China Week in Review
Week of Dec. 3, 2018
China and the world
- In Brussels, Mike Pompeo lays out the Trump administration’s intention to “build a new liberal order” in the world while criticizing China for undermining the current world order—a development which we observed in July. (See our forecasting track record.)
- U.S. allies continue to back away from using Huawei equipment.
North and South Korea take more baby steps towards denuclearization and peace on the peninsula.
Dec. 2:
- President Trump tweets that “China has agreed to reduce and remove tariffs on cars coming into China from the U.S.”
Dec. 3:
- Trump tweets that his meeting with Xi Jinping in Argentina was “an extraordinary one,” and that “relations with China have taken a BIG leap forward!” He added that “very good things will happen.”
- Trump also tweeted about his “very strong and personal relationship” with Xi. “He and I are the only two people that can bring about massive and very positive change, on trade and far beyond, between our two great Nations. A solution for North Korea is a great thing for China and ALL!”
- Taiwan’s defense ministry said that “irregular” patrols by the PLA Navy in the western part of the Taiwan Strait were “routine” in 2018.
- In an interview with PBS, Hudson Institute scholar Michael Pillsbury said that Trump may be pushing on the CCP system by keeping “Xi separate from the wrongdoing” while trying to “get the reformers to change some of this egregious conduct” in China.
- Xi visits Panama for his first state visit as Chinese leader.
- New Zealand announces that it will send 14 diplomats to the Pacific region in 2019, a move that has been read as an effort by Western governments to counter the PRC’s growing influence in the region.
- South Korean president Moon Jae-in said at a press conference that North Korean leader Kim Jong Un may visit Seoul “within the year.” He told reporters on his presidential plane that “President Trump has a very friendly view of Chairman Kim and that he likes him, and so he wishes Chairman Kim would implement the rest of their agreement and that he would make what Chairman Kim wants come true.”
Dec. 4:
- U.S. Secretary of State Mike Pompeo gives a speech entitled “Restoring the Role of the Nation-State in the Liberal International Order” at the German Marshall Fund in Brussels. “In the finest traditions of our great democracy, we are rallying the noble nations of the world to build a new liberal order that prevents war and achieves greater prosperity for all,” he said.
- Pompeo also said that Trump is determined to reverse the “poisoned fruit of American retreat,” and criticized Iran and China for “undermining the international order.” He said: “China’s economic development did not lead to an embrace of democracy and regional stability; it led to more political repression and regional provocations. We welcomed China into the liberal order, but never policed its behavior.”
- In a meeting with NATO foreign ministers in Brussels, Pompeo said that the U.S. will withdraw from the Intermediate-Range Nuclear Forces Treaty in 60 days unless Russia returns to “full and verifiable compliance.”
Dec. 5:
- The Canadian authorities in Vancouver arrest Meng Wanzhou, the CFO of Huawei, at the request of the U.S. for violating Iran sanctions. Meng faces extradition to the United States.
- South Korean newspaper Dong-a Ilbo reports that South Korea’s Cheong Wa Dae (Blue House) has invited Kim Jong Un to visit Seoul from Dec. 18 to Dec. 20, and is making preparations despite not receiving a confirmation from Pyongyang.
- Mike Pompeo meets with South Korean foreign minister Kang Kyung-wha in Washington D.C. to reaffirm the alliance and coordinate plans on the denuclearization of North Korea.
- North Korean foreign minister Ri Yong-ho arrives in Beijing for a three-day trip.
Dec. 6:
- The Japanese government plans to ban purchases of ZTE and Huawei equipment, according to Reuters. Huawei has thus far been locked out of the U.S. market and blocked from building 5G networks in Australia and New Zealand.
Dec. 7:
- A New York court issued an arrest warrant for Huawei’s Meng Wanzhou on Aug. 22, according to documents released at her bail hearing in Canada. The documents also said that the U.S. learned on Nov. 29 that she was stopping over in Vancouver on the way to a third country believed to be Mexico.
- Huawei appoints chairman Liang Hua as acting chief financial officer following the arrest of Meng Wanzhou in Canada.
