SinoInsight 1
On Nov. 19, the United States Senate unanimously passed the 2019 Hong Kong Human Rights and Democracy Act (henceforth referred to as the Hong Kong Act). On Nov. 20, the U.S. House of Representatives passed the Senate version with just one “nay” vote, sending it to the White House to be signed into law by President Donald Trump. Speaker Nancy Pelosi said, “If America does not speak out for human rights in China because of commercial interests, we lose all moral authority to speak out on human rights elsewhere.”
According to various news reports, Trump is expected to sign the legislation. The bill will likely be enacted if Trump vetos or chooses not to sign it because it has the support of a veto-proof majority in Congress.
On Nov. 20, China condemned the passage of the Hong Kong Act and threatened “strong countermeasures.”
If the Hong Kong Act becomes law, then Hong Kong officials, Hong Kong police officers, and Chinese officials will be at risk of being hit by U.S. sanctions.
OUR TAKE
1. President Trump has few reasons (or excuses) to not sign the Hong Kong Act into law; if anything, signing the bill into law boosts his “tough on China” image and allows him to score political points ahead of the 2020 U.S. presidential election. To avoid antagonizing China and jeopardizing the prospect of reaching a “phase one” Sino-U.S. trade deal, Trump could conceivably refrain from using the Hong Kong Act too readily after it is passed.
If current trends hold, the people of Hong Kong and human rights supporters should not place too much hope in seeing a change in the Hong Kong situation with the passage of the Hong Kong Act.
2. We do not expect current trends to hold given the various pressures facing the Trump administration and the Xi leadership, as well as classic CCP behavior in dealing with unrest.
The CCP has consistently acted in accordance with the traits of “deception, perniciousness, struggle.” Thus, when presented with a “good” and “bad” option, the CCP always chooses the “bad” option. In the case of Hong Kong, the CCP could have refrained from sending favorable signals to the Hong Kong government on passing the controversial extradition bill after public sentiment against the bill was rising. Later, when mass rallies and marches were organized, the CCP could have quickly given in to the protesters’ five demands to defuse the situation. Instead, the CCP picked the “bad” options of doubling down on the extradition bill and supporting the Hong Kong government in suppressing the protests using increasingly hardline measures. The recent passage of the Hong Kong Act in Congress is a case of the CCP reaping what it had sown. And given that the CCP will likely continue picking the “bad” option in dealing with the Hong Kong Act, the CCP will only make its already bad situation even worse.
Meanwhile, Xi Jinping will almost certainly have to keep utilizing hardline measures to deal with Hong Kong for two main reasons. First, Xi has to adhere to Party orthodoxy (CCP “political correctness”) in handling Hong Kong or risk undermining his own “quan wei”; Xi has tied his “quan wei” with the Party’s primacy in the regime in consolidating power over the past seven years. Second, Xi cannot afford to look weak on Hong Kong lest his political opponents seize an opening to undermine his leadership and shift the momentum of the “you die, I live” factional struggle in the CCP.
Trump faces similar pressures as Xi. Opponents of his presidency will seize opportunities to attack Trump for showing weakness on China and letting the human rights crisis in Hong Kong drag on indefinitely or degenerate further due to his inaction. While Trump has demonstrated that he will ignore external criticism and pursue his own agenda, he cannot afford to completely disregard his opponents on China or Hong Kong because being “tough on China” is one of his main agendas.
We believe that Trump and Xi are currently still interested in signing a “phase one” trade deal to alleviate some of their domestic woes and avoid a formal Sino-U.S. “cold war.” Given the various pressures they face and classic CCP behavior, however, Xi and Trump could soon find it in their greater interest to abandon trade negotiations and focus on winning the Sino-U.S. “Battle of Waterloo.” And when both parties are looking to win, the Hong Kong Act could transform overnight from a “virtue signaling” tool into a formidable weapon for the U.S. to wield against the CCP.
3. We believe that the recent escalation of police violence in Hong Kong and the growing desperation and determination of the Hong Kong people are pushing the CCP regime closer to a “Berlin Wall moment.” Like Mikhail Gorbachev, Xi Jinping will have to soon have to make a choice about the fate of the Communist Party and whether he wants to bind his fate with the CCP’s.
We wrote in July that the “Sino-U.S. conflict is not just a trade war or a tech war, but a critical battle of ideology, value systems, and morality.” Businesses, investors, and governments must look beyond the trade war to avoid risks and find hidden opportunities.
SinoInsight 2
On Nov. 19, the Hurun Research Institute published its “2019 Hurun Wealth Report,” an annual listing of China’s wealthiest individuals and households.
According to the report’s listing of high-net worth families in Greater China (Dec. 21, 2018 to Nov. 19, 2019):
- There are now 4.94 million “affluent families” (6 million yuan and above in assets) in Greater China, an increase of 60,000 (1.2 percent) over the previous year.
