China Week in Review
Week of Aug. 20, 2018
China and the world:
We have noticed a steady rejection of PRC exports (products, Belt and Road, etc.) in recent weeks. The world is getting increasingly cautious about PRC expansionism and infiltration.
- Malaysia scraps $22 billion worth of PRC-backed projects this week.
- On Aug. 22, Australia bans Huawei from supplying equipment for the country’s 5G mobile network.
- The Japanese government decided to exclude Huawei and ZTE from a tender for suppliers to build government-level intelligence systems, according to an Aug. 26 report by Sankei Shimbun.
Sino-U.S. trade war:
CCP propaganda has been signaling that the PRC is not afraid to take on the U.S. in a trade war. Meanwhile, two days of Sino-U.S. trade talks between mid-level officials did not produce any visible progress.
- We believe that the CCP is employing a delaying strategy to stop the U.S. from implementing further trade tariffs or sanctions for as long as possible. Holding trade talks when the CCP refuses to back down from its tough stance is one such stalling tactic.
- President Donald Trump, however, might have already lost patience with the PRC on trade (see our entry on North Korea below). The Sino-U.S. trade conflict is set to escalate.
Politics:
Xi Jinping takes a raft of actions which dispel recent rumors that he is in trouble. Also, Xi reshuffles personnel to strengthen his grip on the Party and the military.
- Xi attends a key Central Military Commission conference, a national propaganda work conference, and a Comprehensive Law-based Governance Committee meeting.
- Key personnel are appointed or purged in the propaganda apparatus, the political and legal affairs apparatus, and the military.
- Yang Hui, the deputy commander of the Eastern Theater Command, was reportedly placed under investigation for corruption. Yang, a Jiang faction associate, formerly headed the PLA’s intelligence agency.
Economy:
China’s economy continues to worsen. The markets are bearish on China despite the central bank boosting liquidity.
- The finance ministry instructs local governments to issue more bonds.
- The banking regulator is expected to reduce the risk weighting of banks’ local government bond holdings from the current 20 percent to zero.
- Shanghai and Shenzhen A-shares rebounded last week, but institutions are not optimistic, and the volume of transactions has shrunk. On Aug. 22, trading values on the Shanghai Stock Exchanges fell below the 100 billion yuan mark.
- Rental (see entry below) and commodity prices are on the rise.
- African swine fever, a severe and contagious disease, hits five Chinese provinces and affects pork prices.
- Grain production in China has greatly reduced, with wheat harvest falling by 33 percent and yields from the “grain province” of Henan dropping by over 55 percent.
Society:
The CCP has been reinforcing its “stability maintenance” over Chinese society. Meanwhile, societal problems continue to fester.
- Victims of P2P failures continue to hold protests in many areas in China. Some victims are planning an assembly in Beijing on Oct. 1.
- On Aug. 20, hawkers who were formerly military veterans were beaten up by chengguan (local cops infamous for their thuggish behavior) in Guangdong. The incident sparked a thousand-person protest. The local authorities had to mobilize armored vehicles to dispel the protestors.
- Huizhou police arrested over 50 student activists and workers on Aug. 24. The students were supporting workers from Jasic Technology, a welding machinery company in Shenzhen.
- Many local governments across China have been forcefully destroying crosses displayed by underground churches. Churchgoers were forced to sign pledges that they would give up their faith and dispersed.
- On Aug. 25, villagers in Sanya City, Hainan Province clashed with local police over government land acquisition. Police cars were smashed and policemen were wounded in the encounter. Afterwards, the local authorities mobilized a large police force to block off the area and make arrests.
SinoInsight 1
The lack of breakthrough at the latest round of Sino-U.S. trade talks on Aug. 22 and Aug. 23 may be the least of concerns for investors and businesses in China.
We noted last week that the passing of the 2019 National Defense Authorization Act is a watershed moment in China-U.S. relations. Recent developments suggest that a new “cold war” has begun and a full-blown trade war is imminent:
- On Aug. 23, Senator Cory Gardner, chairman of the Foreign Relations Committee’s Asia subcommittee, said that he would introduce a new measure, the Taiwan Act of 2018. In an interview with Reuters, Cory said that the measures would “authorize the State Department to take action such as downgrading relations or altering foreign assistance to discourage decisions seen as adverse for Taiwan.” At a hearing a day earlier, Gardner said that he had drafted an amendment to the Federal Aviation Administration reauthorization bill that requires all carriers to use the reference “Taipei, Taiwan” to be allowed to operate in U.S. airspace.
- At a roundtable on the passing of the Foreign Investment Risk Review Modernization Act on Aug. 23, U.S. lawmakers thanked President Trump for taking an important step to protect America’s intellectual property and technology, and address the national security threat posed by China.
- On Aug. 24, Trump tweeted that Secretary of State Mike Pompeo would go to North Korea for further negotiations only after trade issues with China have been resolved.
OUR TAKE
The Trump administration is serious when it says that China is a “strategic competitor” and a threat. CCP elites might only now be catching on that the trade dispute is only a small part of America’s China policy revolution. The CCP’s misreading of the situation and its responses would likely end up escalating the trade war and add to China’s domestic pains.
Investors and firms that misread the U.S. “adjustment” towards China face substantial risks going forward. Companies may have to consider looking for new supply chains or business outside of China.