- According to Reuters, Huawei told the U.K. government that it will spend $2 billion as part of efforts to address security issues raised by the British in a report in July this year that was signed off by Britain’s GCHQ spy agency.
- Xi Jinping meets with North Korean foreign minister Ri Yong-ho in Beijing. According to a PRC foreign ministry statement, Xi “hoped North Korea and the United States meet each other halfway and address each other’s reasonable concerns, allowing positive progress on the peninsula’s nuclear talks.” Ri said that North Korea’s commitment to denuclearization and safeguarding the peace on the Korean Peninsula remains unchanged.
Dec. 8:
- PRC deputy foreign minister Le Yucheng summoned John McCallum, Canada’s ambassador to Beijing, to demand the immediate release of Huawei’s Meng Wanzhou or face immediate “severe consequences.” Le also summoned U.S. ambassador to China Terry Branstad over the arrest of Meng, and said that “China will take further action based on the U.S. actions.”
Dec. 9
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- White House economic advisor Larry Kudlow tells Fox News that President Trump did not know about the arrest of Huawei’s Meng Wanzhou before his dinner with Xi Jinping in Argentina. “He learned way later,” Kudlow said.
- The People’s Daily publishes a page three editorial on the arrest of Meng Wanzhou. The editorial mentions that Canada arrested Meng “at the request of the American side” and criticized Canada, but did not make any more references to America.
Sino-U.S. trade war
- Contrary to popular fears, the arrest of Huawei CFO Meng Wanzhou may in fact provide an impetus for Xi to push through structural reforms and lock down a Sino-U.S. trade deal in 90 days. (See 12/6/2018 edition of SinoWeekly Plus for analysis.)
- Donald Trump and his top officials believe that Xi Jinping may be able to live up to his commitments made at the dinner table in Argentina. We also believe that Xi is genuine about reform, but he has to overcome domestic obstacles to make good on his word. (See our Dec. 5 analysis.)
Dec. 3:
- U.S. Treasury Secretary Steven Mnuchin told CNBC that there was a “very significant commitment” from Trump and Xi in Argentina, and described the dinner as a “breakthrough moment.” He also said that China has offered more than $1.2 trillion in additional commitments.
- Larry Kudlow tells Fox News that “we should see palpable change on the Chinese side immediately.”
- U.S. Agriculture Secretary Sonny Perdue said that China will likely resume buying soybeans from America around Jan. 1, 2019 due to limited supplies from elsewhere. “We don’t think there’s enough soybean supply in South America to tide them over to the new crop (in) South America,” he told reporters. (We said in April that China will not be able to touch soybeans in a trade war, see here.)
- Israel’s finance ministry announces that Israel and China have expanded a protocol that helps finance Israeli exports to China by offering $500 million in government guarantees
Dec. 4:
- Trump tweets that US Trade Representative Robert Lighthizer will be leading trade talks with China to see “whether or not a REAL deal with China is actually possible.” He wrote that China should remember that he is a “Tariff Man” if talks fail, but added that he would “happily sign” a fair deal.
Dec. 5:
- China’s commerce ministry said in a statement that Sino-U.S. negotiations have a “clear timeline and road map” and that China aims to rapidly implement “an agreed upon consensus.” Commerce ministry spokesman Gao Feng said: “We are very confident in reaching an agreement (with the United States) within the next 90 days.”
- Trump tweets: “Very strong signals being sent by China once they returned home from their long trip, including stops, from Argentina. Not to sound naive or anything, but I believe President Xi meant every word of what he said at our long and hopefully historic meeting. ALL subjects discussed!”
Dec. 7:
- Trump tweets, “China talks are going very well!” The tweet comes amid worries from the markets about the arrest of Huawei CFO Meng Wanzhou and the state of ongoing Sino-U.S. trade negotiations.
Dec. 8:
- White House National Trade Council director Peter Navarro tells Fox News that while China never honored “a single major commitment it has made,” he feels that “this is different” now with President Trump. “They respect him, they fear him,” Navarro said of the PRC.
