Why the US delayed China sanctions after shooting down a spy balloon; Exclusive Insight: A New Era for China's Financial Sector: Li Yunze Assumes Control of China's Financial Supervision
The G7 struggles to find unity over China’s economic bullying; China’s Credit, New Loans Plunge as Worries Over Recovery Mount
Welcome to this issue of The China Brief. Today is May 11, 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: A New Era for China's Financial Sector: Li Yunze Assumes Control of China's Financial Supervision
On May 10th, Li Yunze, born in 1970 and an alternate member of the Central Committee of the Communist Party of China, was appointed Secretary of the General Administration of Financial Supervision, which is based on the China Banking and Insurance Regulatory Commission. As the head of China's financial supervision and the first ministerial-level official born in the 1970s, Li Yunze represents a shift in the country's financial leadership.
Historically, corruption has plagued China's financial sector, with significant risks emerging. This can be partly attributed to the key leaders in the domain, who are mostly proteges of former Premier Zhu Rongji, former Vice Premier Wang Qishan, and former Central Bank Governor Zhou Xiaochuan. The issue of "inbreeding" is severe.
One essential task that General Secretary of the Communist Party of China, Xi Jinping, is currently focusing on is systematically purging corrupt officials from the financial system and promoting talented individuals nurtured by himself, who have no connection with the abovementioned individuals, to crucial positions.
This new generation of leaders includes Mr. Li Yunze, as well as Mr. Ge Haijiao, the chairman of the Bank of China, and Mr. Zhu Hexin, the upcoming governor of the central bank. These individuals were born around 1970, held relatively low ranks in 2012, and have been rapidly promoted to different positions in recent years. This selection and appointment method for cadres was also employed by Xi Jinping when he took office and restructured the military.
Despite their grassroots experience, these new financial leaders may lack experience in high-level positions, such as leadership roles at the headquarters of state-owned banks and financial regulatory departments. This is a challenge for the new generation of financial system leaders, represented by Li Yunze, Zhu Hexin, and Ge Haijiao, as they tackle crucial tasks including controlling large-scale financial risks, assisting Xi Jinping in purging the financial sector's personnel, establishing a new financial regulatory framework, and carrying out comprehensive and deep reforms of the financial industry to support the real economy.
While Xi Jinping's strategy of promoting young, grassroots leaders to important positions in the military has been generally successful, China's financial sector is different due to intertwined issues of corruption, business, and personnel over the years, resulting in systemic financial risks. The new generation of financial system leaders, represented by Li Yunze, Zhu Hexin, and Ge Haijiao, face an arduous task, and it is hoped that they can adapt quickly and overcome the challenges ahead.
(The author of this article is Liu Cirong, a finance expert.)
The G7 struggles to find unity over China’s economic bullying
Financial Times
Japan is engineering a joint G7 approach on anti-coercion, as it looks to counter China's threatening behavior toward countries such as Japan, South Korea, and Australia. With no plan yet in force, Liz Truss proposed "Seven Musketeers," a concrete mechanism of automatic mutual assistance, similar to economic NATO. TOKYO expects a broad coalition including developing countries, similar to Japan's response to the China rare earth incident. Some, like Japan, are wary of autonomously following Washington's adventures in geopolitics and would prefer a multilateral process. Nevertheless, even with mitigating policies implemented, the US will not stop taking unilateral action against China.
China’s Credit, New Loans Plunge as Worries Over Recovery Mount
Bloomberg
China's credit and new loans both fell short of economists' expectations in April, adding to concerns about the country's economic recovery. Aggregate financing reached $176bn, far short of Bloomberg's 2 trillion yuan median estimate, in a traditionally slow month for expansion, and new loan values of ¥718.8bn were also lower than estimates.
China’s ban on Canadian beef still in place year-and-a-half later; industry in dark
The Toronto Star
China continues to ban beef imports from Canada, a year and a half after a case of BSE (mad cow disease) was reported. The discovery of the atypical case of BSE had little impact on trade in the US, the majority of Canada's trading partners did not impose any restrictions but China, South Korea and the Philippines temporarily suspended imports, with South Korea and the Philippines lifting the restrictions two months later. However, China's ban remains firmly in place, with industry representatives stating they are still unaware of the reason for this. A similar case affected Ireland and Brazil, but China lifted its beef trade restrictions after short periods. Tensions between the two countries have ratcheted up again with the Canadian government expelling Chinese diplomat Zhao Wei, who was allegedly involved in a plot to intimidate a Canadian politician and his relatives in Hong Kong. Concerns have been expressed that China may retaliate by blocking agricultural shipments.
