjin Pharmaceutical and Jilin Aodong Medicine - among them. The EIA called on shareholders, including BlackRock, Citigroup and HSBC, to divest their stakes in the firms. The use of endangered animal parts in Chinese traditional medicine has been heavily criticised by conservation groups.
China detained employee of Japanese trading firm, report says
Al Jazeera
Chinese authorities have detained a local employee of a Japanese trading firm, according to a report by The Nikkei newspaper. The employee, a Chinese national who oversaw rare metals at the company, was detained in March, but the reason for the detention is unknown. This incident comes amid a series of raids on foreign companies and detentions of their staff in China, including the raid on US consultancy Mintz's Beijing office and the arrest of several of its local staff. These incidents have caused concern within China's foreign business community. The Chinese Ministry of Foreign Affairs has not yet commented on the report.
Manila summons China envoy over South China Sea collisions
Deutsche Welle
The Philippines has summoned China’s ambassador to Manila and filed a diplomatic protest after two collisions between Chinese and Philippine vessels in the South China Sea. The collisions occurred during a Philippine resupply mission to Philippine troops on the BRP Sierra Madre, a grounded former warship in the Philippines’ exclusive economic zone. China has lodged a complaint with the Philippines in response. The incidents occurred near Second Thomas Shoal in the Spratly Islands, a group of largely uninhabited islands in the strategically important sea with various overlapping claims by the Philippines, China, Vietnam, Malaysia and Taiwan.
In northeast China, Russian and Chinese firms ink deals from manufacturing to agriculture
Yahoo US
Chinese and Russian companies attending a regional conference in northeastern China have signed a number of cooperation deals in sectors ranging from manufacturing and logistics to e-commerce and agriculture. The conference in Shenyang was attended by Russian local government officials, business representatives and nearly 800 Chinese companies. China has urged increased cross-border connectivity with Russia and deeper economic cooperation despite disapproval from the West after Russian forces invaded Ukraine last year. Russian firms have been setting up businesses in China in increasing numbers with the province of Liaoning seeing outbound shipments to Russia soar 82.3% in the first nine months of this year to CNY 42.64bn ($5.83bn).
Exits from China’s stock market add to worst capital flight since 2016: Goldman
South China Morning Post
Foreign investors have withdrawn $3.3bn from China's onshore stock exchanges, contributing to the largest capital flight from the country in seven years, according to Goldman Sachs. The outflows come as the CSI 300 Index fell 4.2% last week, nearing a 12-month low. Goldman economists suggested the pressure for capital outflows and yuan depreciation would persist due to higher US interest rates and the need for more monetary easing in China. The yuan's slump to a 16-year low has also forced businesses to keep more of their export proceeds outside China.
Foxconn shares slide after report says China probing taxes, land use
Al Jazeera
Shares in Foxconn, a major supplier of Apple's iPhones, dropped by 3% after reports emerged that the company is under investigation in China for tax audits and land use probes. China's state-backed Global Times reported that some of Foxconn's subsidiaries in China are being audited, and that China's natural resources department had conducted investigations on the land use of Foxconn enterprises in Henan and Hubei provinces. The investigations have not been officially announced by any Chinese government department. The reports come just months ahead of a Taiwanese election, in which Foxconn's billionaire founder Terry Gou is running as an independent candidate. Gou has accused Taiwan's ruling Democratic Progressive Party of taking the island to the brink of war with China.
South Korea to Tap Africa as China Tightens Graphite Controls
Bloomberg
South Korea is looking to African countries, such as Mozambique and Tanzania, to secure graphite as China tightens its export controls on the material. China is the world's largest producer of graphite, which is used in electric vehicle batteries, and its recent export controls have raised concerns among major South Korean battery makers. South Korea plans to expand diplomatic dialog with China to ensure smooth graphite imports and will also seek to bring forward the start of a domestic synthetic graphite factory.
Biden administration picks 31 regional tech hubs to spur US innovation
Yahoo US
The US Commerce Department has named 31 regional tech hubs from 370 applicants, making the areas eligible for $500m in federal funding to help spur innovation across a variety of sectors. The programme is part of President Joe Biden's belief that the government should help fund key sectors to attract more private sector investments in industries like electric vehicle battery production, semiconductors, and clean energy. The Biden administration this month announced seven "hydrogen hubs" in 16 states would share $7bn to jump-start the emerging industry.
