Beijing fails to boost business confidence at Two Sessions, Plus Goldman Sachs tells investors to avoid China -- China Boss News 3.08.24
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What happened
The news and views are in - and it appears that polices unveiled at China's Two Sessions - when delegates of the National People’s Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC) gather to receive and iron out Beijing’s instructions - have underwhelmed.
Premier Li Chang's annual work report, the shortest in over two decades, promised that the Chinese government was focused on stabilizing economic growth as it aimed for a modest 5%.
But analysts warned that - without more stimulus - even that would likely be beyond reach due to plunging foreign investment and the debt crisis.
In addition to announcing another increase of 7.2% in China's military budget - the same as last year - and a new focus on making it easier for migrant workers to get urban benefits - something sorely needed to jumpstart consumer spending (see my post here) - there was also an unsettling tweak in Li’s language on Taiwan.
According to Reuters, China “dropp[ed] the mention of ‘peaceful reunification’” with Taipei that had in previous years been boilerplate.
“Last year, the premier had called for ‘advanc(ing) the process of China’s peaceful reunification.’ This year, Li said they will ‘be firm in advancing the cause of China’s reunification,’” Associated Press staff said.
Why it matters
Killing the lights
But what unsettled many China watchers most was an 11th hour announcement that Beijing was scrapping a decades-long tradition of the Premier’s press conference.
CNN’s Simone McCarthy described the move as “a significant break with precedent,” one that been “a rare window into the thinking of China’s number two leader, who is nominally in charge of the economy.”
“The changes are likely to add to broader concerns about transparency around China’s policymaking and further dim the premier’s profile, which had already been impacted by Xi’s hardline control over all policy areas, including the economy. Under Xi, the premier and the State Council, which functions as China’s cabinet, have been increasingly sidelined,” she wrote.
Alfred Wu, an associate professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy, told McCarthy that canning the Premier’s briefing - as well as all his subsequent briefings “for the rest of the current five year political cycle,” as the announcing spokesman confirmed, was “[b]y design.”
“They don’t want other voices to dilute the voice of the party, which is controlled by Xi,” he added.
Bloomberg’s Rebecca Choong Wilkins said that “[f]or some, this is the end of an era” and “an important signal about just how Xi intends to run his government.”
“The days when a senior official could directly engage with the media on everything from financial markets to minimum wages are firmly behind us. The premier’s role has been diminished and one of the few remaining channels to communicate directly on policy eliminated.”
To Russia with love
As beautiful, young Chinese women served tea to thousands of mainly middle-aged and elderly male delegates, it became apparent that little would emerge from China’s rubber-stamping legislature to halt a crisis of confidence enveloping the economy.
Time Magazine’s Charlie Campbell opined that “in many ways, inertia was inevitable.”
“Key economic policies are typically decided by the Chinese Communist Party’s (CCP) Third Plenum, a five-yearly plenary session of its Central Committee that is especially geared toward economic development. The Third Plenum should typically have happened by October and the fact that it still hasn’t is unprecedented and a subject of no little conjecture,” he wrote.
Nis Grünberg, lead analyst for politics and society at Berlin-based Mercator Institute for China Studies, said that “the enhanced focus on investment in technology and developing emerging industries,” revealed that “China is trying to develop its way out of economic hardship.”
But that would almost certainly create “more conflict with the U.S.” and generate new White House export controls on sensitive tech.
On that note, even clearer signals of policy direction reverberated through the halls of the legislature’s Media Center when, during a press conference, Kremlin-lovin’ top diplomat Wang Yi devoted an entire monologue to deepening ties with Russia, and another to berating the U.S. for suppressing China with a “unilateral sanctions list reaching bewildering levels of unfathomable absurdity.”
Rumors of a shakeup in the officialdom were “swirling” ahead of the Two Sessions, especially since the sackings of China’s former foreign minister Qin Gang and defense minster Li Shangfu have left glaring, months-long vacancies in the State Council.
Experts believed that Wang Yi’s “reappointment” to the office he once held “was intended to be temporary,” and that Liu Jianchao, a senior party cadre who’s been running around Europe pretending to broker peace between Russia and Ukraine, might be announced at the NPC as Qin’s permanent replacement.
But that didn’t happen, and Wang snuggled so tightly with Moscow’s propaganda as he lambasted the West and the current international order, that he seemed professionally - and nationally - conflicted. Or maybe he’s using the current gig to promote himself as a leading candidate in Xi’s succession. Nothing would make Putin cozier in Mother Russia, except the prospect of a second Trump administration pulling the plug on Ukraine.
At any rate, Wang’s ‘to Russia with love’ and ‘to hell with the U.S.’ speech certainly made an impression. It upstaged critical announcements at China’s Two Sessions that were supposed to steady the ship, not bounce it. If the party truly wants to speak with one voice whilst instilling confidence - how ‘bout also flipping the kill-switch on Wang and his ridiculous histrionics.
