SinoInsight 1
On July 31, Hao Peng, the Party secretary and director of the PRC State-owned Assets Supervision and Administration Commission, met with Pony Ma Huateng, the founder, CEO, and chairman of Tencent, to promote “deepening cooperation” between Party Central and Chinese internet companies in areas such as Big Data and artificial intelligence.
According to a SASAC statement, Hao Peng encouraged Tencent to work with state-owned enterprises to “close the gap between online and offline economies,” and spotlighted the “positive outcome” of having private investors like Tencent involved in the mixed-ownership reform of the state-owned telecom operator China Unicom.
Hao was appointed as director of the SASAC on May 21 this year. On June 16, he had a meeting with Alibaba’s Jack Ma that was similar to the recent Tencent talks.
OUR TAKE
1. The Sino-U.S. trade war and China’s worsening economy are two reasons why the central authorities are interested in “deepening cooperation” between private and public sector enterprises.
With the Trump administration targeting Chinese tech giants like Huawei and ZTE within the context of the trade war, the CCP has greater incentive to strengthen its control over private enterprises through private-public collaborations.
More crucially, the CCP needs private capital to help it keep the SOEs afloat as economic crisis looms.
2. The CCP’s so-called “mixed-ownership reforms” are designed to address the low-efficiency of SOEs and carry out “fiscal transfusion” from the private sector to the public sector. With private capital infusions and management support, SOEs should ideally be able to become more efficient and gain a financial lifeline. Mixed-ownership reform also gives SOEs a stake in private companies and a slice of their profits.
Mixed-ownership reforms, however, are unlikely to succeed under the CCP authoritarian system. Given the dominance of the state, private firms would either find themselves cast aside or “annexed” by SOEs in due course. Private companies would be more hesitant to get involved in mixed-ownership reform efforts with SOEs, and the deterioration of the Chinese economy would accelerate.
Many observers believe that mixed-ownership reform is the new “public-private partnership,” an initiative that was introduced in 2013 to allow private companies to invest in local government infrastructure projects. Local governments, however, ended up abusing the PPP program to accumulate more implicit debt.
3. In recent years, the CCP has been exploiting private enterprises to protect the state sector and its regime as the Chinese economy declines. For instance, the central authorities have been promoting a policy of “the state advances, the private sector retreats” (國進民退), used administrative means and industrial monopolies to chip away at the profits of private firms, and took advantage of government financial advantages to seize arbitrage opportunities. These activities have eroded the private sector and increased China’s financial risks.
From official data, central enterprises saw record-high profits and revenue (double-digit growth) in 2018 despite the start of the trade war between the United States and China. Central enterprises saw a total operating revenue of 29.1 trillion yuan (up 10.1 percent YoY) and a total net profit of 1.2 trillion yuan (up 15.7 percent YoY). However, central enterprises saw sharply decreased profit and revenue growth in the first half of 2019. According to official figures, central enterprises gained 14.5 trillion yuan in operating revenue (up 5.9 percent YoY) and 703.77 billion yuan in net profits (up 8.6 percent YoY) in H1 2019.
Xiang Songzuo, the former chief economist at the Agricultural Bank of China who is now a professor at Renmin University, revealed the PRC’s problem with SOEs during an economic forum in December 2015. Xiang observed that “virtually all SOE main businesses are operating at a loss. How are they making money? Through side businesses, of which one is financing or financial arbitrage. This is a scary phenomenon, my friends.”
From publicly available information, the worse the Chinese economy becomes, the more central enterprises carry out financial arbitrage. In 2018, the balance of notes receivable was 11.96 trillion yuan, an increase of 13.3 times from 2001. In 2019, the commercial paper and receivable volume increased greatly after the People’s Bank of China’s carried out big stimulus measures. According to the PBoC’s financial statistics for the first half of 2019, notes financing increased by 1.18 trillion yuan during that period.
The significant declines in the performance of central enterprises in the first half of this year indicate that China’s real economy is in a grim state. With the U.S. preparing to impose tariffs on all Chinese goods, China’s financial risks, which are already very high, is set to climb higher still.
SinoInsight 2
Hong Kong saw its ninth straight week of mass demonstrations against a controversial extradition bill and other connected issues over the weekend.
