SinoInsight 1
On Dec. 8, Huang Hong, vice chairman and Party Committee member of the China Banking and Insurance Regulatory Committee, spoke at the 2020 China Trust Industry Annual Conference.
Huang’s main points include:
- Huang criticized China’s trust industry for moving from direct financing to indirect financing and turning off-balance sheet business into on-balance sheet business. As a result, trust companies derive revenue mainly from interest differentials rather than management fees.
- Huang slammed the trust industry for their “obsession with speculation,” exploiting regulatory loopholes, and facilitating regulatory arbitrage by financial institutions and financial access in “restricted areas” (property sector, etc.).
- Huang instructed the trust industry to “stop playing games with regulators,” not “modify or circumvent regulatory requirements in conducting trust business,” and not “disrupt market order.”
- Huang said that the trust industry must “earn money the honest way.”
- Huang threatened to cancel financial licenses of trust companies who refuse to comply with regulation and cease speculating.
OUR TAKE
1. Huang Hong’s speech affirms our analysis of China’s serious systemic financial risks.
Huang’s call out of the trust industry’s “obsession with speculation” and regulatory arbitrage suggest that the PRC’s stimulus measures are not performing as intended and are instead expanding financial bubbles. To mitigate financial risks, the CCP is forced to regulate financial institutions more stringently, a move that may trigger a debt crisis in China and bankrupt numerous companies.
Communist China’s economic rescue policies are bound for failure due to CCP culture and characteristics. Specific to financial regulation, Party officials will prioritize personal achievements over regime security, and issue excessive clamp downs to stifle companies and the financial sector. Meanwhile, businesses, especially those categorized as “too big to fail,” will leverage the central government’s fear of social instability to gain regulatory reprieve. China’s systemic risks will exacerbate rather than alleviate as both sides deflect individual responsibility and play the blame game to scapegoat the other party for China’s financial woes.
Alibaba’s Jack Ma summarized the current government-business impasse in his October speech (which caused Ant Group’s suspension): “Today, there is too much red tape and too few policies [supporting businesses]. My greatest fear is that regulators create a situation where they have no risk, but the whole economy is at risk of not developing.”
2. China’s financial risks have grown so large that the CCP is willing to temporarily sacrifice economic growth so as not to prop up the financial bubble. In recent weeks, many CCP officials have publicly called for strict financial regulation and risk control, with the most high-profile move being the last-minute suspension of Ant Group’s IPO.
PRC regulatory authorities are also stepping up efforts to shrink the scale of China’s trust industry. According to data from Wind, the net financing scale of trust companies plummeted (minus 138.7 billion yuan) in November 2020, reaching its lowest level since July 2018.
Meanwhile, total social financing in November increased 140.6 billion yuan from a year ago to 2.1 trillion yuan; in October, total social financing stood at 1.4 trillion yuan. However, the stock of social financing in November grew 13.6 percent year-on-year, down 0.1 percent from October, the first decline of the year.
The CCP’s tightening financial regulations and recent bond defaults of local state-owned enterprises have clearly impacted China’s economy. China’s consumer price index (negative 0.5 percent YoY) and producer price index (negative 1.5 YoY) both shrunk in November, a rare “double deflation.” China’s CPI in November fell to October 2009 levels.
3. China’s shadow banks will suffer from the CCP’s tightening financial regulations. This in turn pressurizes financial institutions who benefit from regulatory arbitrage, resulting in more debt defaults and difficulties in credit bond issuance. A vicious cycle will trigger, heightening risks in the financial system.
For example, China’s trust industry faces stricter regulation during a period when more and more trust products are reaching maturity (122.3 billion yuan in October, 165.9 billion yuan in November, and 234.6 billion in December). As the net financing scale of trust companies shrink significantly by the year’s end, other financial institutions will encounter liquidity crunches and default.
4. The CCP’s propaganda and public statements reveal that Beijing is operating on the presumption of a Biden presidency in January 2021, that Sino-U.S. relations will again favor the CCP, and that pandemic-stricken America and Europe will recover slowly and be dependent on Chinese products.
A review of recently released CCP economy data highlights the world’s dependence on Chinese exports. On Dec. 7, the PRC’s General Administration of Customs (GAC) issued figures showing that the total value of China’s imports and exports for the January-November period increased 0.6 percent from a year ago to $4.17338 trillion, with six months of consecutive growth (May to November). China saw a trade surplus of $459.92 billion, an increase of 21.8 percent over the same period a year ago.