Diplomats turned away from trial of prominent activist in China
Reuters
Western diplomats were prevented by court staff from attending the subversion trial of human rights activist and lawyer Guo Feixiong in the southern Chinese city of Guangzhou. The US embassy in China, along with diplomats from Canada, Denmark, France, Germany, the Netherlands and UK, were refused entry to the court, with a clerk advising them that foreign visitors would need prior approval from higher authorities. Guo, who has alleged mistreatment by Chinese authorities during more than a decade spent behind bars on previous charges, is currently facing a charge of "inciting subversion of state power".
Chinese foreign minister calls for China, France to work together to ‘tackle global challenges’
South China Morning Post
The foreign ministers of China and France have discussed 'tackling global challenges' during a meeting in Paris. Qin Gang told his French counterpart Catherine Colonna that the sides should boost cooperation on international affairs and expand exchanges at all levels. Colonna said France was ready to strengthen communication with China on major international and regional issues and find more common ground. The foreign ministers also discussed Ukraine and nuclear proliferation in North Korea and Iran.
Yellen urges G-7 to help poorer nations counter China, Russia threats
Nikkei Asia
US Treasury Secretary Janet Yellen has urged the G7 nations to build economic resilience to enable developing nations to protect themselves from the geopolitical threats posed by non-democratic countries such as Russia and China. Yellen said the objective was not just to enhance the resilience of the G7 nations but also to build resilience for their allies, including developing countries.
China says it will resolutely object if U.S. curbs investment in semiconductor industry
Reuters
China's commerce ministry spokesperson, Shu Jueting, has warned the country will "resolutely object" if the US restricts Chinese companies from investing in the semiconductor industry. The statement comes amid US plans to introduce new export rules for AI technology to help keep it out of the hands of China. It is believed the rules have been created to prevent China from winning the arms race developing between the two nations over artificial intelligence.
China Warns Brokerages Not to Spread Sensitive Information
Bloomberg
Regulators in China have warned domestic brokerages not to distribute information that jeopardizes national security during their analysis of the country's financial markets. Under monthly oversight processes, Chinese analysts are expected to prevent leaks and the spread of counterfeit information that could affect markets. Previous messages to brokers in recent months have reiterated similar concerns over securing China's information and managing analyst speeches. The warning comes amid Beijing's crackdown on perceived national security threats in the foreign consulting and financial services space.
China, France agree to strengthen economic ties
Reuters
Chinese and French Foreign Ministers agreed in a recent meeting to strengthen economic ties in a more balanced relationship. French Foreign Minister Catherine Colonna emphasised China's role in encouraging Russia to respect the United Nations Charter with regard to Ukraine, a statement that followed the outburst of diplomatic differences between China and Paris earlier this year. Cooperation in building a transnational supply chain will be key in strengthening ties between these two countries, and the French Foreign Minister asked the Chinese counterpart for increased access to the Chinese market for French companies.
As China has fewer children, baby product firms scramble to diversify
Japan Times
A historic decline in Chinese population has led to falling sales of baby and children’s products, prompting the country's firms to diversify into other areas and seek alternative revenue streams. Sales in China's baby and child sector shrank last year due to oversupply and low birth rates, with Health and Happiness seeking to offset the decline this year through global expansion and diversification. China's market for baby food and diapers is the world's largest and is forecast to contract for the first time since 2012. The market is expected to shrink 2% to $37.2 billion by 2025.
Looted relics returned to China were on loan to New York’s Met museum
South China Morning Post
New York authorities have returned a pair of stone-carved tomb beds worth $3.5m to China following a criminal investigation into an American collector. Manhattan’s District Attorney’s Office said the 1,000lb artifacts had been on loan to the Metropolitan Museum of Art since 1998, with one bed on display and the other “largely hidden from public view” in the storage area. They were seized from the collection of 85-year-old Shelby White, a board member of the museum. An investigation found they had been looted and smuggled out of China in the early 1990s. They were presented to the Chinese consulate in New York on 2 November.