Noteworthy incidents include:
Aug. 2
- The PRC foreign ministry refuted rumors that the PLA Garrison in Hong Kong would be deployed to enforce martial law (戒嚴) in the city on Aug. 4, as well as rumors that U.S. and U.K. passport holders will be “cleaned up.”
Aug. 3
- After an afternoon protest march in the Mong Kong district by about 26,000 people, some protesters gathered in Tsim Sha Tsui to retrieve the PRC flag flown in the area and throw it into Victoria Harbor. Beijing’s Hong Kong and Macau Affairs Office and the Hong Kong government both issued statements condemning the actions. Former Hong Kong leader Leung Chun-ying also offered a HK$1 million reward for anyone who could help the police identify those responsible for the incident, and added that the “rioters” who did the act “will be sorry.”
- About 4,000 supporters of the Hong Kong police force held an appreciation rally for the police in Victoria Park from 3:00 p.m. to 6:00 p.m. Hong Kong time. The supporters carried banners of support for the police, as well as small PRC and Hong Kong flags. According to photos posted on Hong Kong social media pages, the flags were discarded in public rubbish bins after the rally. Neither Beijing nor the Hong Kong government criticized the mistreatment of the PRC and Hong Kong flags by supporters of the Hong Kong police.
- In the evening, police and protesters clashed near police stations in five districts in Hong Kong. In one district, protesters lit small fires outside the police station. The police used tear gas and riot equipment to disperse the protesters. In another district, local residents called on the police to leave their neighborhood after the police arrested some protesters.
Aug. 4
- Protesters held peaceful rallies in the districts of Tseung Kwan O and Kennedy Town in Hong Kong. After the rallies ended, some protesters hurled bricks and other projectiles using slingshots at a police station in Tseung Kwan O while others briefly occupied and lit a fire on a thoroughfare in Causeway Bay. The police fired several canisters of tear gas to disperse the protesters.
- Over the weekend, some protesters began attacking the Hong Kong police and triad thugs who accosted them in the streets. Some of the protester attacks against the police appeared to be retaliation for police violence against protesters and journalists, as well as the seemingly indiscriminate arrests of passersby and even tourists.
- Protest organizers plan a city-wide strike in seven districts and involving over 500,000 people from more than 20 business sectors. The organizers urge all employees in Hong Kong to join the strike.
OUR TAKE
1. The increase in protester violence against the police and thugs is a sign of their growing anger and desperation in the face of brutal police action, an indifferent Hong Kong government, and a hardline PRC.
Hong Kong human rights lawyer Albert Ho told The Wall Street Journal, “Right now there are a lot of young people out there who feel they have nothing to lose, who feel they are looking at the end of rule of law, of a legal system, of a culture.” This sentiment can be observed from Hong Kong social media, online forums, and on-the-ground conversations.
2. Based on our long-term research into the Chinese Communist Party, we believe that it will evaluate the situation in Hong Kong based on the following four criteria before deciding to implement martial law:
- Hong Kong descends into major chaos;
- The Jiang faction uses the Hong Kong issue to attack the Xi camp in a major way;
- The Hong Kong protest movement begins to have a major impact in influencing the mainland;
- The Hong Kong protest movement severely challenges the CCP’s authority and “One Country, Two Systems” model.
The fulfillment of just one of the above criteria is enough for Beijing to justify implementing martial law in Hong Kong. In our assessment, however, none of the four criteria have been sufficiently met at present.
3. Beijing will not likely spread rumors about martial law and “cleaning up” foreigners in Hong Kong at this time to avoid creating more panic and increased capital flight from the city. Various factional elements, however, could have an incentive to spread rumors to undermine Beijing and shift the balance in the CCP factional struggle.
If Beijing is serious about enacting martial law, it would more likely float a trial balloon first. For example, a less prominent PRC scholar could make public comments about the possibility of imposing martial law in Hong Kong. This tactic would give Beijing just enough deniability while still allowing the warning to have an air of credibility.
The CCP will likely order martial law only as a last resort because to do so would be to sacrifice Hong Kong’s status as an international hub, harm the interests of CCP elites in the city, and ruin the PRC’s international reputation.
4. Xi Jinping faces substantial levels of political risk over the Hong Kong protests. The tricky Hong Kong situation, as well as tough domestic and international pressures, would have generated great friction and little consensus in the CCP. The difficulties of bringing the Party to a consensus could see Xi skip Beidaihe (if the summer retreat is still on) and delay convening a Fourth Plenum.
