SinoInsight 1
Recently, the CCP made several moves and released data that indicate a broader “opening up” of China’s economy. Around the same period, the CCP took actions that suggest a leftward shift.
‘Opening up’
Sept. 2
- The China Central Depository & Clearing Co., Ltd. released data showing that it held 2.46955 trillion yuan ($361.341 billion) worth of foreign institution-owned government bonds as of end of August 2020, an increase of 117.31 billion yuan from the same period last month and up 31.17 percent from the end of 2019. The CCDC data reflected 21 consecutive months (since December 2018) of foreign investors adding to their holdings of PRC government bonds. The CCDC also stated that there were 2,106 foreign institutional investors holding government bonds in August (up 40 from a month ago) and 74 out of the world’s top 100 asset managers have completed their filings to join the bond market.
Sept. 3
- The People’s Bank of China and three other government departments issued a draft regulation encouraging foreign institutional investors to invest in the Chinese bond market over the middle- to long-term. Foreign institutional investors who already have access to the China Interbank Bond Market or the Hong Kong-mainland Bond Connect program may directly invest in exchange-traded bond products. They will also gain access to onshore hedging tools like interest rate swaps and forwards.
- The China Banking and Insurance Regulatory Commission (CBIRC) authorized Tokyo-based Ueda Yagi Tanshi to establish the first wholly foreign-funded money brokerage in mainland China.
- The China Securities Regulatory Commission gave the greenlight for Citibank Group and Singapore’s DBS Group to establish foreign-controlled financial institutions in mainland China. Currently, there are a total of eight joint foreign-controlled securities companies in China, including DBS Securities and Daiwa Securities.
Sept. 7
- Wang Caixia, deputy director of the CBIRC’s international department, told mainland media outlets that China has 41 foreign-owned corporate banks and 115 foreign bank branches as of July 2020. He added that foreign insurance institutions have set up 65 foreign-funded legal entities in China and that the registered assets of those entities total 1.6 trillion yuan, up 51 percent from early April 2018.
- The PRC’s State Administration of Foreign Exchange (SAFE) released data showing that China’s foreign exchange reserves had grown for five consecutive months in August, rising $10.2 billion to $3.165 trillion.
Sept. 8
- Goldman Sachs wrote in a note that the inclusion of Chinese bonds in FTSE Russell’s World Government Bond Index could drive $140 billion into those bonds. Analysts say that foreign investment inflows could potentially further boost the yuan.
Moving left
Recently, the local government of Pingyao County, Shanxi Province, cited a “socialist transformation” regulation from 1958 to overturn a private property policy issued in 1986 to confiscate valuable private property from their owners, according to mainland media reports. Since December 2019, the Pingyao government has been actively confiscating private property that was returned to Chinese citizens over the past two decades. Most of the confiscated property included ancient luxury mansions valued at tens of millions of yuan; the ancient city of Pingyao was a financial center in the late Qing period and was designated a UNESCO World Heritage Site in 1997.
On Sept. 8, the once defunct leftist magazine “Midstream Collections” (中流叢刊) resumed publication online. The first issue featured articles like “Commemorating Wei Wei” (Wei Wei is a prominent leftist author and founder of the original “Midstream” publication) and “Back to Marx.”
The previous incarnation of “Midstream” was home to Marxist fundamentalists and neo-Maoists. The publication was shut in 2001 after carrying an open letter by its editor-in-chiefs Wei Wei and Lin Mohan, as well as former propaganda department head Deng Liqun, criticizing then-CCP boss Jiang Zemin’s so-called “July 1 Speech,” where he proposed to allow private business owners to join the Chinese Communist Party. The open letter censured Jiang for causing “major ideological splits in the Party” and committing “an extremely major political error.”
OUR TAKE
1. CCP propaganda outlets, international media, and overseas financial institutions have been talking up the “growing momentum” of China’s financial “opening-up.” The PRC’s recent approval of foreign-controlled financial institutions in China and rollout of policies to encourage foreign investors to put their money in the mainland add to the sense of greater financial liberalization in China.
Foreign investors, however, must be wary of the CCP’s continuous shifts to the left in recent years. With political risks on the rise in China’s financial markets, any foreign capitalists who invest are supplying the CCP with the proverbial rope with which it would use to hang them.
2. The CCP’s much-touted “comprehensive financial liberalization” and “economic recovery” from the coronavirus are a superficial numbers game and obscure key risk factors. As time wears on, the CCP will find it increasingly difficult to maintain the facade of “economic recovery”:
a) Numbers game
Manufacturing: China appears to be seeing expanding manufacturing activity in August, with the Purchasing Manager’s Index (PMI) coming in at 51.0 (down 0.1 from a month ago). However, three key PMI indices, new export orders, import orders, and orders in hand, were below the 50 percent mark, signaling contraction.
Cost of living: The factory price of industrial producers in August fell 2 percent year-on-year (YoY) and grew 0.3 percent month-on-month; the price of consumer goods, which are counted under factory price, grew 0.6 percent YoY. Meanwhile, consumer prices rose 2.4 percent; food prices, which make up consumer prices, rose 11.2 percent. Of the different food items, pork prices grew 52.6 percent YoY and an astonishing 93.4 percent from January to August. In other words, the cost of food and necessities are on the rise but consumer consumption has not recovered.
