Don't bank on China's headless economic recovery, Plus Yellen back in China to stop 'flood' of green tech exports -- China Boss News 4.05.24
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What happened
The number of bad loans at China's largest state banks is rising as the financial sector tries to heed Beijing’s call to "pump up the domestic economy” and “rescue its debt-laden property developers and local governments," Bloomberg reported.
Bank of Communications Co. (Bocom), Industrial & Commercial Bank of China Ltd. (ICBC) and Agricultural Bank of China Ltd. (ABC) all reported notable increases in bad loan ratios last week mostly due to defaulted residential mortgages.
“As of the end of 2023, the balance of real estate loans and mortgages at ICBC was more than 7 trillion yuan, accounting for more than a quarter of their loan book. Bocom’s Vice President Yin Jiuyong said the pressure to keep asset quality in check remains ‘immense’ this year as it will take time for home sales and developers’ liquidity conditions to recover,” Bloomberg staff said.
The property crisis is also rocking China’s 12 “shareholding” banks - a group of national joint-stock banks, like China Merchants Bank, Shanghai Pudong Development Bank, China Everbright Bank, China Guangdong Development Bank, and Ping An Bank, in which the Chinese government has controlling interest.
On Monday, South China Morning Post’s He Huifeng revealed that that these work-horses of China’s financial system “reported the largest salary cuts among financial institutions last year” while 10 of China’s state-owned and state-controlled banks “also demanded employees return bonuses.”
Why it matters
Xi Jinping wants China to be a ‘financial superpower’
Ironically, the glum news comes as half of China's top 10 provincial economies are planning vast expansions in financial services, including increases in the number of financial institutions, as a separate South China Morning Post report said.
At last October’s financial work conference, Chinese leader Xi Jinping said China must “strengthen the quality of its financial services to support key areas such as technology, advanced manufacturing, the green economy and small and medium-sized enterprises.”
In January, he kicked off 2024 with “a roadmap . . . for how China would become a financial superpower,” one that would be “distinct from Western models” and “have world-leading economic, technological and comprehensive national strength.”
That sent the governments of Guangdong, Jiangsu, Zhejiang, and other regional powerhouses into a burst of planning sessions in a bid to outcompete one another for top shares of Beijing’s development budget.
Mary E. Gallagher, a China specialist and Professor of Democracy, Democratization, and Human Rights Professor at the University of Michigan, gave valuable insight into this phenomenon in a carefully worded essay last week. Although Gallagher was addressing global trade concerns over China’s glut of manufactured goods for export, she emphasized that her “excess capacity is a feature, not a bug” argument applied across sectors and is part and parcel of China’s governance model.
“The use of campaigns for governance tends to produce overcapacity and excess because it provides clear priorities and goals that are sent out down through the system. It unleashes competition not only between firms, but also between local governments who strive to assist local companies through protectionism, subsidies, and lax enforcement of regulations that might stand in the way of performance. Even when focused on economic goals, these campaigns provide opportunities for local officials who are competing for promotions and appointments higher up in the system to demonstrate personal loyalty to the leader,” she wrote.
Btw, Gallagher’s article is the best attempt I’ve seen lately at explaining China’s political economy to the unfamiliar, and I urge you to read it or share.
Who’s really driving this thing?
The fog, here, however, is that China’s new-age mass mobilization and campaign-style governance has a very different sort of leader.
Mao was a war hero - a communist revolutionary that inspired the masses. Xi, on the other hand, is the party’s man, a life-long bureaucrat for whom political education in the halls of elite power was instructive, Wall Street Journal reporter and author of Party of One: The Rise of Xi Jinping and China's Superpower Future, Chun Han Wong says.
In an excerpt of his book adapted for Time Magazine last year, Wong wrote that “[m]ythmaking is a key component of Xi’s push for preeminence.”
“Whereas Mao and Deng Xiaoping won adulation through revolutionary exploits and epoch-defining achievements, Xi took power as a relative unknown and had to build his appeal from scratch. He opted for winning favor through populist deeds and folksy branding, drawing on imagery that recalls Mao and on methods that are more Madison Avenue.”
“The party” also has a significant role in “humaniz[ing] Xi” especially “on social media,” Wong added.
What’s more, Wong pointed out long-held concerns among the party elite about Xi’s, ahem, limitations, and, in particular, his lack of formal education which could deeply impact the country’s direction. Xi was sent to the countryside to work with peasants in his most formative years during the Cultural Revolution.
Last week, the Economist highlighted the confusion over the leadership of China’s economic recovery as it discussed the “swirling debate inside China” about Premier Li Qiang’s “reticence” in taking charge.
At the recent China Development Forum in Beijing, a major annual economic conference normally led by the premier, Xi, rather than Li, met with top American CEOs. Li also missed the much-anticipated and high profile Two Sessions closing news briefing last month, breaking with more than 30 years of tradition.
