SinoInsight 1
On May 7, the People’s Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) announced a new set of regulations that give foreign institutions unlimited access to Chinese stocks and bonds.
Key items in the regulations include:
- Foreign investors are no longer required to apply for any quotas under the dollar-dominated qualified foreign institutional investor (QFII) scheme and the yuan-dominated qualified foreign institutional investor (RQFII) scheme.
- Qualified investors can freely choose which currency and when they make remittances.
- Procedures for outbound remittances and repatriation of funds were simplified.
- The limit on the number of qualified investor custodians was removed.
OUR TAKE
The PBoC and SAFE’s joint statement on the new regulations noted that the changes are aimed at “further opening up China’s financial market.”
In our China 2020 outlook, we predicted that the PRC will “significantly open up China’s financial markets” to arrest China’s rapid economic decline. The coronavirus pandemic has compounded China’s economic problems, with exports declining across the board, companies incentivized to pull supply chains out of China, unemployment rising sharply, and businesses being forced to shutter. Against this backdrop, it is unsurprising that the PRC has moved quickly to liberalize its financial markets.
Some other points to consider:
1. The pandemic has convinced countries like the U.S. and Japan to pull companies and supply chains out of mainland China back home. Many countries have also realized the downside of relying on China as the “world’s factory.” As a result, a form of “de-globalization” is now underway.
The CCP’s latest move to open up its financial markets is almost certainly aimed at reversing the outflow of capital from China to elsewhere. Whether or not the CCP succeeds is another matter, especially if countries like the U.S. are invoking national security as a reason to move funds and capital out of China.
2. The Luckin’ Coffee scandal will likely make it much harder for Chinese companies to make IPOs in U.S. financial markets. Chinese companies, however, have been afforded another channel to access foreign funds and investment with the passage of the new PRC financial regulations.
3. The pandemic has affected Chinese exports and the PRC’s ability to grow its foreign exchange reserves. The PRC’s foreign exchange reserves are also coming under pressure from maturing external debt, which exceeds China’s dollar assets.
4. The PRC would have to open its financial markets further to fulfill the requirements of the Sino-U.S. “phase one” trade deal. However, only $114.6 billion of the $300 billion QFII quota had been used by foreign investors as of the end of April 2020. It is likely that PRC’s recent regulations change will end up being more style than substance.
5. From the CCP’s perspective, opening up China to foreign investments, and particularly American investments, is a sound national security strategy. For instance, greater financial integration between the U.S. and China would make it harder for the U.S. to maintain long-term “strategic competition” with the CCP regime and the regime would end up being more secure. The Trump administration, however, is likely aware and wary of closer Sino-U.S. financial integration; several U.S. news outlets reported this week that the Trump administration is taking steps to block the investment of U.S. federal retirement funds in a fund that contains China-based stocks.
SinoInsight 2
Over the past week, the United States ratcheted up its strategic competition with the PRC by several notches.
Notable developments include:
May 4
- U.S. Deputy National Security Advisor Matt Pottinger delivered a speech in Mandarin during a virtual symposium held by the University of Virginia’s Miller Center. Referencing the May Fourth Movement, Pottinger said, “The cliché that Chinese people can’t be trusted with democracy was, as both P.C. Chang and Hu Shih knew, the most unpatriotic idea of all. Taiwan today is a living repudiation of that threadbare mistruth.” In concluding his speech, Pottinger said, “Wasn’t the goal [of the May Fourth Movement] to achieve citizen-centric government in China, and not replace one regime-centric model with another one? The world will wait for the Chinese people to furnish the answers.”
May 6
- When asked by a reporter if he is satisfied with how China was fulfilling the Sino-U.S. “phase one” trade deal, U.S. President Donald Trump said, “I’ll be able to report in about a week or two, as to not only with the farmers, but with many other industries also.” He added, “They [China] have a deal. Hopefully, they’re going to keep the deal. We’ll see. They may, they may not. We’re going to find out. We’ll know soon.”
May 7
- When asked about the trade deal and where Sino-U.S. relations are headed during an interview with Steve Gruber of The Steve Gruber Show, U.S. Secretary of State Mike Pompeo replied, “In the end, the Chinese Communist Party will have to decide: Do they really want to participate as a member of civilized society, the nations that work towards better outcomes for people all across the world, or are they going to do what we’ve seen? We all know the history of the Soviet Union. Do they want to behave in a way that’s more consistent with what authoritarian regimes have done on this planet for an awfully long time? If they do, I know that President Trump will do the right thing to make sure we protect the American people.”
- Secretary Pompeo tweeted: “China could have prevented the deaths of thousands of people worldwide and spared the world a descent into global economic malaise. They had a choice. China is still refusing to share the information needed to keep people safe. This is not about politics, it’s about saving lives.”
- Republican lawmakers in the U.S. House of Representatives announced the formation of a China Task Force to “reinforce Congressional efforts to counter current and emerging cross-jurisdictional threats” stemming from the PRC. In a statement House Minority Leader Kevin McCarthy said that the Task Force will look at a “broad range of China-related issues” including PRC influence operations targeting the U.S., the PRC economic threat to the U.S. and its allies, PRC efforts to gain technological advantage, and the PRC’s role in the origin and spread of COVID-19.
