China Week in Review
Week of Oct. 29, 2018
China and the world
- The People’s Republic of China continues to court America’s allies.
- President Donald Trump and Xi Jinping may have spoken to each other on the phone, but the U.S. continues to toughen its stance towards the PRC.
The North Korea denuclearization and peace process makes further progress despite some “backsliding” from Pyongyang. (See SinoInsight 1 for analysis.)
Oct. 29:
- According to a new report from the Australian Strategic Policy Institute, the PRC had sent over 2,500 researchers linked with the military to U.K., U.S., and other foreign universities over the past decade. Many of these researchers hid their military affiliations, and focused on collaborative research on hard sciences, “especially emerging and dual-use technologies,” said report author Alex Joske.
- Chinese foreign minister Wang Yi visits the Philippines and meets with president Rodrigo Duterte and foreign minister Teodoro Locsin Jr. The PRC and the Philippines sign an agreement that sees the PRC make a $1 million disaster relief donation and $7.2 million worth of law enforcement-related materials and equipment. The two countries also exchanged letters on the feasibility study of a joint infrastructure project.
Oct. 30:
- John Richardson, chief of U.S. Naval Operations, said in Jakarta that the United States and China “will meet each other more and more on the high seas.” A day earlier, Richardson said at a press conference in the Philippines that the U.S. will “continue to progress this program of freedom of navigation operations” in the South China Sea.
Oct. 31:
- The U.S. and South Korea announce that a joint working group to coordinate strategy on North Korea will be launched in November.
- North Korea is preparing for a possible visit by outside inspectors to verify the shutdown of its nuclear and missile test sites, according to South Korea’s spy agency.
- U.S. Secretary of State Mike Pompeo said on a radio show that China is probably the biggest national security threat facing America and that the Trump administration is pushing back “on all fronts.” He said: “It is a multipronged effort on behalf of all of the United States Government, at the President’s direction, to convince China to behave like a normal nation on commerce and with respect to the rules of international law.”
- Australia and Papua New Guinea will upgrade the Lombrum Naval Base on Manus Island, a move that will give Australia and the U.S. greater access to the South Pacific and the South China Sea.
- The U.S. and South Korea sign a strategic guideline on how their combined defense mechanism will operate after the transfer of wartime operational control.
- A Chinese foreign ministry spokesperson said that U.S. allegations of PRC spies stealing U.S. trade secrets are “inconceivable” and “pure fabrications.”
Nov. 1:
- The U.S. Justice Department launches a broad initiative to counter PRC economic espionage. “Chinese economic espionage against the United States has been increasing — and it has been increasing rapidly,” said Attorney General Jeff Sessions. “Enough is enough. We’re not going to take it anymore.”
- The Justice Department also issues an indictment alleging that Fujian Jinhua Integrated Circuit Co. Ltd. had conspired to steal trade secrets from Idaho-based semiconductor firm Micron’s Taiwan branch.
- Li Keqiang meets with a group of U.S. Republican lawmakers in Beijing. Li said that both countries should “meet each other halfway and work together in the spirit of mutual respect and equality.” Senator Lamar Alexander told Li that the delegation was there “to show our respect to a great country and a great people,” and that the two countries “are competitors but not adversaries.”
- North and South Korea agree to cease “all hostile military acts” each other along the border on land, sea, and air.
- South Korean leader Moon Jae-in says that Kim Jong Un would visit Seoul “soon.”
Nov. 2:
- The North Korean foreign ministry said in a statement that Pyongyang could restart its nuclear and economic development program (“byungjin”) if the U.S. does not drop sanctions against North Korea. However, the statement does not threaten to abandon denuclearization negotiations with the United States.
- The U.S. announces that it will reimpose all sanctions on Iran that were removed in a 2015 deal on Nov. 5.
Nov. 3:
- The U.S. Navy said that it had 18 unsafe or unprofessional encounters with the PRC since 2016.
Nov. 4:
- A South Korean military spokesperson confirmed that the U.S. and South Korea will begin small-scale military drills on Nov. 5. The drills were previously suspended following recent U.S.-North Korean denuclearization talks.
- South Korea names senior Goldman Sachs economist Kwon Goo-hoon to chair a presidential committee on Northern Economic Cooperation, which advices on economic relations with North Korea, Russia, and northeast China.
Sino-U.S. trade war
- Xi and Trump’s telephone call portends a potential cooling of trade tensions. Whether or not tensions cool depends on whether Beijing can make concessions, and how much.
- Cui Tiankai, PRC ambassador to the U.S., appears to reverse his hard stance towards America, a sign that the PRC is committed to making peace with the U.S. on trade.
- Chinese semiconductor company Fujian Jinhua suffers the initial fate of ZTE. Unlike ZTE, we believe that Beijing will not step in on behalf of Fujian Jinhua, and there is a high probability of the company being forced to close down due to sanctions.