“This reticence is becoming a pattern. Compared with his predecessor, Mr Li has held fewer meetings with foreign officials and business leaders in his first year: only two-thirds as many, according to the South China Morning Post in Hong Kong. He has travelled to only half as many meetings abroad. And when he has taken to the skies, he has flown on chartered flights rather than a government plane. …”
“…If Mr Li has lost clout, who has gained it? The obvious answer is He Lifeng, another deputy prime minister, who has become Mr Xi’s economic tsar,” Economist analysts suggested.
While that may be, the “obvious” point to make at this most critical time - when China’s entire financial system is slipping under the weight of bad debt - is that no one should be wondering who's in the driver's seat.
This Week’s China News
The Big Story in China Business
YELLEN IN CHINA AS TENSIONS OVER GREEN TECH EXPORTS RISE: US Treasury Secretary Janet Yellen is back in China for the first part of a week-long effort “to manage the trade relations between the world’s two largest economies,” South China Morning Post reported.
Yesterday, the US’ chief financial officer posted on X:
“During my time in China, I’ll focus on advancing a healthy economic relationship that provides a level playing field for American workers and firms, and furthering cooperation on shared challenges like illicit finance and climate change.”
“As the world’s two largest economies, it is critical that we maintain clear channels of communication – particularly when we disagree. The American people expect us to responsibly manage this relationship, and the world expects that we work together where we can.”
Yellen’s first stop is the southern Chinese city of Guangzhou where she “was greeted by China’s vice-minister of finance, Liao Min, and US ambassador to China Nicholas Burns,” SCMP said.
Today, she is meeting “with Vice Premier He Lifeng for frank and substantive conversations on our bilateral economic relationship.”
Tension over China’s green tech ‘flood’: In a speech ahead of her trip, Yellen criticized China's industrial policies, especially “heavily subsidized green technology exports,” and promised to “press [her] Chinese counterparts to take necessary steps to address this issue,” according to New York Times.
Financial Times yesterday said that Yellen has “‘not ruled out’ raising trade barriers” in response.
”Economists and foreign governments say China’s policy of picking green tech winners — coupled with weak consumer spending, high investment and the more recent economic downturn — is leading to a growing export glut and driving prices down to levels that stop foreign counterparts from competing,” they wrote.
Not our problem: CSIS’ Scott Kennedy told FT that China knows “there’s an imbalance between production, where Chinese companies have continued to produce, but domestic demand has not kept up.”
“However, the counterargument for [Chinese officials] is that global demand is also low. They will say the big problem is not that they’ve produced too much — it’s that the world is buying too little,” he said.
Law and International Xi
LAWMAKERS AIM TO SANCTION US INDEX FUNDS INVESTING IN CHINA, END TAX BREAKS FOR CHINESE EQUITIES: Financial Times last week reported on several efforts in US Congress which aim "to prohibit funds from investing in Chinese companies, in an effort to address the strategic, commercial and national security risks.”
Brad Sherman, co-author of the No China in Index Funds Act and ranking member of the capital markets subcommittee, said “We keep Chinese stocks out of index funds because those funds do no research into the risks these companies pose.”
There is also a No Capital Gains Allowance for American Adversaries Act and additional legislative measures designed to “‘end tax breaks for Chinese equities, restrict sanctioned Chinese companies’ access to US capital markets, increase transparency on risks to American corporations, and reduce exposure to these risks for retail investors and other Americans saving for retirement,’” according to FT staff, citing lawmakers’ statements.
CHINA ISSUES TRAVEL ADVISORY FOR UNITED STATES: China last week told citizens traveling to the United States to “take safety precautions” and “be prepared for various unexpected situations,” according to South China Morning Post.
On its WeChat account, China’s Ministry of Foreign Affairs said that “[s]everal Chinese students and company employees have recently been subjected to ‘unwarranted interrogations and harassment’ by US airport law enforcement officers,” and that “phones, computers and other luggage items were searched piece by piece,” while “several people were banned from entering the country.”
“The ministry and the Chinese embassy and consulates in the US have lodged a solemn representation to the US, and we remind those who plan to travel to the US to be aware of these situations,” MOFA said.
Last year, the US State Department advised US citizens to “[r]econsider travel to Mainland China due to the arbitrary enforcement of local laws, including in relation to exit bans, and the risk of wrongful detentions.” That advisory was newly amended to include travel to Hong Kong and Macau.
Geopolitics
BIDEN-XI PHONE CALL READOUTS: US President Joe Biden and Chinese leader Xi Jinping spoke by phone on Tuesday. Excerpts from the readouts of both sides follow:
President Biden emphasized the importance of maintaining peace and stability across the Taiwan Strait and the rule of law and freedom of navigation in the South China Sea. He raised concerns over the PRC’s support for Russia’s defense industrial base and its impact on European and transatlantic security, and he emphasized the United States’ enduring commitment to the complete denuclearization of the Korean Peninsula. President Biden also raised continued concerns about the PRC’s unfair trade policies and non-market economic practices, which harm American workers and families. The President emphasized that the United States will continue to take necessary actions to prevent advanced U.S. technologies from being used to undermine our national security, without unduly limiting trade and investment. The two leaders welcomed ongoing efforts to maintain open channels of communication and responsibly manage the relationship through high-level diplomacy and working-level consultations in the weeks and months ahead, including during upcoming visits by Secretary Yellen and Secretary Blinken.
