SinoInsight 1
On May 25, the PRC Ministry of Finance announced that profits at China’s state-owned enterprises (SOEs) fell 63 percent to 412.01 billion yuan in the first four months of 2020 as compared to the same period from a year ago. Profits of central SOEs decreased 53.1 percent from a year ago to 362.8 billion yuan while profits of local SOEs fell 85.5 percent from 2019 to 49.21 billion yuan. A press release on the finance ministry’s website disclosed the net profits of SOEs after taxes for the first time; SOEs net profit after taxes fell 74.3 percent from January to April 2020 as compared to a year ago to 210.56 billion yuan.
On May 26, mainland media outlets reported People’s Bank of China data as showing that Chinese banks issued 12.14 trillion yuan of structured deposits (a hybrid financial product that combines traditional deposits with higher-return investment products), a record high. Issuance of structured deposits had risen for four consecutive months, with April seeing the largest increase (total structured deposits reaching 471.9 billion yuan). Meanwhile, the scale of structured deposits (1.72 trillion yuan) issued by small- and medium-sized banks was more than double that of big banks (0.82 trillion yuan) when comparing the difference between the figure in late December 2019 and that of late April 2020.
On May 28, mainland media reported that so-called “national civilized city” (全国文明城市; or a grading system to designate “model cities”) evaluation for 2020 will not include “road-side businesses, markets, and mobile hawkers” in its grading benchmarks.
OUR TAKE
1. The above information and data are signs and symptoms of problems plaguing China’s worsening economy, including so-called “idling funds,” a lack of liquidity in small- and medium-sized banks, and a further accumulation of financial risks. PRC premier Li Keqiang had been indirectly alluding to these problems in his 2020 government work report delivered at the Two Sessions.
2. Li Keqiang emphasized the “six guarantees” in his work report, particularly the PRC government’s “guarantee” of employment and people’s livelihood. By turning a “blind eye” to “road-side businesses, markets, and mobile hawkers” in the evaluation of “national civilized cities,” the CCP is looking to bring back the so-called “street-stall economy” to help the people at the bottom of society to make a living.
The CCP had previously sought to outlaw the “street-stall economy” in an effort to clean up cities and boost government tax revenue. As part of its effort to stamp out the “street-stall economy,” the CCP relied on thuggish local law enforcement officers (chengguan) to drive away street vendors in the name of “urban management.”
Given the CCP’s characteristics and operations, however, it is unlikely that its plan to give the lower rungs of society some breathing space to earn an income will be successful. Local governments, pressed to boost their revenue and accrue political capital, could end up extracting “protection fees” from street vendors or deny them the chance to operate. Meanwhile, street vendors will likely also create competition for shop owners, making things harder for both parties. Ultimately, those in the lower rungs of society will still find it difficult to make ends meet.
3. Li Keqiang’s concern with “idling funds” is reflected in the scale of structured deposits issued by Chinese banks and declining SOE profits. As China’s economy worsens and growth retreats, banks become even more reluctant to make loans. Meanwhile, the rapid increase in the issuance of structured deposits by small- and medium-sized banks indicate that those banks are short of funds and are being forced to offer attractive interest rates to attract deposits. However, the issuance of more structured deposits merely worsens the problem of “idling funds” and the pernicious cycle repeats.
4. We are very pessimistic about the state of China’s economy in the second half of 2020, and particularly so if there is an outbreak of a second wave of deadly infectious diseases. A severely impacted Chinese economy will in turn seriously threaten the CCP regime.
SinoInsight 2
May 27
- U.S. Secretary of State Mike Pompeo issued a statement condemning the PRC’s “disastrous decision” to “unilaterally and arbitrarily impose national security legislation on Hong Kong” and announced that he had certified to Congress that Hong Kong was no longer autonomous from China.
- David Stilwell, assistant Secretary of State for East Asia, told reporters that the U.S. is considering options “across the spectrum” to use against the PRC for seeking to impose a national security law on Hong Kong. Stilwell said that the options include visa and economic sanctions. Anonymous U.S. officials and people familiar with discussions told Reuters that the Trump administration is considering “targeted sanctions, new tariffs and further restrictions on Chinese companies.”
- A judge in the B.C. Supreme Court in Vancouver ruled that extradition proceedings against Huawei CFO Meng Wanzhou should proceed. Just a day prior, some overseas Chinese media outlets were reporting that Meng’s case was expected to be overturned.
May 28
- The PRC National People’s Congress voted to approve a resolution to impose a national security law on Hong Kong.
- The governments of U.S., U.K., Australia, and Canada issued a joint statement on Hong Kong where they noted that “China’s decision to impose a new national security law on Hong Kong lies in direct conflict with its international obligations under the principles of the legally-binding, UN-registered Sino-British Joint Declaration.” The statement also noted that “the world’s focus on a global pandemic requires enhanced trust in governments and international cooperation. Beijing’s unprecedented move risks having the opposite effect.”
- According to news reports, the Trump administration is planning to cancel the visas of Chinese graduate students and researchers in the U.S. who have direct ties with universities affiliated to the People’s Liberation Army.
OUR TAKE
1. The various developments above indicate that the Sino-U.S. “new cold war” is well and truly underway. The announcement of the NPC Hong Kong national security law and the coronavirus pandemic have deepened the U.S. and the world’s distrust of the CCP regime, and accelerated the pace at which the “new cold war” between the U.S. and the PRC is unfolding.
We said that China and the U.S. are in a “new cold war” in January 2019 and noted in July 2019 that the “current Sino-U.S. conflict is not just a trade war or a tech war, but a critical battle of ideology, value systems, and morality.” We also outlined the trajectory of Sino-U.S. relations in 2020 in our 2020 outlook and special report.
2. Huawei’s Meng Wanzhou can and will almost certainly appeal against the latest court ruling against her and the extradition proceedings. Appeals, however, take time, and the trajectory of Sino-U.S. relations indicates that Meng and Huawei will more likely than not lose their appeal case.
Meng’s case is also not Huawei’s biggest problem. The U.S. ban on Huawei products and ban on companies selling chips to Huawei, if strictly enforced, will likely cripple the company. Huawei will also find it difficult to sell its products going forward as countries start to account for national security in making tech purchases. At least one Japanese news outlet recently reported that the Japanese government is planning to avoid using tech equipment manufactured by Huawei, ZTE, and other Chinese companies out of national security considerations. Meanwhile, U.K. prime minister Boris Johnson is under pressure from his party over allowing Huawei to develop part of Britain’s 5G network.
In accounting for the current pace of technological development, Huawei stands to lose its technological and market advantage within three to five years if it is cut off from U.S. tech and if it cannot develop critical technologies on its own. Huawei’s loss will be a blow for the CCP in its struggle for survival and push for world domination.
