SINOWEEKLYPLUS

Xi’s meeting with provincial-level officials hints at unprecedented crisis; the CCP and Venezuela’s ‘Black Swan’

SinoInsight 1
On Jan. 23, leading Chinese film studio Huayi Brothers Media announced that it had signed a five-year cooperation partnership with Alibaba Pictures. As part of the agreement, Huayi Brothers will produce at least 10 theatrical films over the next five years, and Alibaba Pictures will be given priority as a potential investor, marketer, distributor, and merchandising partner. Meanwhile, Alibaba will provide a 700 million yuan ($103 million) loan to Huayi Brothers that is due in five years. Huayi Brothers will offer pledged guarantees for its equities and earnings.

On Jan. 24, Huayi Brothers announced that its first extraordinary shareholders meeting of 2019 had passed 10 proposals. The proposals include the company and its wholly-owned subsidiaries applying for 2.3 billion yuan worth of comprehensive credit from four Chinese banks—Zheshang Bank, Ping An Bank, CITIC Bank, and Minsheng Bank.

OUR TAKE
1. Huayi Brothers is looking to finance 2.9 billion yuan worth of debts that will soon be due. To finance this debt, the film company is pledging nearly all its equities and assets, or its future box office earnings.

Huayi Brothers’ shares plummeted sharply in 2018 after celebrities like Fan Bingbing and Feng Xiaogang were embroiled in a tax evasion scandal. In October 2018, the Chinese tax authorities issued a notice to recover three years worth of back taxes from the film industry. By the end of last year, Chinese film industry shares had evaporated over 120 billion yuan in value.

2. Based on our research, China’s film industry is well connected with the military, elite cadres, and Party princelings. The CCP elite is known to turn to the film industry to launder money.

The central authorities’ attempt to recover back taxes from the film industry is thus connected with the CCP factional struggle. An ongoing effort to “reshuffle” the film industry appears to be an attempt at shaking up entrenched interests.

The worsening Chinese economy will likely negatively impact box office earnings. Hence, there are huge risks behind Huayi Brothers’ move to pledge its shares and assets.

SinoInsight 2
On Jan. 23, Venezuelan opposition leader and National Assembly head Juan Guaidó declared himself interim president. America, Canada, and most countries in Latin America recognize Guaidó as interim president. China, Russia, Turkey, and a handful of other countries expressed their support for incumbent president Nicolás Maduro.

Around the same time (Jan. 24 Beijing time), China’s WeChat app suddenly experienced “malfunctions.” WeChat users found that they were unable to send pictures, documents, or links. Meanwhile, Microsoft’s Bing search engine was temporarily blocked, and full service is yet to be restored.

OUR TAKE
1. The changing political scene in Venezuela reflects a growing wariness and move away from socialism/communism around the world. The CCP regime will likely view the Venezuelan case as a catastrophic Black Swan event, and may move to heighten domestic vigilance and “stability maintenance” work.

We believe that the Bing shut down on the mainland and mysterious WeChat “malfunction” was an attempt by the CCP to block the spread of information about Venezuela in China.

2. Maduro has not announced plans to step down and the situation is still developing in Venezuela. However, we believe that Venezuela could move towards democracy and reinstate a free-market economy within a short period (less than a year) with the support of the U.S. and other countries. In this scenario, the CCP’s influence in Venezuela will greatly weaken.

3. Venezuela owes the Chinese regime $20 billion and has been repaying the debt with oil shipments. We are pessimistic on the prospects of a new Venezuelan government recognizing the debts of the Maduro government.

4. Should Venezuela move towards a free-market economy, the international markets could see a sharp increase in crude oil supply and falling oil prices. This does not benefit the Middle East or Russia, who are reliant on crude oil exports, but will benefit the U.S. dollar.

5. A recovering Venezuela will curb the tide of refugees flocking to the U.S. and will have a stabilizing effect in Latin America.

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