Why the US delayed China sanctions after shooting down a spy balloon
Reuters
The US State Department has delayed imposing human rights-related sanctions, export controls and other restrictive actions against China in an effort to limit damage to the countries' relationship, sources have said. The agency has pushed back a rolling list of actions to counter China known as the "competitive actions" calendar that the Biden administration had planned to carry out. Despite officials signaling disapproval of a Chinese spy balloon that crossed US airspace in February, Secretary of State Antony Blinken chose to delay announcing several planned actions in response, say insiders who spoke to Reuters. The decision has angered some officials with fears of a divide between those pushing for a restrictive approach and those in favor of more measured, restrained action.
Global companies warn of slower-than-expected recovery in China
CNN
Several global firms have pointed to a patchy recovery in China in recent weeks, leading some executives to warn of slower-than-expected growth. Last week, Estée Lauder suffered its biggest daily stock drop on record after citing pressures in China for a lowered sales outlook, while Starbucks and Qualcomm have also flagged uncertainties related to the country, which is a top market for the pair. Beijing abandoned its zero-Covid policy in December and scrapped longstanding quarantine requirements for international arrivals in January, ending restrictions that had isolated its economy. That policy U-turn led to hopes that China could help propel global growth as it had before the pandemic. However, data and advisory firm China Beige Book's COO Shehzad Qazi said many analysts on Wall Street had overestimated the pace of China’s recovery. While China's Q1 GDP growth was encouraging, there are fresh concerns such as the job market for younger people and the possibility of deflation, making it harder for companies to predict how they’ll fare in the coming months.
China’s deflation worries deepen as consumer prices grow only 0.1% in April
CNN
Consumer prices in China have increased at their slowest pace in two years, further deepening fears of deflationary pressure in the country. In April, the consumer price index grew by a minimal 0.1% from a year ago, its slowest since February 2021, according to data revealed by the National Bureau of Statistics. In March and February this year, it had risen to 0.7% and 1% correspondingly. Meanwhile the producer price index (PPI), which measures factory-gate prices, marked a 3.6% decline, its largest contraction for three years, thereby sealing its seventh continuous month of decline. Despite such a backdrop, People's Bank of China, the central bank, has been slashing interest rates and injecting cash into the economy in order to stimulate and bolster it.
Italy to hold talks with China about exiting Belt and Road Initiative
Financial Times
Officials from Italy will hold discussions with China over exiting the country's Belt and Road initiative program. Italy, the only G7 country to participate in the initiative, caused firm rebukes from Washington and Brussels for its involvement. Italian Prime Minister Giorgia Meloni will decide whether Italy will formally notify Chinese officials of its intent to withdraw from the program before her four-year participation agreement is automatically renewed unless Rome formally notifies Beijing of its intention to withdraw.
The Plot to Steal the Other Secret Inside a Can of Coca-Cola
Bloomberg
An espionage case involving the theft of trade secrets of paint and coatings companies including Dow Chemical, Akzo Nobel and PPG Industries shows how the Chinese government’s approach to incentivising intellectual property theft is unpredictable, according to Bloomberg. The case involved former Coca-Cola employee Shannon You and a detailed set of chemical recipes for 2-micron-thick plastic liners for the company's beverage cans, described by federal prosecutors as the company’s “other secret formulas”. You was involved in elaborate efforts to steal the recipes and other information, which were co-opted for Weihai-based NMG Technologies, a paint and coatings company. Any technology transfer will have benefited China’s state and national grant programmes, which observers say are in part being used as front for intelligence efforts outside the country.
Coatings can protect against salty sea air and UV rays, or prevent touchscreens from being smudged. The drinks-can industry depends on a coating that is uniform and able to withstand the specific recipes of different drinks and their ingredients. The coatings industry faced a crisis after concerns emerged about bisphenol A interference with the human endocrine system. A ban led to a renewed search for liner chemistries, resulting in the BPANI (bisphenol A non-intent) category – despite the fact that even nominally BPA-free consumer products may still contain trace amounts of the chemical.