China Uncovers Another Case of Spying by US, State Media Reports
Bloomberg
A Chinese citizen has been accused of leaking state secrets to American intelligence agents over an eight-year period, according to state media reports. The man, identified only as Hou, allegedly provided 11 confidential documents, including two classified as top secret, to the US. He was detained by the Sichuan provincial state security agency in July 2021. The report did not name the US intelligence agency involved, the consulting company or the institute Hou worked for. The case is being reviewed by a local court in Chengdu. China has recently passed a new counter-espionage law to crack down on alleged spies for the US.
After collisions at sea, could Sino-Philippine tensions boil over?
Japan Times
Tensions are escalating between the Philippines and China in the South China Sea, as both countries have overlapping claims in the strategically and economically important region. Recent incidents include a collision between a China Coast Guard vessel and a Philippine resupply vessel, China's use of lasers and water cannons against the Philippine Coast Guard, and the amassing of Chinese fishery boats near Reed Bank. These actions not only worsen relations between the two countries but also have the potential to escalate into a larger crisis that involves the United States, Manila's defense treaty ally.
Pakistan puts 'blind trust' in China as Belt and Road enters new phase
Nikkei Asia
Pakistan's caretaker Prime Minister, Anwaar-ul-Haq Kakar, visited China's Belt and Road Forum and signed 20 deals with China, including the long-awaited Main Line 1 (ML-1) railway project. However, experts have said that financial constraints and security threats could still hinder the projects. The ML-1 project, which is the largest in the China-Pakistan Economic Corridor (CPEC), is estimated to cost $6.7bn, with China lending 85% of the money. Despite the agreement, experts are not certain the ML-1 project will go ahead. Pakistan will need the International Monetary Fund's consent to provide a sovereign guarantee to China for the railway project. Pakistan has shrinking foreign reserves and earlier this year went to the IMF for a $3bn bailout. Experts have also raised concerns that the Gwadar Port is not properly connected to mainland Pakistan, which would hamper commercial activities. In addition, China has raised concerns about the security of Chinese organisations and personnel in Pakistan.
How China’s property crisis has unfolded, from Evergrande to Country Garden
Financial Times
China's largest private developer, Country Garden, has failed to make a payment on an offshore bond, putting the company at risk of default. This comes as China's property sector continues to face challenges, with sales drying up and many developments across the country left unfinished. The turmoil in the property sector is significant for China as construction and real estate have historically been a major driver of economic growth, contributing roughly a quarter of GDP. Country Garden's sales fell 44% year-on-year in the first half of 2022, and the company has around $11 billion of international debts and total liabilities of around $200 billion. The company is expected to pursue an offshore debt restructuring, but the status of its mainland obligations remains uncertain. The default of another developer, Evergrande, in 2020 raised concerns about the scale of problems in the Chinese property market. Since then, more than half of the top 50 developers have gone into default, and Chinese developers have defaulted on around $115 billion of $175 billion in outstanding offshore dollar bonds since 2021.
Manila says Chinese vessels 'intentionally' hit Philippine boats
Japan Times
The Philippines has accused Chinese vessels of intentionally hitting Philippine boats in the South China Sea. The incidents occurred near Second Thomas Shoal in the Spratly Islands, and both countries have filed diplomatic protests and released videos to support their claims. This further escalates the ongoing diplomatic row between the two nations.
China’s belt and road pivots to ‘small yet smart’ with ‘modest’ financing pledge
South China Morning Post
China has pledged 780 billion yuan ($106.6 billion) in new financing for its Belt and Road Initiative (BRI), which is a more modest figure compared to previous years. The funding will be allocated to the China Development Bank, the Export-Import Bank of China, and the Silk Road Fund. The focus of the BRI is shifting towards "small yet smart" projects, which are smaller, more targeted, and financed with smaller loans. These projects include solar power plants and roads in remote areas. This is in contrast to the large road and rail projects that were seen in the early days of the BRI. China's financing for overseas development has fallen in total value, resulting in smaller loan commitments and shorter repayment periods. President Xi Jinping said China would continue to deepen cooperation on green projects in infrastructure, energy, and transport. The new direction for the BRI also emphasizes integrity, anti-corruption, compliance with laws, and social responsibility. The Chinese currency will be increasingly used to avoid increasing debt burdens for borrowers.
Spies Bring Their China Warnings in From the Cold
Bloomberg
The heads of the intelligence agencies from the Five Eyes alliance (US, UK, Canada, Australia, and New Zealand) have publicly accused China of engaging in large-scale espionage and theft of intellectual property. The move toward greater transparency by the intelligence agencies reflects efforts to regain public trust and the changing information environment shaped by social media. The primary objective of the public accusations may be to influence public opinion and counter mixed messages from politicians. The alliance is particularly concerned about the potential loss of critical technological knowhow to China, which has a clear advantage due to its government's control over the private sector.