Transportation: China’s transportation and communications index fell 3.9 percent from a year ago while transportation fuel consumption dropped 13.8 percent over the same period. This shows that travel in China is still down and economic activity is flagging.
b) RMB asset appreciation illusion
Some Western financial indexes have included Chinese securities and government bonds into their indexes in recent years. This has resulted in not insignificant foreign investment inflows to China, or the equivalent of a “financial blood transfusion” for the CCP regime during a time when the Chinese economy was underperforming and under pressure from U.S. tariffs. Meanwhile, the RMB has been strengthening recently due to the large flow of funds into China, a phenomenon that appears to be driven by CCP propaganda of China as a coronavirus “financial safe haven,” interest rate differentials caused by Fed stimulus, and foreign investors looking for high-yield investments in the Chinese bond market. However, the PRC’s currency “strength” could easily evaporate overnight once current “favorable” circumstances shift against China’s favor.
Liu Yuhui, a professor at the Chinese Academy of Social Sciences’ Institute of Economics, offers a compelling alternative reason for why the RMB has been appreciating; namely, strict capital account controls and the currency’s non-convertibility. Liu notes that the RMB could in fact be depreciating in real terms as the gap between the nominal exchange rate and the black market exchange rate continues to widen.
3. As China continues to be plagued by domestic and external woes, including the growing isolation of the PRC by the international community, the idea of partially closing up China becomes increasingly appealing for the CCP. Observers should bear in mind that the CCP, with its belief in the Marxist dialectic, is well-accustomed to dealing in contradictions—the CCP has no problems with “opening up” China financially (a right-ward move) while tightening social controls across the board (a left-ward move). As long as the Party is in control, limited financial and even economic “liberalization” does not necessarily mean that China is “opening up.” The fact that Xi Jinping relied on adherence to Party orthodoxy to consolidate power means he will keep pulling China leftward to maintain his position.
The CCP’s recent seemingly insignificant leftward lunges—the revival of “Midstream” and home confiscations in Pingyao county—should be read by foreign investors as a sign of increasing political risks in China. Indeed, the Pingyao county property confiscations, which appear to be driven by government financial shortages, sets an ugly precedent other local governments can follow. Should the phenomenon become widespread, China will see accelerated capital flight as private entrepreneurs flee the country to avoid the “socialist transformation” of their property and assets. Foreign investors should not presume that they are safe—the CCP hit major companies like Qualcomm and Microsoft with hundreds of millions of dollars in fines under various pretexts during Xi’s first term in office, and could potentially “confiscate” foreign-controlled financial institutions any day if the regime’s financial situation is truly dire.
SinoInsight 2
On Sept. 9, Chad Wolf, acting head of the U.S. Department of Homeland Security, said Washington was blocking visas “for certain Chinese graduate students and researchers with ties to China’s military fusion strategy to prevent them from stealing and otherwise appropriating sensitive research.” The U.S. Department of State told Reuters that since President Donald Trump announced restrictions against certain Chinese students and researchers to the United States on May 29, “as of September 8, 2020, the Department has revoked more than 1,000 visas of PRC nationals who were found to be subject to Presidential Proclamation 10043 and therefore ineligible for a visa.”
On Sept. 10, PRC foreign ministry spokesman Zhao Lijian described the cancellation of over 1,000 visas as “outright political persecution and racial discrimination” during a regular press conference. Zhao did not comment on the military background of the students and researchers whose visas were revoked or their potential involvement in espionage.
Meanwhile, a Sept. 10 Bloomberg report noted that ByteDance will likely miss its deadline to sell its TikTok U.S. operations after negotiations were complicated by new PRC regulations prohibiting the export of certain artificial intelligence technologies being used by TikTok. Last month, President Trump signed executive orders that will result in TikTok and WeChat being banned on Sept. 20.
Trump’s actions against Chinese tech firms have been met with subtle accusations of racial discrimination. On July 30, PRC foreign ministry spokesman Wang Wenbin asserted that U.S. “animosity” towards Chinese companies “has nothing to do with national security or democracy, freedoms, fairness or reciprocity,” but is “because they are Chinese companies.” Days after Wang made his remarks, ByteDance founder Zhang Yiming wrote about “the challenge of anti-China sentiment” in an internal company memo regarding the sale of TikTok.
OUR TAKE
1. The U.S. has long telegraphed its move to revoke visas for very specific groups of PRC nationals, i.e. military-linked students and researchers who could be stealing or appropriating valuable research. The more than 1,000 visas cancelled over the past three months also represents a tiny fraction of the over 369,000 Chinese students studying in America. In other words, there is no evidence to support PRC foreign ministry spokesman Zhao Lijian’s allegation of “political persecution and racial discrimination” against Chinese students on the part of the United States.
2. We previously noted that the CCP will “double down on the ‘racism’ card that it has thus far remained content to play subtly” when it feels seriously endangered by U.S. ideological confrontation. The CCP’s recent efforts to emphasize its “socialism with Chinese characteristics” and rebut the Trump administration’s strategy of distinguishing between the CCP and the Chinese people suggest that it feels sufficiently threatened in the ideological realm. Zhao Lijian’s latest allegation is another sign of the CCP reaching for the “racism” card to deflect increasing U.S. scrutiny of its pernicious overseas operations and even fan the flames of racial tensions in America.
The CCP could be tempted to ramp up its “racism” and “victimhood” strategy if President Trump goes ahead with banning WeChat and TikTok on Sept. 20 and in the lead up to the 2020 U.S. presidential election in November. Open accusations of Trump administration “racism” by the CCP or covert efforts to stoke racial tensions in America could have explosive potential given the current U.S. domestic situation (an organized 50-day “siege” of the White House is set to commence on Sept. 17). To counter the CCP’s “racism” card effectively, the Trump administration needs to bolster the cultural component of its strategic approach to the PRC.