Oct. 29:
- The U.S. Commerce Department announces that it is restricting exports to Fujian Jinhua Integrated Circuit Co. Ltd. because the firm poses “significant risk of becoming involved in activities that are contrary to the national security interests of the United States.”
- President Trump said in an interview with Fox News that the U.S. can make a “great deal with China,” and that he has tariffs worth “$267 billion waiting to go if we can’t make a deal.”
Oct. 30:
- At the screening of the documentary “Better Angels” at the National Press Club in Washington D.C., PRC ambassador to the U.S. Cui Tiankai said that China and the U.S. relations need the “touch of ‘better angels.’” Cui’s remarks are carried by the foreign ministry, state media, and pro-Beijing media in Hong Kong. Previously, Cui stuck to Beijing’s earlier combative stance and used tough rhetoric. For instance, he declared that the PRC would “fight to the end” with the U.S. on trade, and said that America’s accusations that China was not abiding by international law was an act of “the pot calling the kettle black” (“做賊喊捉賊”).
Nov. 1:
- Xi Jinping and President Trump have a telephone conversation. Per Trump’s tweet about the phone call, the two leaders seem to be set for their summit at the G-20 meeting at the end of November.
- President Donald Trump tweeted: “Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects, with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina. Also had good discussion on North Korea!”
- The European Union issued a statement calling on China to take more steps to open up its markets to foreign firms and provide a level playing field.
- In a joint op-ed in Caixin, the German and French ambassadors to China wrote that European businesses should have the same opportunities in China as Chinese industries have in Europe.
Politics
- The CCP elite continues sending political signals about the importance of the private economy as well as reform and opening up to the regime.
- A recent Central Leading Group for Inspections commentary signals that the CCP factional fighting is in a critical phase and the officialdom will see more purges.
Oct. 29:
- Xi Jinping speaks to the new leadership group of the All-China Federation of Trade Unions at Zhongnanhai. He said that trade unions should be loyal to the CCP and “guide the workers and masses to obey and follow the Party.” Xi added that the Party must “ensure the status of the working class as the master.”
- Harvard researcher William Overholt said in an with BBC Chinese that a high-level Chinese official told him that “the atmosphere in Beijing is a ‘life-and-death struggle.'”
Oct. 31:
- The CCP Politburo said after a meeting chaired by Xi Jinping that the PRC will take more timely steps to support the economy, which is facing increasing pressures, according to remarks carried by Xinhua News Agency. Compared to a Politburo meeting on the economy in July, the Oct. 31 meeting did not mention the need to curb housing prices, carry out Party building, or continue economic de-risking. However, the Oct. 31 meeting called for supporting the private economy and safeguarding the rights and interests of foreign firms in China.
- Chinese vice president Wang Qishan will be giving a keynote speech at a forum organized by Michael Bloomberg in Singapore from Nov. 6 to Nov. 7, according to the South China Morning Post. Wang is expected to “offer assurances” that the PRC will continue to open up its economy.
Nov. 1:
- A Central Leading Group for Inspections commentary piece published in Xinhua calls on Party committees at all levels to adhere by the “four consciousness” and implement “Xi Jinping Thought.”
- Xi Jinping said at a symposium of private sector entrepreneurs that “the private sector is an essential component of the Chinese economy,” and “the private sector and private entrepreneurs are our own people.”
- Prominent executives like Tencent’s Pony Ma and Baidu’s Robin Li attended the private entrepreneur symposium. Alibaba’s Jack Ma, who recently announced his retirement, was not in attendance.
Economy
- Recently released Chinese data shows that the economy is worsening and consumption is shrinking.
- Judging by the profits of the four major state-owned banks, corporate financing costs are now rather costly.
- The central bank’s new financial stability report acknowledges that the economy is facing high risks.
- The RMB exchange rate nearly broke the 7 mark until Trump and Xi spoke over the phone. Later, it appeared that the central bank intervened to bring the exchange rate below 6.9.
Oct. 29:
- Kweichow Moutai, a favorite stock pick, saw total revenue and profit growth in the third quarter go lower than market expectations. The company’s Q3 sales are also expected to drop by as much as 14 percent. On the same day, Kweichow Moutai’s stock opened lower than its previous close, and the stock saw over 76.6 billion yuan of value evaporate in a single trading day.
- The onshore and offshore renminbi exchange rates fell to 6.9583 and 6.9624 respectively, setting a new decade-and-a-half low.
Oct. 30:
- The PRC foreign ministry announces that Li Keqiang will hold the third “1+6” Round Table Dialogue in Beijing on November 6.
- The four major state-owned banks released their Q3 reports. The banks made a total net profit of 779.561 billion yuan, and over 150 billion yuan individually. Total revenue reached 1.88 trillion yuan.
Oct. 31:
- According to China’s National Bureau of Statistics, the country’s manufacturing purchasing managers’ index was 50.2 percent in October 2018, down 0.6 percent from September. The non-manufacturing business activity index was 53.9 percent, down 1 percent from the previous month.