- There are now 1.98 million “high-net worth households” (households with tens of millions and more in assets) in Greater China, down 30,000 (1.5 percent) households from a year ago; this was the first decrease in “high-net worth households” in five years.
- There are now 127,000 “ultra-high net worth households,” down 6,000 (4.5 percent) households from the previous year.
- There are now 84,000 “international ultra-high net worth households” (over 211 million yuan [$30 million] in assets), a decrease of 4,800 households (5.4 percent) from a year ago.
On Nov. 20, mainland media outlets reported that there was 15.91 million “untrustworthy enforcers” (people who fail to fulfill a court order) as of Nov. 14, 2019 per the Supreme People’s Court’s “China Enforcement Information Disclosure Website.” This is compared with 87,000 “untrustworthy enforcers” in 2014.
On the same day, Pinduoduo, an e-commerce platform known for selling counterfeit or low-priced products, published its third-quarter earnings in a financial report. According to the report, Pinduoduo’s net revenue for the third quarter of 2019 was 7.513 billion yuan, an increase of 123 percent from a year ago; Pinduoduo’s net losses were 2.126 billion yuan. After the publication of the financial report, Pinduoduo’s U.S.-listed stocks fell 20 percent.
OUR TAKE
1. The data above affirms our pessimistic outlook on the Chinese economy:
We believe that emigration is likely a key reason for the large drop in the number of wealthy people and households in Greater China; rich people are likely very concerned about the intensifying social contradictions in China and the CCP’s “extreme left” shift in recent years.
Another possible reason for the decline in wealthy people is linked with the rise in debt defaults in China. Debt issues have resulted in an increasing number of corporate bankruptcies and defaults on personal liabilities.
Pinduoduo’s increased earnings are likely linked to rising unemployment and prices in China. Over time, the consumption power of people who can only afford to buy low-priced, counterfeit goods will continue to shrink.
2. We believe that China and the United States will find it very hard to seal a trade deal, and even an interim one, given the current political and geopolitical pressures facing the leader of either country. Even if both sides reach an interim trade deal, China’s economy will not pick up quickly in the short-term. The Sino-U.S. collision could trigger a financial crisis in China.
SinoInsight 3
On Nov. 19, the PRC finance ministry released financial data for the first 10 months of 2019:
- The national general public budget revenue was 16.7704 trillion yuan, up 3.8 percent year-on-year. Tax revenue comprised 14.1514 trillion yuan (0.4 percent increase YoY) of the total national general public budget revenue while non-tax revenue totaled 2.619 trillion yuan (27.1 percent increase YoY).
- The national general public budget expenditure was 19.0587 trillion yuan, an increase of 8.7 percent year-on-year.
- The national general public budget deficit was 2.28 trillion yuan; the deficit scale increased by 66.3 percent.
- The national government fund budget revenue was 6.0206 trillion yuan, an increase of 8.7 percent year-on-year.
- The national government fund budget expenditure was 6.8647 trillion yuan, an increase of 22.6 percent year-on-year.
- The national government fund budget deficit was 844.1 billion yuan; in comparison, the deficit for the whole of 2018 was 515.7 billion yuan.
On Nov. 20, Li Xiaochao, the deputy director of the office of the Fourth National Economic Census Leading Group and deputy director of the National Bureau of Statistics (NBS), announced that the NBS will revise preliminary accounting figures for 2018 and will release the revised figures in the near future.
OUR TAKE
1. China’s worsening economy and business closures have caused the PRC government’s fiscal revenue to drop. The substantial increase in non-tax revenue (27.1 percent) is likely down to local governments collecting more fines; put another way, local governments seem to be ignoring the central government’s tax reform policies and are instead finding other ways to extract a slice of enterprise profits.
The increased national government fund budget deficit in the first 10 months of 2019 is comprised mostly of land sales income and other related expenditures (the balance of special funds and expenditures, with a small surplus). There are two likely reasons for why deficits started creeping up in the second half of 2018 after the Sino-U.S. trade war began: First, real estate companies started reducing their reserve land, and second, local governments started borrowing heavily for infrastructure building to drive the economy.
All in all, China’s fiscal and fund budget deficits in the first 10 months of 2019 reached as high as 3.13 trillion yuan.
2. With the poor 2019 economic figures, the CCP needs to revise the 2018 figures to produce a GDP growth rate that meets its 6 percent to 6.5 percent targeted GDP growth rate. It should not come as a surprise if some provinces are “found” to have inflated their GDP figures by as much as 20 percent.
It should be noted that after the NBS announced that China’s GDP only grew by 6 percent in the third quarter (the lowest growth rate in three decades), Xiang Songzuo, an economics professor at Renmin University of China, publicly declared on his social media account that the figure is “obviously overestimated.” In 2018, Xiang noted that an internal report by a research group of a very important institution estimated that China’s GDP had grown by either only 1.67 percent or is in negative figures.