Dec. 9
- U.S. Trade Representative Robert Lighthizer told CBS that the arrest of Huawei’s Meng Wanzhou is a “criminal justice matter. It is totally separate from anything I work on or anything that trade policy people in the administration work on.”
Politics
- The PRC state apparatus takes the first steps towards actualizing Xi Jinping’s commitments to Trump in Argentina.
- The CCP propaganda apparatus begins prepping the ground for Xi to announce and implement structural reforms in China.
Dec. 2:
- Overseas Chinese language media reported that photos of former Chinese vice premier Jiang Chunyun and former TV host Sang Yu were being circulated on social media. The photos, which revealed that Jiang and Sang were married and living in the U.S., attracted a lot of attention.
- The December edition of a magazine published by the Beijing-based Duowei News carries a series of articles criticizing Xi Jinping for creating a dictatorship and implementing failed policies. (see our Dec. 5 analysis)
Dec. 4:
- State media Xinhua launches a series of commentary pieces to commemorate the 40th anniversary of “reform and opening up” entitled “Strong Guarantees.” According to one of commentary, the PRC’s political reform must rely on “Party leadership,” put the “people first,” and adhere to the “rule of law.”
- The National Development and Reform Commission, the People’s Bank of China, and 37 other departments signed a memorandum of understanding to punish companies engaging in intellectual property theft.
Dec. 5:
- The CCP State Council holds a meeting and issues a decision to promote innovation, and passes a draft act to amend the patent law in the PRC to improve intellectual property protection and combat rights infringement.
- Xinhua publishes in a regular column an article entitled “Xi Jinping’s Reform ‘Promise’.” The article praises Xi for having the courage to take action to push through reforms in the regime. On the same day, Xinhua also published an article about Xi’s “powerful and resonating” statements about constitutionalism. (see our analysis of why Xi removed presidential term limits.)
- Chinese premier Li Keqiang chairs the first plenary session of the national leading group on science and technology, and calls for reforms to promote the implementation of policies that will give scientific institutions and personnel greater autonomy to research and innovate.
Economy
- The policies and statements from the central authorities this week indicate that the CCP elites are worried and fearful about the ever-worsening state of the Chinese economy.
- To reverse the economic downturn, the CCP has been forced to use social security and tax money to promote employment growth, increase short-term liquidity by means of treasury cash deposits, and scrap the reserve funds of online payment platforms (a move that will add over 1 trillion yuan to the banking system).
- Hong Kong’s property sales and sales volume plummeted by over 50 percent in November from 2017, an omen that property prices on the mainland will likewise fall sharply.
Dec. 3:
- Li Keqiang hosts a symposium in Nanjing on economic trends and developments in the next year with provincial-level officials. Li warned of “rising downward pressures amid complicated circumstances at home and abroad,” and noted that the solution lies in “unwavering deepening reform and opening up” and staying focused on dealing with the task at hand.
- China’s markets rally at the news of the 90-day pause in the Sino-U.S. trade war. The Shenzhen and Shanghai indexes rose by over 3,000 points, and the renminbi exchange rate rose to below the 6.89 mark.
Dec. 4:
- The People’s Bank of China’s payment and settlement department issues an emergency notice requiring online payment platforms (Alibaba, WeChat, etc.) to deposit all reserve funds with the central bank and cancel individual accounts for reserve funds before Jan. 15, 2019. The reserve funds generate billions of yuan in interest each year for the online payment platforms.
- According to data released by China’s commerce ministry, China imported 2.88106 trillion yuan worth of services from January to October 2018 (up 9.6 percent), and incurred a services deficit of 1.45989 trillion yuan.
- According to data from Hong Kong’s Land Registry, total residential sales (HK$26 billion) and volume (2.635 units) in Hong Kong for November fell by over 50 percent from the previous year.
Dec. 5:
- The PRC State Council issued a decision on promoting employment “for the present and future.” (See the 12/6/2018 edition of SinoWeekly Plus for the analysis.)
Dec. 6:
- China’s A-shares market drops by 1.8 percent in the wake of Huawei CFO Meng Wanzhou’s arrest. Chinese businesses in the tech and telecommunications saw their shares drop by about 4 percent.