China urges Gaza ceasefire, willing to do whatever needed to end violence
Al Jazeera
China's special envoy on the Middle East, Zhai Jun, has expressed China's willingness to promote dialogue and restore peace in Gaza. Zhai described the situation in Gaza as "very serious" and expressed concerns about the potential for a large-scale ground conflict and armed conflicts spreading to neighboring countries. China has called for an immediate ceasefire and an end to the violence. Beijing has maintained good relations with Israel but has also supported the Palestinian cause for decades. China has provided emergency assistance to Palestinians through the UN and via bilateral channels.
China’s Star 50 Tech Gauge Falls to Record Low on Growth Concern
Bloomberg
China's Star 50 Index, which tracks tech stocks, has fallen to its lowest level since its inception over three years ago. The index has declined for six consecutive months, the longest on record, as investors' confidence in the sector wanes. The drop in tech stocks is being attributed to concerns over higher US interest rates, which are expected to dampen demand for growth stocks globally. The slump in tech stocks is also expected to impact China's tech shipments, with sluggish exports anticipated for companies in the Star 50 Index.
TSMC affiliate eyes Singapore for its most advanced chip plant
Nikkei Asia
Taiwan Semiconductor Manufacturing Co's affiliate Vanguard International Semiconductor (VIS) is considering building its most advanced chip plant in Singapore, according to three sources. VIS, in which TSMC owns a 28.3% stake, is looking to capture demand for automotive-related chips. The company already operates an 8-inch chip plant in Singapore, acquired from GlobalFoundries in 2019. The expansion would be VIS's largest investment in years, with the new facility likely to be built close to its existing plant in Tampines.
Alibaba promises major discounts ahead of China's 'Singles Day' shopping event
Yahoo US
Alibaba has announced that it will offer huge discounts for this year’s Singles Day shopping event, in an indication that Chinese consumer confidence remains low. The event, which will begin on Tuesday and typically lasts for several weeks, will feature over 80 million products at their lowest prices this year. Alibaba will also offer a 15% price reduction on some products in addition to the discount coupons usually available. The company did not disclose the total value of subsidies and coupons it plans to offer this year.
China Plans Twice-a-Decade Financial Policy Conference Next Week
Bloomberg
China is set to hold a key financial policy meeting early next week to address risks and set priorities for the country's $61tn financial industry. The closed-door national financial work conference in Beijing is expected to focus on resolving financial risks, including the property crisis and local government debt. The meeting will provide clarity on how China intends to turn around its economy without creating unintended risks. It comes as China grapples with a property market slowdown and a worsening crunch in the $9tn local government debt market.
Tim Cook Can’t Make iPhones Without This Chinese Company and Its CEO
WSJ
Apple CEO Tim Cook recently visited Luxshare Precision's Apple Watch factory near Shanghai, praising the assembler's work in making Apple's most advanced products. Luxshare manufactures AirPods, the Apple Watch and the recently released iPhone 15, including the top-of-the-line iPhone Pro Max. Luxshare is also the assembler of Apple's first mixed-reality headset, due to reach consumers next year. Apple has been hitting headwinds in China recently as the government orders officials not to use the iPhone or other foreign devices at work and cracks down on foreign apps. However, most iPhones are still made in the country and it would likely take years to change that. Luxshare is helping Apple diversify away from China by investing in additional capacity in Vietnam and India. Luxshare documents and people involved in the supply chain said the company wants Vietnam to account for 30% of its total production, without reducing its China footprint. Luxshare has also begun preparing to assemble a next-generation version of Apple's virtual-reality headset, which could go into mass production in 2027.
China crackdown on cyber scams in Southeast Asia nets thousands but leaves networks intact
Associated Press
Tens of thousands of people, mostly Chinese, have been caught in cyber scam networks run by powerful Chinese criminal syndicates in Southeast Asia, a region where China has financed big construction projects through President Xi Jinping's Belt and Road Initiative. Scammers lure victims with high-paying job offers, only to force them to work in scam operations. The scams are run by Chinese bosses and local elites in countries such as Myanmar, Laos, and Cambodia. The syndicates are also known for "pig butchering" cons, where scammers dupe individuals into investing in bogus schemes after tricking them into digital romances. When scam operations are shut down in one place, they often resurface elsewhere. China has detained around 4,000 suspects and returned them to China, but experts say efforts to crack down on the scams have not been comprehensive. The problem is an embarrassment for Beijing and is discouraging ordinary Chinese from traveling to Southeast Asia due to fears of being duped or kidnapped.
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