This Week’s China News
The Big Story in China Business
GOLDMAN SACHS TELLS CLIENTS: ‘DON’T INVEST IN CHINA’: The chief investment officer of Goldman Sachs Group Inc.’s wealth-management business, Sharmin Mossavar-Rahmani, on Monday told Bloomberg TV that investors “should not invest in China.”
Mossavar-Rahmani cited “a steady slow down in the economy over the next decade,” along with “weakening” in traditional areas of growth, and “a lack of clarity on China's policy making coupled “with patchy economic data” as reasons for that stark and unexpected - coming from a long-time, all-in China bull - conclusion.
“There may be some short-term stimulus measures coming, but China’s real estate sector hasn’t found the bottom yet,” Mossavar-Rahmani warned.
“Data is unclear — we really don’t have a good grasp of what growth was last year or what growth will be this year. While China formally published a growth rate above 5% for 2023, most people think that is not the real growth number — it was actually a lot weaker. We don’t recommend clients move into China at this point.”
Paring back China resources: In November, it became obvious that the investment bank was changing tack on China when chief executive David Solomon announced at Financial Times’ Global Banking Summit that the firm “had moved away from a ‘growth at all costs’ strategy.”
“Today, it’s a more conservative approach [in China] and we’ve probably pared back some of our financial resources there, simply because there’s more uncertainty,” Soloman said.
Only weeks earlier, Solomon and many of his Wall Street counterparts gathered uncomfortably at a Hong Kong Monetary Authority conference which was themed “Living with Complexity,” as Kaye Wiggins amusingly noted in Financial Times.
“… American financiers would probably be nervous about any one-to-one photographs with [keynote speaker Hong Kong Chief Executive John Lee]. He is under US sanctions for ‘being involved in coercing, arresting, detaining or imprisoning individuals’ under a draconian national security law that Beijing imposed on Hong Kong in the wake of pro-democracy protests in 2019. The sanctions would penalize American financial institutions if they did business with him.”
Shocked over ‘shockwaves’: Since then, Goldman has been relinquishing office space in Hong Kong, as Soloman laments about the “shockwaves” of “geopolitical competition.”
“Everywhere I go, people want to talk geopolitics. That’s not been the case for most of my professional career. We’re now going through a period of time where the impact of geopolitical events is going to have a broader impact on economic growth and capital flows around the world,” he said at the Goldman Sachs Global Affairs Summit.
In other China business news
‘WORK SECRETS’: CHINA EXPANDS ANOTHER ANTI-ESPIONAGE LAW: China expanded its state secrets law to include “work secrets,” last week.
Why? Because it can and wanted to scare the bejesus out of local businesses who supply services and products to the hundreds of thousands of state-owned-enterprises and the massive Chinese government, itself.
This is one of those sticky problems with reverting back to state capitalism after you’ve made significant strides in market reforms. Nearly all private businesses of size are deeply entangled with the state.
The punchline - as usual - is that no guidance defining ‘work secret’ or its red lines has been issued. Officials say it’s coming, but if recent updates to other anti-espionage acts serve as example, it will not.
THE BANKER’S GOOSE STEP: Meanwhile The Economist’s Chaguan reported that “China’s bankers face new orders: to develop a ‘financial culture with Chinese characteristics’” and to be “more patriotic.”
“Unveiled over several days in the People’s Daily, the Communist Party’s official mouthpiece, the campaign calls on financiers to ‘pursue profits through righteousness, not solely for the sake of profit’, and to be content with ‘reasonable returns’. Guided by ‘iron’ self-discipline and strict external regulation, finance houses must serve the cause of ‘high-quality development’. That short phrase is code for a large ambition. It describes a drive by Xi Jinping, the supreme leader, to make China into a high-technology, low-carbon industrial superpower,” he wrote.
Insert your own expletive of disbelief here.
Law and International Xi
DEUTSCHE BANK TO FILE LIQUIDATION LAWSUIT AGAINST SHIMAO: Deutsche Bank is planning to ask a Hong Kong court to liquidate Shanghai-based property developer Shimao Group "after it found the developer's debt restructuring terms unacceptable," Reuters reported last week.
The Mainland Chinese property developer missed the interest and principal payment for a $1 billion offshore bond in July, 2022, and “its entire $11.7 billion worth of offshore debt” has been in default since, news staff said.
China Boss last month informed that China Evergrande's liquidation is seen as a test case “of whether a liquidation order issued in Hong Kong would be recognized in mainland China.”
That liquidation claim was brought over the course of a year by an unhappy “politically connected investor” in Hong Kong.
China v. foreign creditors: But liquidation procedures against large Chinese firms brought by foreign investors are rare.