The GAC noted that the total value of imports and exports in November grew 13.6 percent to $460.72 billion, the highest single-month growth since 1979. Exports grew 21.1 percent to $268.07 billion (a record high since February 2018), while imports grew 4.5 percent to $192.65 billion. China’s trade surplus grew 102.9 percent to $75.42 billion.
Also according to the GAC, China’s exports to the U.S. grew 5.7 percent to $405.826 in the first 11 months of 2020. Imports to the U.S. grew 6.1 percent to $118.462 billion, while China’s trade surplus with the U.S. was $287.364, or slightly lesser than the figure in 2019 ($295.8 billion). The GAC’s figures suggest U.S. demand for Chinese goods has increased significantly, particularly towards the year’s end, and is not being met by other emerging markets or domestic manufacturing.
In other words, the CCP likely believes it can “safely” carry out financial deleveraging and derisking now, in view of U.S. dependency on Chinese exports and a supposedly return to “predictability” and “stability” in Sino-U.S. relations with a Biden administration. This leaves the CCP extremely vulnerable to Black Swans should President Trump overturn the election result in January 2021.
SinoInsight 2
Dec. 7
1. The U.S. State Department sanctioned 14 vice chairpersons of the National People’s Congress Standing Committee for undermining Hong Kong’s autonomy via the Hong Kong National Security Law. The sanctioned officials and their family are barred from traveling to the U.S. while their assets in America, or being held by Americans, are blocked.
The 14 officials are: Wang Chen, Cao Jianming, Zhang Chunxian, Shen Yueyue, Ji Bingxuan, Arken Imirbaki, Wan Exiang, Chen Zhu, Wang Dongming, Padma Choling, Ding Zhongli, Hao Mingjin, Cai Dafeng, and Wu Weihua.
Wang Chen, the first-ranked member of the NPSCS, is a Politburo member. Cao Jianming was the Procurator-General of the Supreme People’s Procuratorate.
2. President Trump tweeted a segment by Fox News commentator Tucker Carlson on PRC scholar Di Dongsheng’s recent explosive remarks affirming the CCP’s decades-long influence over America’s financial and political elites.
Dec. 8
1. Speaking at Milken Institute Asia Summit, U.S. Commerce Secretary Wilbur Ross said, “China continues to be both the largest potential market and the principal military and economic threat in the region.” He added that the PRC bought only 70 percent of the agreed amount of agriculture products as part of the Sino-U.S. “phase one” trade deal and “lesser percentages” of other items.
2. Speaking at The Wall Street Journal’s CEO Council summit, Secretary of State Mike Pompeo said that Hong Kong is “no longer anything but another Chinese Communist-run city” and “the world, the business community should treat it as such, and the United States government is very close to being in a place where it’s doing precisely that.”
3. In a fact sheet titled, “U.S. Investors Are Funding Malign PRC Companies on Major Indices,” State Department Under Secretary for Economic Growth, Energy, and the Environment Keith Krach wrote that “many major stock and bond indices developed by index providers like MSCI and FTSE” include PRC companies listed on the Department of Commerce’s Entity List and/or the Department of Defense’s List of “Communist Chinese military companies” (CCMCs). “The money flowing into these index funds–often passively, from U.S. retail investors–supports Chinese companies involved in both civilian and military production,” as well as the CCP human rights abuses, Krach added.
4. In a briefing on the rollout of U.S. designations against religious freedom violators, Ambassador Sam Brownback said, “China is at war with faith, but it’s a war they will not win. And they’ve continued to do that towards Buddhists, Muslims, Christians, Falun Gong, really the full range of religious people.” He added, “China needs to act like a normal nation and follow the rules, including religious freedom. The world community has got to put abundant pressure on China to change, or China will change the world.”
Dec. 9
Secretary Pompeo delivered a key speech about CCP influence operations on American college campuses at the Georgia Institute of Technology. Speech highlights include:
- “Americans must know how the Chinese Communist Party is poisoning the well of our higher education institutions for its own ends.”
- “For a long time, Republicans, Democrats, leaders all across academia, institutions, commercial space thought that by trading and engaging with China that the Chinese Communist Party would reform itself, it would loosen up, it would embrace economic and political freedom, and it would present less risk to freedom around the world … Instead, the Chinese communists used the wealth that was created by this to tighten their grip on power, their grip on power over the Chinese people, and to build a high-tech repressive state like the world has never seen.”
- “General Secretary Xi Jinping has made clear his intentions. He says he wants total control at home, and to make China the number-one power abroad. He’s building up the People’s Liberation Army. He’s manipulating international organizations for Beijing’s benefit. And he’s engaging–as we have seen in TV only just these last two days, he’s engaging in a vast influence campaign all across the world.”