Li Auto rises by the most in six months after posting best quarterly profit
South China Morning Post
Shares in Chinese electric vehicle maker Li Auto soared after it reported its best quarterly earnings yet, with a net income of ¥933.8m ($134.6m) compared with a net loss of ¥10.9m the previous year. Profits jumped 261% month-on-month while sales grew 66% year-on-year to 52,584 units. Despite a price war that has hit industry-wide sales in China, coupled with struggles in the post-Covid economic recovery, Li has been able to increase its market share driven by “a wider array of product choices,” according to Xu Yingbo, an analyst at Citic Securities in Beijing.
Slow transition to EVs could see foreign carmakers lose market share in China
South China Morning Post
International automakers including Volkswagen, General Motors, BMW and Toyota are set to lose market share in China as they fail to transition to electric vehicles fast enough, according to a new report by environmental group Greenpeace. By 2030, VW's share of the Chinese market may fall by 3 to 7 percentage points, while other car companies may lose between 0.5 and 4 percentage points. The Greenpeace report predicts Chinese carmakers such as BYD, which is backed by Warren Buffett's Berkshire Hathaway, stand to gain market share by 4 to 5 percentage points by 2030. A range of other studies support Greenpeace's findings, including projections by AlixPartners and UBS that electrification will change the face of China's vehicle industry.
South China Sea — not Taiwan — more likely spark of U.S.-China conflict, former Chinese colonel says
Japan Times
There is a heightened possibility of a conflict between the US and China starting in the South China Sea, warn experts. As both US and allied military vessels and aircraft fly regular missions over the disputed Spratly and Paracel island chains, sea and air conflict has become increasingly likely, said Zhou Bo, a former senior colonel in China’s People’s Liberation Army (PLA) and current senior fellow of the Center for International Security and Strategy at Beijing’s Tsinghua University. Due to increased scrutiny of each side in relation to Taiwan, conflict in that region, including via an accident or miscalculation, is deemed less likely. In late April, several reports emerged of near-collisions between Philippine and Chinese government vessels. Zhou and other experts have called for collaboration among coast guards and similar agencies, as well as among countries, to enable accidents to be avoided. The South China Sea continues to heat up, with the US granted access to several military bases in the Philippines.
Chinese foreign minister conveys willingness to visit Japan
Japan Times
China's Foreign Minister Qin Gang is reportedly considering visiting Japan later this year, a move said to reflect Beijing's concerns over improving ties between Japan and South Korea, which could result in Japan hardening its stance on China. Both countries are also considering resuming a bilateral high-level economic dialogue, which was last held in 2019. The potential visit comes after worsened public sentiment towards China in Japan following the detention of a Japanese pharmaceutical company's senior employee for allegedly spying activities. Ties between China and South Korea have also deteriorated recently after South Korean President Yoon expressed concern over increased tensions around Taiwan amid pressure from China.
Yuan Primed for Losses on Uneven Recovery, Political Tensions
Bloomberg
The yuan is vulnerable and set to decline further against the dollar, according to Stephen Chiu, Bloomberg Intelligence's chief Asia foreign-exchange and rates strategist. Chiu believes the currency may be affected by a decline of its Asian peers during periods of dollar weakness, as well as the holiday season when dividend outflows can cause a relative weakness of the yuan. Meanwhile, China's economic data since April has cast doubt on the re-opening optimism that was expected to support demand, and geopolitical risks have continued to build.
China Asks State Banks to Cut Deposit Rate Ceilings From May 15
Bloomberg
China is to cap the rates offered on certain bank deposits from next week as it continues to offload lenders' funding costs to stimulate the economy. The limit will apply particularly to agreement and call deposits with China's four largest state-owned banks, including the Industrial & Commercial Bank of China, which can offer up to 10 basis points above benchmark interest rates. All other lenders have been informed to cap the ceiling at 20 basis points. The move comes after multiple rounds of rate cuts last year and earlier this month.
Cross-strait tensions no deterrent for Taiwan’s embrace of clean wind energy
Japan Times
Taiwan has become a leading offshore wind market outside Europe, and is aiming to generate between 40-55GW through wind power with long-term green power contracts. However, the wind farms off the country's west coast could be at risk as they sit in a waterway that has become a focal point of tensions between Beijing and Washington. Insurance has emerged as a possibility to hedge against such risks, with some foreign energy firms asking if they can buy political risk insurance to prepare them for possible military confrontations, however premiums are considered prohibitively expensive. Taiwan has a colossal appetite for renewables and is expected to generate about €32.6bn ($32.6bn) in investments by 2025, with offshore wind crucial to its energy security. To meet ambitious targets, the country is turning to more floating wind technology, which leverages deeper waters than fixed-bottom turbines can reach.