Society
Dec. 2:
- The World Organization to Investigate the Persecution of Falun Gong issues a report on the state of forced organ harvesting of Falun Gong practitioners in China. Between Oct. 19 to Nov. 16 this year, investigators called 12 hospitals in China to ask if they “still used Falun Gong practitioner organs” when carrying out transplantation operations. The report highlighted 17 calls to the hospitals, noting that none of those who picked up the phone issued a denial while 11 of the 17 calls saw the hospital staff respond in an affirmative manner to the caller’s question.
Dec. 3:
- Tens of thousands of residents of Leshan City in Sichuan Province hold a night protest and block key roads to pressure the local government to change new toll collection regulations.
Dec. 5:
- In Leshan City, a man ignited explosives in a bus and injured at least 17 people, according to officials.
Dec. 6:
- According to mainland media reports, over 500 entertainers (including dozens of top-tier actors) were recently interviewed by the Chinese authorities and some were ordered to pay huge back taxes. Wu Jing, the protagonist of the “CCP nationalist patriotism” action film “Wolf Warrior 2,” reportedly has to pay 200 million yuan in back taxes, news which drew mockery on Chinese social media.
- About 700 villagers in Liaoning’s Teng’ao Town took to the streets to protest the construction of a waste-to-energy plant in their town. The local authorities mobilized large numbers of police to suppress the protest. The following day, virtually the whole town went on strike to protest the police action. Despite the popular uprising, the local authorities continued using intimidation tactics to force the locals to sign so-called “letters of undertaking” with respect to the waste-to-energy plant construction.
Dec. 8:
- The authorities in Shandong Province detain 10 people who were involved in a protest by military veterans in October, according to state media.
SinoInsight 1
Western media outlets reported on Dec. 5 that Huawei chief financial officer Meng Wanzhou was arrested in Vancouver while in transit on Dec. 1, the date of the dinner between President Donald Trump and Chinese leader Xi Jinping. Meng, the daughter of Huawei founder Ren Zhengfei, is wanted for covering up violations of sanctions on Iran and faces extradition to the United States
According to top officials in the Trump administration, Trump had no knowledge that Meng was arrested before the dinner. The Financial Times reported that the PRC government knew about the arrest before the dinner “but decided not to raise the issue during the meal because Mr. Xi wanted to focus on trying to resolve the trade tensions.”
On Dec. 8, the PRC foreign ministry summoned both the Canadian and U.S. ambassador to China to address the issue. Deputy foreign minister Le Yucheng warned Canada that it faces “serious consequences,” while telling the U.S. that it will take further action “based on the U.S. actions.”
Many media outlets and commentators believe that Meng’s arrest and the Huawei fallout could potentially derail the 90-day Sino-U.S. trade talks, and could even become a lasting point of contention for both countries.
OUR TAKE
1. The arrest of Huawei CFO Meng Wanzhou will have greater repercussions for the PRC than the U.S. Commerce Department’s business ban on ZTE in April 2018 (later revised into a form of “probation”).
Domestically, Huawei supplies telecommunications equipment to the People’s Liberation Army. If Meng’s arrest leads to crippling U.S. sanctions (financial, services, business, etc.) on Huawei, the PLA will immediately fall behind in technological developments and modernization. Depending on the severity of the sanctions (business bans, huge fines, etc.), Huawei also stands to lose its domestic market share; the company currently leads other Chinese smartphone makers.
More troubling for Huawei is losing its overseas business prospects. Already, America has locked out Huawei from its markets, and U.S. allies have been rejecting bids from the company to build their 5G networks. With Meng’s arrest, foreign countries and companies alike will likely lose confidence in doing business with Huawei.
Huawei might never recover from U.S. action if Meng Wanzhou is extradited and prosecuted.
2. It is noteworthy that the family of Stanford physics professor and Danhua Capital founding partner Zhang Shoucheng made known his death and denied speculation that his death was connected with Meng Wanzhou on the same day that news of her arrest became public. Zhang died on Dec. 1, the same day that Meng was arrested.