- “Much of the high-end industrial base inside of China is based on stolen technology, or technology purchased from other nations.”
- “When I say ‘China,’ I’m talking about the Chinese Communist Party. I love and value, as we all do, our Chinese American community, and the Chinese people that live here in the United States and those that live in China as well. We want good things for them.”
- The CCP “know(s) that left-leaning college campuses are rife with anti-Americanism, and present easy targets for their anti-American messaging.”
- “Under President Trump, our State Department has made very clear these Confucius Institutes are literally up to no good.”
- “Yielding to the objection of hurt feelings plays right into the Chinese Communist Party’s hands … It’s what the party says constantly in response to legitimate criticism around the world … how would the party know how the Chinese people feel anyway, as no one ever gets to vote?”
- “We can’t let the CCP weaponize political correctness against American liberties. We have to protect and preserve them. Fraudulent cries of racism or Sinophobia should never drown out a candid exposure of the activities of the Chinese Communist Party.”
- “We see too often on American campuses that there is silence and censorship. It’s being driven by the Chinese Communist Party … So many of our colleges are bought by Beijing.”
- The CCP is “the central threat of our time.”
Dec. 10
1. On International Human Rights Day, the State Department designated 17 officials of foreign governments and their immediate family members for their involvement in gross human rights violations. Secretary Pompeo’s announcement singled out Chief Huang Yuanxiong of the Xiamen Public Security Bureau Wucun Police Station for “particularly severe violations of religious freedom of Falun Gong practitioners.” Pompeo added, “the world cannot stand idly by as the PRC government perpetrates horrific and systematic abuses against people in China, including violating the internationally recognized right to freedom of thought, conscience, and religion or belief.”
2. The U.S. Embassy in Beijing posted an announcement about the State Department’s International Human Rights Day virtual program on its social media pages, including Weibo. The picture attached in the post featured Hong Kong protesters and the words, “Boldly Speak Out and Step Up” (大膽說，
出來) in Chinese characters.
OUR TAKE
1. The Trump administration will continue to pressure the CCP regardless of how election disputes play out. There is genuine bipartisan consensus in America on the “China challenge,” and President Trump is not merely looking to “lock in” Joe Biden to his China policies, as some commentators suggest. We expect to see Trump or administration officials announce dramatic moves targeting the CCP before the year is out and in the weeks leading up to Inauguration Day. Treasury Secretary Steve Mnuchin is due to identify non-U.S. financial institutions who have done business with sanctioned Hong Kong officials by Dec. 13.
2. Secretary Pompeo deliberately reemphasizes the distinction between the CCP and the Chinese people in his speech at Georgia Tech. Additionally, as during his earlier speech at the Wisconsin State Capitol, Pompeo cautioned the CCP against playing the “racism” card to counter America’s exposure of its malign activities and behavior.
We warned in August that the CCP will eventually double down on its “racism” card when it is “seriously endangered by U.S. ideological confrontation.” The Trump administration can counter the CCP’s “racism” charges effectively by boosting the cultural component of its strategic approach to the PRC.
3. We previously analyzed that in addressing the CCP’s persecution of Falun Gong, a taboo topic, Trump administration is essentially hovering over the “nuclear” button in dealing with Communist China.
If the administration’s handling of Hong Kong sanctions is any indication, the Trump administration will sanction Falun Gong persecutors up the ranks to the sub-national level. This means that Guo Shengkun, the sub-national level official heading the Central Political and Legal Affairs Commission, is an eventual target of U.S. sanctions. Guo is also a Jiang Zemin faction member; Jiang is the Party boss who initiated the Falun Gong persecution campaign, while Jiang faction members and supporters comprise the bulk of CCP officials who perpetrate the persecution.
4. As previously analyzed, Di Dongsheng’s brazen remarks about the CCP influence over America’s elites reflect the CCP’s belief that President Donald Trump has “no chance to serve a second term, coupled with confidence that Joe Biden will revert America to the ‘engagement’ policy that massively benefited the PRC’s rise in the last four decades.” Both Trump and Pompeo are alerted to Di’s remarks, which are the closest the CCP has come to making a public admission about its malign influence operations.
We believe the 2020 U.S. presidential election and the “China challenge” could intersect at some point before Inauguration Day, with consequential results. Businesses, investors, and governments are advised to hold off on implementing plans for China based on a Biden administration until the election outcome is formally finalized.