May 8
- The U.S. Department of Homeland Security announced new rules that will limit visas for journalists from mainland China employed by non-U.S. media to a 90-day period. Journalists can apply for extensions, each of which will also be capped at 90 days. The rule will apply to mainland Chinese journalists who are already in the United States. The DHS explained that the new rule, which took effect on May 11, is a response to the PRC’s “suppression of independent journalism.”
May 10
- According to a report by The Wall Street Journal, Trump administration officials are in talks with Intel Corp. and Taiwan Semiconductor Manufacturing Co. to build new chip factories in the United States.
Meanwhile, the CCP hints that it does not actually want to escalate tensions while continuing to send “contradictory” messaging on its military ambitions:
April 30
- Yan Xuetong, a hawkish PRC strategist and the dean of the Institute of International Relations at Tsinghua University, said in an interview with Caixin Magazine that there will not be “accidental” minor or “near miss” military incidents (擦槍走火) in the Taiwan Strait or South China Sea because “the U.S., mainland China, and Taiwan are controlling military operations very strictly” in those areas. “So firstly, the probability that minor or ‘near miss’ military incidents will occur is very slim. Secondly, even if incidents were to break out, the relevant parties will be able to control things in time and prevent those incidents from developing into a full-blown conflict,” Yan said.
May 4
- In an interview with the South China Morning Post, hawkish former People’s Liberation Army Air Force major general Qiao Liang said, “China’s ultimate goal is not the reunification of Taiwan, but to achieve the dream of national rejuvenation–so that all 1.4 billion Chinese can have a good life. Could it be achieved by taking Taiwan back? Of course not. So we shouldn’t make this the top priority. If Beijing wants to take Taiwan back by force, it will need to mobilize all its resources and power to do this. You shouldn’t put all your eggs in one basket, it’s too costly,” he said. Qiao made similar remarks recently to other publications.
- According to a Reuters report, the China Institutes of Contemporary International Relations, a PRC think-tank affiliated with the Ministry of State Security, had submitted a report to the top CCP leaders in April that concluded that “global anti-China sentiment is at its highest since the 1989 Tiananmen Square crackdown.”
May 8
- Hu Xijin, the editor-in-chief of Global Times, a nationalistic Party media outlet, wrote in a Weibo post that the PRC should expand its nuclear stockpile to 1,000 warheads soon. Hu added that the stockpile should include “at least 100 DF-41 strategic missiles,” a class of intercontinental missiles capable of striking continental United States. “We love peace and promise not to use nuclear weapons first, but we need a bigger nuclear arsenal to suppress U.S. strategic ambition and impulse against China,” He wrote. “Don’t think that nuclear warheads are useless during peacetime. We are silently using them to shape the attitudes of American elites towards us.”
OUR TAKE
1. The CCP, several major Western media outlets, and many international commentators have recently argued that the Trump administration and the Republican Party are looking to “blame China” chiefly due to political reasons (win re-election, deflect attention from the Trump administration’s handling of the coronavirus epidemic, etc.). We believe that this argument does not hold water because the Trump administration and Republicans, in implementing the 2017 National Security Strategy, would have gone ahead with their recent actions against the PRC regardless of the coronavirus outbreak and U.S. domestic politics.
The coronavirus and U.S. domestic politics, however, do serve as catalysts in “pushing” the Trump administration and Republicans to move faster and more boldly in countering the CCP. U.S. Deputy National Security Advisor Matt Pottinger’s May 4 speech and U.S. Secretary of State Mike Pompeo’s remarks on May 7 (see above) suggest that the Trump administration is looking to take U.S. strategic competition with the PRC to the next level. We expect to see greater U.S.-China decoupling and “containment” of the CCP regime in the coming weeks and months. Depending on the situation in mainland China, we would not be surprised to see the Trump administration openly advocating and facilitating regime change as early as this year.
2. The “leaked” China Institutes of Contemporary International Relations report, as well as efforts to downplay the CCP’s regional military ambitions by hawkish PRC strategists like Qiao Liang and Yan Xuetong, suggest that the CCP is getting concerned about the recent ramping up of U.S. pressure towards the PRC and wants to lower Sino-U.S. tensions.
Ideology, however, is forcing the CCP to walk a tightrope. On the one hand, the CCP does not want the U.S. to view its regime as the new Soviet Union and officially take the Sino-U.S. relationship into “cold war” territory before it is prepared. On the other hand, Party culture and nationalism compel the CCP to persist with its belligerent rhetoric (see Hu Xijin’s remarks about expanding the PRC’s nuclear stockpile) and so-called “wolf warrior” diplomacy. The CCP’s inability to ignore ideological matters will likely lead to more misunderstandings with the U.S. and a further escalation of Sino-U.S. tensions. (It is possible that the CCP will scale back its rhetoric somewhat when it is pushed into a corner; see our analysis of Sino-U.S. trade war rhetoric in 2018 here and here.)
The CCP’s ideological “rigidity” will also force it to initiate a Fourth Taiwan Strait Crisis in one form or another. Concurrently, the CCP could make the seemingly “contradictory” move of “winning over” Taiwan by announcing benefits for Taiwanese akin to the so-called “31 measures” and “26 measures” at the upcoming Two Sessions.