GM, VW face idled capacity risk in China without faster EV transition
Reuters
Greenpeace has warned high legacy automaker production capacity for conventionally powered vehicles in China would be wasted by 2030 if they failed to transition to electric autos. By 2030, if new energy vehicles formed 40% of sales, about one in three production facilities at 10 major automakers will go unused, and if sales rates went to 70% usage will drop to two-thirds, said Greenpeace. Volkswagen (VW), Toyota and General Motors faced an unequalled risk, with the likes of EV manufacturer BYD having the chance to take market share from traditional vehicle makers, the campaigner added.
China's state firms pay more as public-private wage gap hits record 89%
Nikkei Asia
Chinese state-owned enterprise (SOE) workers earned twice as much as their counterparts in the private sector in 2020, according to official data. Employees of urban privates saw their pay rise just 3.7% YoY to RMB65,237 ($9,410) in 2020. SOE workers picked up the slack with an average annual pay of RMB127,758, having risen 7% YoY, the greatest rate recorded on comparable data going back to 2008. The widest pay gap in over a decade was primarily down to government policies during the pandemic, in particular directing financial support toward SOEs rather than private enterprises. The gap is expected to narrow in 2021, however, as private companies recover more quickly from the pandemic's impact.
Biden hints at attending G7 summit virtually if debt issue drags on
Japan Times
US President Joe Biden has said he may participate in the Group of Seven summit from 19 May in Hiroshima, Japan, virtually if discussions fail to resolve the issue of lifting the US debt limit. Following yesterday's failed negotiations with congressional leaders, Biden warned that he could change his travel plans but would delay neither final decision nor move but “might do it virtually or not go". Travel plans may change due to complications in raising or suspending the debt limit to fuel the $31.4tn US economy. Treasury Secretary Janet Yellen warned the government could run out of cash as early as 1 June.
Biden Presses for China Contact Despite Risks of Losing Leverage
Bloomberg
The Biden administration is attempting to engage China amid rumors that the United States is not doing enough to ease tension and outright hostility, a sentiment that has been backed by allied nations in both Asia and Europe. The approach of utilizing meetings and phone calls with China has been proposed at every level, from Defense Secretary Lloyd Austin to the possible conversation between President Biden and China’s President Xi Jinping, in an effort to paint the Chinese leader as recalcitrant should he refuse the calls. The calls have also been used to console anxious allies around the globe in an attempt to paint America as doing more to resolve the situation, however, it has not been met positively by the Chinese as they ignore meetings and outreach. China's Foreign Minister Qin Gang recently commented that the US must change its policies for relations between China and the US to improve. The US has faced continued allegations from both allies and competitors of being too soft on China and failing to resolve key issues and tension between China, Taiwan, and the US.
China’s consultancy crackdown is scaring away investors, experts warn
South China Morning Post
The investigation of international consulting firm Capvision by Chinese national security authorities, which was broadcast on prime-time television, indicates that the government has shifted its priorities toward national security. While many Chinese data companies have operated in nebulous areas by accepting significant payments in return for insider information, authorities had largely tolerated their activities, as they provided crucial market intelligence. However, Capvision was identified as providing consulting for foreign companies in sensitive industries, with some of those firms also having relationships with foreign governments, militaries or intelligence agencies. Other advisors in the industry may find themselves targets for investigation as Beijing steps up efforts to protect national security. The move follows the implementation of an updated anti-espionage law, which is expected to come into effect in July.
Australian trade minister sets off for China, aims to break down trade barriers
South China Morning Post
Australian Trade Minister Don Farrell has traveled to China to meet with his Chinese counterpart, Wang Wentao, to work on resolving trade restrictions that have been a source of tension between the two countries. China is Australia's largest trading partner, and in 2020 imposed restrictions on many goods imported from Australia amid a diplomatic spat over trade and Covid-19. Recently, China has started to ease import restrictions on Australian coal, cotton, and copper. Farrell said he planned to advocate for the full resumption of exports to China for all sectors.
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