Zhang was hand-picked to join an expert panel for the PRC state-run “Thousand Talents” program in 2009. He was also invited to be a professor at Tsinghua University. His company Danhua Capital is listed in America’s Section 301 investigation on China.
Mainland news outlets had earlier reported that Huawei Terminal (Dongguan) chairman Yu Chengdong had specially traveled to an IT leaders summit in Shenzhen on April 1, 2017 to pick up Zhang, who was a summit participant.
3. We believe that the arrest of Huawei’s Meng Wanzhou will not affect Sino-U.S. trade negotiations, but may instead help make a trade deal a reality.
Our Dec. 5 analysis on the significance of Xi Jinping’s commitments to Trump and the CCP factional struggle show that he has no choice but to make good on structural reforms or face significant political and geopolitical pressures. Meng’s arrest gives Xi another reason to push through reform and perhaps prevent the complete collapse of Huawei. As for Trump, he has another card to play against the PRC and seal a historic deal.
Christmas may have come early for both Trump and Xi with the arrest of Meng Wanzhou, albeit for contrasting reasons.
4. We believe that the CCP is putting on a show for the domestic audience in sounding tough on Meng’s arrest. If the CCP truly wanted to rally domestic support, it would not conceal news of her arrest on Dec. 1 and wait until overseas media outlets reported the incident before reacting to the news.
5. It is crucial for companies with supply chains on the mainland to consider issues like whether or not China and the U.S. will reach a deal and avert escalating the trade war come March 2019. Misreading Sino-U.S. relations can have potentially troubling financial and other costs.
From predicting the trade war in January 2018 to spotting the Trump administration’s attempt to reshape the liberal world order, SinoInsider has a proven track record of correctly reading the Sino-U.S. relationship. Contact us today to find out how we can help your business sidestep risks and discover opportunities in this period of geopolitical uncertainty.
SinoInsight 2
From January to November 2018, first-hand property transaction volume in Shenzhen was 26,000 units at an average price of 54,000 yuan per square meter at the end of the transaction period, according to data from the Shenzhen Housing Management Bureau. Second-hand property transaction volume was 62,000 units at an average price of 42,000 yuan per square meter at the end of the transaction period.
Property prices in Shenzhen are representative of the property market in China’s first-tier cities. Historically, property prices in neighboring Hong Kong have a big impact on the Shenzhen property market, and in November, Hong Kong’s property sales and sales volume fell by more than 50 percent from a year ago.
OUR TAKE
1. Property prices have fallen slightly in Shenzhen this year as compared to 2017 (first-hand: 26,000 units, 55,000 yuan per square meter; 64,000 units, 43,000 yuan per square meter). The plateauing of property prices in Shenzhen appeared to start in 2016, a development that places serious financial pressure on leveraged property speculators.
This year, Shenzhen courts auctioned over 2,000 seized properties, an increase of 100 percent from 2017. This data suggests that some property buyers in Shenzhen are having trouble paying their mortgage.
2. According to official data from the Shenzhen government, the city’s residents had in October 2018 deposits of 1.24 trillion yuan, loans of 1.95 trillion yuan, and housing provident fund credit of 83 billion yuan. That is to say, the household leverage ratio [(Loans + housing provident fund credit) / deposits] of Shenzhen residents was 164.1 percent. This figure indicates that Shenzhen residents cannot take on more credit and pay higher property prices because they have maxed out their leverage.
The household leverage ratio of Shenzhen residents has exceeded 100 percent since 2015, reaching a peak of 165 percent in 2017. The phenomenon of high household leverage ratio is in line with the CCP’s policy of shifting debt from state-owned enterprises to the people.
3. From January to October 2018, the absolute value of retail sales of consumables in Shenzhen increased by only 2.8 percent as compared to the 9.2 percent in the same period a year ago. After deducting the 2.7 percent price increase during that period, then Shenzhen barely saw an increase in consumption. In other words, the Shenzhen residents do not have the purchasing power to prop up the local property market.
4. We believe that the Shenzhen property market has peaked and will be affected by nearby Hong Kong. If China and the U.S. fail to negotiate a true trade war truce in the next 90 days, the Shenzhen property bubble is at risk of popping and affecting the entire country.