- The onshore and offshore RMB exchange rates fell to 6.9757 and 6.976 respectively, a new low. Meanwhile, the bank selling price fell below the 7 to a U.S. dollar level.
- The People’s Bank of China announced that it will issue three-month and one-year central bank bills in Hong Kong on Nov. 7. A total of 20 billion yuan worth of bills will go into circulation.
- Starbucks’ latest quarterly earnings report shows that the company’s same-store sales in China grew by only 1 percent in the latest quarter, down 2 percent from the previous quarter.
Nov. 2:
- The onshore and offshore RMB exchange rates rose below 6.9, setting a new high since Sept. 28.
- The PBoC issues the 2018 China Financial Stability Report, a comprehensive assessment of the soundness of the country’s financial system since 2017. The report noted that local implicit debt is higher than explicit debt, and warns of a “gray rhino” risk in 2019.
Society
Oct. 29:
- Over 600 long-term tenants of “Love Life, Love Apartment” apartment blocks assembled outside the company’s office in Shanghai’s Yuanbao district to demand the cancellation of their loan contracts after the housing rental company went broke. The tenants were intercepted and beaten up by security personnel and local police. (For more on the financial risks of housing rental companies, see here.)
Oct. 31:
- Hundreds of financial victims of P2P platform failure went outside the Beijing municipal government offices to submit petitions. The Beijing municipal authorities summoned large numbers of police to the scene, and the petitioners were dispersed.
- The Xi’an government dispatched nearly 3,000 people to forcibly demolish a large village in the city which was nicknamed “Little Hong Kong.” The demolition, which was carried out over 15 days, sparked violent clashes between the villagers and the local police. According to unofficial reports, the clashes have led to many being injured and even some fatalities.
Nov. 1:
- Villagers from Sanhongqi, Beijiao, and Shunde in Guangdong Province blocked a construction site after suspecting that local officials had sold the land without authorization. The villagers were cleared out by security personnel armed with riot equipment. Dozens of villagers were arrested.
SinoInsight 1
On Nov. 2, the North Korean foreign ministry warned that Pyongyang could resume nuclear development if the U.S. does not drop sanctions. The foreign ministry’s statement, however, did not say that denuclearization talks were off.
Just a day earlier, both Koreas had announced that they were stopping all hostile military action at the border. Also, South Korean president Moon Jae-in said that North Korean leader Kim Jong Un was due in Seoul “soon.”
OUR TAKE
1. Pyongyang’s latest “backslide” adheres to our read of the geopolitical situation on the Korean Peninsula.
We wrote on July 2: “Again, we believe that Kim Jong Un is serious about denuclearization. U.S. pressure would see that Kim eventually accomplishes the task rather quickly. However, it should not be surprising to see several twists and turns, including more ‘backsliding’ after progress has been made, before North Korea is nuclear-free.”
And on Sept. 20 we wrote: “While North Korea would very likely seek ways to get the best out of both parties, it would ultimately pivot towards the U.S. because it has greater economic and political incentive to do so.”
2. North Korea’s statement comes after President Trump and Xi Jinping had their phone call. Trump wrote in his tweet that he and Xi had a “good discussion” on North Korea, while state media Xinhua noted that Xi hopes to “further advance the denuclearization of the Korean Peninsula in parallel with the building of a peace mechanism on the peninsula” and China will “play a positive role.” Both Trump’s tweet and the Xinhua statement hinted that there could be an easing up of trade tensions as Xi and Trump prepare to meet at the G-20 in Argentina.
In light of “improving” Sino-U.S. relations, Kim Jong Un might be feeling an urgent need to advance the peace and denuclearization process to escape the pressure and sanctions from both the PRC and the United States. And for Kim to take concrete steps to denuclearize, he needs to secure a peace declaration with the U.S. for internal propaganda purposes; we wrote in March that Kim’s “biggest headache” in abandoning his nuclear program is selling the concept at home. A peace declaration would also allow Kim to slowly pull North Korea out of the PRC’s orbit and draw closer towards South Korea and the United States. (For more on rocky DPRK-PRC relations, see here and here.)
Pyongyang can be sure that the U.S. will pay attention to North Korea if it “threatens” to change course on denuclearization. Indeed, the U.S. and South Korea recently announced that a military exercise that was previously halted would carry on as planned on Nov. 5. Kim and the DPRK could continue the “threat tantrums” to test if it gets the U.S. to the table quicker. Should the Trump administration hold firm, Kim will likely have no choice but to show agreeableness while signaling that North Korea’s patience does not last forever.
If Kim Jong Un is willing to make a big move to denuclearize and there is sufficient trust between the U.S. and the DPRK, the second Trump-Kim summit could be held in December. The ball, however, appears to be completely in America’s court. Kim may just have to wait.