The two presidents had a candid and in-depth exchange of views on China-U.S. relations and issues of mutual interest.
President Xi Jinping noted that his San Francisco meeting with President Biden last November opened a future-oriented San Francisco vision. Over the past months, their officials have acted on the presidential understandings in earnest. The China-U.S. relationship is beginning to stabilize, and this is welcomed by both societies and the international community. On the other hand, the negative factors of the relationship have also been growing, and this requires attention from both sides.
President Xi Jinping stressed that the issue of strategic perception is always fundamental to the China-U.S. relationship, just like the first button of a shirt that must be put right. Two big countries like China and the United States should not cut off their ties or turn their back on each other, still less slide into conflict or confrontation. The two countries should respect each other, coexist in peace and pursue win-win cooperation. The relationship should continue moving forward in a stable, sound and sustainable way, rather than going backward.
President Xi Jinping underlined three overarching principles that should guide China-U.S. relations in 2024. First, peace must be valued. The two sides should put a floor of no conflict and no confrontation under the relationship, and keep reinforcing the positive outlook of the relationship. Second, stability must be prioritized. The two sides should refrain from setting the relationship back, provoking incident or crossing the line, so as to maintain the overall stability of the relationship. Third, credibility must be upheld. The two sides should honor their commitments to each other with action, and turn the San Francisco vision into reality. They need to strengthen dialogue in a mutually respectful way, manage differences prudently, advance cooperation in the spirit of mutual benefit, and step up coordination on international affairs in a responsible way.
President Xi Jinping stressed that the Taiwan question is the first red line that must not be crossed in China-U.S. relations. In the face of “Taiwan independence” separatist activities and external encouragement and support for them, China is not going to sit on its hands. He urged the U.S. side to translate President Biden’s commitment of not supporting “Taiwan independence” into concrete actions. The U.S. side has adopted a string of measures to suppress China’s trade and technology development, and is adding more and more Chinese entities to its sanctions lists. This is not “de-risking,” but creating risks. If the U.S. side is willing to seek mutually beneficial cooperation and share in China’s development dividends, it will always find China’s door open; but if it is adamant on containing China’s hi-tech development and depriving China of its legitimate right to development, China is not going to sit back and watch.
President Xi Jinping stated China’s position on Hong Kong-related issues, human rights, the South China Sea, and other issues.
Best Reads
How China could respond to US sanctions in a Taiwan crisis (Logan Wright, Agatha Kratz, Charlie Vest, and Matt Mingey, The Atlantic Council): Atlantic Council experts arrive at seven key findings in examining China’s ability to respond to and withstand a punishing regime of G7 sanctions for invading Taiwan.
The axis of evasion: Behind China’s oil trade with Iran and Russia (Kimberly Donovan and Maia Nikoladze, The Atlantic Council): Donovan and Nikoladze highlight how “Iran, Russia, and China have created an alternative market of sanctioned oil” paid for “in Chinese currency.”
How China follows Putin’s cyberattack playbook — with better tech (Ian Williams, The Times): Williams writes that China is more effective at using “disinformation and espionage” against Western democracies than Moscow.
Middle Kingdom Surreal
STEVEN ROACH BARRED FROM DISCUSSING HONG KONG CONCERNS IN BEIJING: Ex-chairman of Morgan Stanley Asia Steven Roach was told not to discuss Hong Kong’s political and economic troubles in a speech addressing multinationals executives and officials at the China development Forum in Beijing last week, Radio Free Asia reported.
Roach told RFA that he wanted “to raise his concerns about Hong Kong's future,” in light of the business risks related to the city’s new national security law, Article 23, which has made many nervous due to its broad scope and application.
But Roach, who is also a senior fellow at Yale University’s Jackson Institute for Global Affairs said, “he was stopped, as organizers made it clear before, during and after the forum that they did not want to hear sharp questions, only ‘views constructive to China.’”
‘Hong Kong is over’: In February, Roach wrote a widely read Financial Times commentary, which argued that “Hong Kong is over,” due to a “confluence of three factors.”
“The wheels came off in 2019-20 when, under Carrie Lam, the Hong Kong leadership made the mistake of proposing an extradition arrangement with China that sparked massive pro-democracy demonstrations. China’s response, clamping down through the imposition of a new Beijing-centric national security law, shredded any remaining semblance of local political autonomy. The 50-year transition period to full takeover by the People’s Republic of China had been effectively cut in half,” he said.
A latecomer to harsh China and Hong Kong criticism, Roach formerly held the distinction of being considered a “good friend” by the Chinese government, and has attended the China Development Forum since it first began in 2000, when it was first organized under more reformist leadership.
But the platform has changed dramatically since then, and “constructive criticism” on reasons for “capital outflows,” for example, now “causes uncomfortable reactions” among the elite, Roach said.
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Have a great weekend.