In a post on LinkedIn, entrepreneur and China policy analyst Matías Otero Johansson said the Deutsche Bank liquidation request would be another “litmus test for the Chinese financial system.”
“From the Chinese perspective it's not hard to imagine DB [Deutsche Bank] swooping in like a modern-day East India Company to pick the bones of a national champion. Evergrande's foreign creditors reportedly had to take a 99% haircut last month. But telling foreigners to take a hike isn't without cost. If China is to attract international capital tomorrow, then investors like DB must be compensated today. Otherwise, as U.S. Commerce Secretary Gina Raimondo warned, China could truly become ‘uninvestable’.”
Sputtering economy, more risk: As I explained in the post on Evergrande, Chinese officials are also unlikely to give creditors a thumbs up if it puts more pressure on the economy.
If Beijing does permit the liquidation of Evergrande’s assets in China - and it may to warn against speculation - a more serious issue is the impact that a further loss of confidence could have on China’s fragile economy.
In a chilling reminder that the optics of failing property giants are significant, Reuters staff noted that Evergrande’s 2021 debt default “sent [China’s] struggling property sector into a tailspin.”
“Beijing is grappling with an underperforming economy, its worst property market in nine years and a stock market wallowing near five-year lows, so any fresh jolt to investor confidence could further undermine policymakers' efforts to rejuvenate growth,” they said.
Geopolitics
TAIWAN GETS CHINESE WATER TORTURE TREATMENT AFTER DEMOCRATIC ELECTIONS: “Taiwan is facing a steady ‘drip, drip’ of Chinese pressure ahead of the inauguration of its next president in May, with officials in Taipei fearing Beijing could further squeeze the island's room to maneuver without resorting to direct conflict,” Reuters analysts said last week.
U.S. Representative Mike Gallagher, chairman of the U.S. House of Representatives select committee on China, who was in Taipei last week, described Beijing’s strategy as “a salami-slicing effort.”
Another foreign official, who spoke on condition of anonymity, told Reuters that new “regular” patrols around Kinmen, which is only 3 km away from Mainland China and its “altered” air routes in the Taiwan Strait were “ a "drip, drip" of pressure, keeping up the message that Beijing does not like Taiwan’s new president Lai Ching-te, who once supported declaring the island’s independence.
"It's part of the pattern of gradually altering the status quo in the Taiwan Strait, seeing what they can get away with and shifting to a new normal, restricting Taiwan's space to move," the source said.
Best Reads
How China Miscalculated Its Way to a Baby Bust (Liyan Qi, Wall Street Journal): Qi explains how “the architects of China’s one-child policy” failed to predict its current demographic crisis.
How Russia war-gamed a Chinese invasion (Max Seddon and Chris Cook, Financial Times): Financial Times received a cache of leaked files from 2008 to 2014 containing Russian military war games “of a hypothetical Chinese invasion.”
We need to be more aware of the spies in our midst (Elisabeth Braw, Politico): Braw highlights Norway’s annual intelligence reports which “chronicle the innovative ways in which Russia and China, as well as Iran and North Korea, go about gathering intelligence now that the usual embassy route has become much harder for them.”
Middle Kingdom Surreal
CANADIAN SCIENTIST LIED ABOUT LINKS TO WUHAN LAB: The Guardian last week said “newly released” Canadian intelligence reports found that “[a] leading research scientist at Canada’s highest-security laboratory . . . lied about about her relationship with research institutions linked to the Chinese government,” including the Wuhan Institute for Virology at the center of the Covid-19 origins controversy.
“The dismissal of Xiangguo Qiu and her husband, Keding Cheng, has been shrouded in mystery ever since the couple were escorted from Winnipeg’s National Microbiology Laboratory in 2019 and formally fired two years later.
“Intelligence assessments released late on Wednesday afternoon alleged that Qiu’s ‘close and clandestine relationships’ with Chinese institutions which showed a ‘reckless judgment’ could have harmed Canada’s national security. The assessments were among more than 600 documents released after a long fight with opposition legislators who had demanded information behind the sackings.”
Sam Cooper, an award-winning investigative reporter at The Bureau, wrote about his “3-plus year investigation into Covid origins and Canada's potential involvement” on Substack.
“And now, the sensitive records disclosed by CSIS — which Prime Minister Justin Trudeau tried to suppress — potentially place Xiangguo Qiu at the scene of the crime with numerous international scientists involved in bat coronavirus studies.
What is irrefutable — according to the CSIS records — is that WIV secretly hired Qiu to advise the Wuhan lab on bio-security, train its lab workers on safety, and employed Qiu precisely because she was the only ‘Chinese’ scientist in the world with access to a Level 4 lab outside China,” Cooper wrote.
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Enjoy your weekend.