Newsletter 86 - October 2, 2021
Welcome to the 86th edition of Trade War.
Power shortages spreading across China start to hit global supply chains and could spark global inflation. The State Council meets to combat sluggish consumption and some international funds move to cut their China exposure.
Evergrande’s Xu Jiayin has cultivated the family members of China’s elite political leaders and his billionaire buddies will benefit from an early asset sale. “Common Prosperity” unlikely to narrow wealth gap. And new report shows China’s is by far the world’s largest lender.
China power shortages could spark global inflation
China electricity shortages have started to hit supply chains and could lead to global inflation, reports the Wall Street Journal.
Shortages of coal, a surge in demand for Chinese products and national efforts to cut emissions have sparked electricity shortages and rationing in cities across China.
“Global markets will feel the pinch of a shortage of supply from textiles, toys to machine parts,” a trend that will likely push global inflation higher, particularly in developed countries like the U.S., wrote Nomura chief China economist Ting Lu in a note.
"Some residential areas in northeastern China experienced blackouts for hours. Traffic lights were even turned off,” reports the Journal. “Factories in manufacturing regions were ordered to cut back on operating hours or even shut down for a week.”
A Chinese ban on Australian coal imposed after that country called for a global investigation into the origins of the pandemic, shortages in renewable energy including after a drought hit hydroelectric resources in the southwestern province of Yunnan, and the continuing strict controls on electricity prices, have also worsened the situation.
Air-con and street lights off, Apple suppliers idled
“Cities in Guangdong Province are limiting peak time power; punters on social media are speaking about some schools and offices turning off the air-con; some street lights are off,” writes BBC China correspondent Stephen McDonell in a tweet thread. “In Suzhou several factories supplying Apple have reportedly suspended production due to electricity cuts.”
Evergrande’s Xu Jiayin elite connections to leadership
Evergrande’s rags-to-riches founder Xu Jiayin has succeeded in part because of connections to the relatives of top leaders, report the New York Times’ Alexandra Stevenson, Michael Forsythe, and Cao Li.
“Mr. Xu cultivated relationships with the family members of some of China’s most senior officials,” including former premier Wen Jiabao’s brother Wen Jiahong, who as a company director, at one point controlled the second biggest stake in Evergrande, the paper reports.
“[Xu] could not have gotten so big without the collaboration of the country’s biggest banks,” said University of California, San Diego political scientist Victor Shih, in an interview with the Times. “That suggests the potential help of senior officials with a lot of influence.”
Some of Xu Jiayin’s billionaire poker buddies will benefit from a deal where a local government is buying a stake held by the beleaguered property company in a regional bank, reports Bloomberg News’ Blake Schmidt.
“Evergrande agreed to sell a 20% stake in the [Shengjing Bank] to the local Shenyang government for 10 billion yuan ($1.55 billion), with the bank demanding that all proceeds go to settle debts with the lender,” reports Bloomberg.
Recent investors in Shengjing Bank include a number of billionaires who are all notable for being regular poker partners with Xu and who have backed Evergrande financially.
The roster of the extreme wealthy who will benefit from the deal include Cheung Chung Kiu, the Chongqing, China-born chairman and founder of Hong Kong-listed property company C C Land Holdings, Henry Cheng, chairman of New World Development, and Karen Lo, who has real estate holdings in Malibu and New York City and is the largest investor in Hong Kong fashion company Esprit.
Wuzhen Summit with Common Prosperity pledges
At this year’s annual World Internet Conference, better known as the Wuzhen Summit, “Common Prosperity” has been an important theme while its entrepreneur participants have been more subdued, reports Protocol’s Shen Lu.
Rather than touting their new products and partying it up, as in previous summits, the assembled tech CEOs have kept a lower profile and vowed to grow their public interest spending; the CEO of Weibo, China’s Twitter-like app, for example, pledged to increase the amount his company spends from 1% to 3% of revenues.
"Platform companies must address issues of deep government and public concerns, such as corporate governance, user data privacy protection and cybersecurity governance," Alibaba CEO Daniel Zhang said at the summit.
"In the past, [Alibaba founder] Jack Ma rarely spoke with a script in hand. [JD.com’s] Richard Liu would openly diss ecommerce and real estate bigwigs when he felt like it. And [mobile phone maker Xiaomi’s] Lei Jun would talk about his products incessantly," wrote one WeChat tech blogger. "At this year's live-streamed conference, the big names all held scripts when speaking about the digital economy and artificial intelligence."
“The summit used to attract founders and CEOs of Chinese tech giants, but many renowned Chinese tech CEOs were absent this year,” writes Shen Lu. “The tech entrepreneurs who did attend kept low profiles, delivering tightly scripted speeches toeing the "common prosperity" line. And they did not party like they used to.”
So won’t Common Prosperity resolve inequality?
Here is a good tweet thread from Peking University finance professor Michael Pettis on why Xi’s ‘Common Prosperity’ push is unlikely to create a substantially more equal society. Also, don’t miss the illuminating ChinaTalk interview with Rhodium Group’s Logan Wright that Pettis raises in his thread.
Some funds to cut China exposure
A new survey shows that a growing number of pension funds and insurers are planning to reduce their investments in China as the regulatory crackdown continues, reports the Financial Times’ Tabby Kinder.
The poll carried out in June and July by the $1.6 trillion fund manager Invesco found that 12 percent plan to cut their China exposure, three times as many as in the last survey two years earlier; meanwhile, those who plan to increase investment has fallen from 80 percent to 64 percent over the same period.
The rolling crackdowns on everything from technology companies to private tutoring and real estate have “wiped billions of dollars from the holdings of major international investors and prompted a vigorous debate over the future of the world’s second-largest economy,” writes the paper.
Foreign financial investors, however, are still attracted by what has been an increasingly more open market, with Beijing ending an earlier quota system for foreign institutional investors in 2019, and a year later, allowing asset managers and investment banks to have 100 percent ownership of their China operations.
“For those who have been investing in China for a long time and have seen the ups and downs, the case for investing in China continues to be very much intact despite [recent regulatory] issues,” Andrew Lo, head of Asia Pacific at Invesco, told the paper.
Combatting sluggish consumption
China’s State Council has met to discuss new measures to boost sluggish consumption, reports the China Daily.
“More steps are anticipated in boosting consumption, supporting smaller businesses and securing employment as the country's growth faces challenges amid scattered COVID-19 cases and a sluggish consumption recovery,” reported China’s official English language newspaper without specifying details.
Retail sales, a measure of consumption, struggled in August growing only 2.5 percent year on year, down from a 8.5 percent rise the month before, while factory production also disappointed, according to China’s National Bureau of Statistics.
"Sluggish consumption may lead to a drop in prices, thus resulting in reduction of enterprises' profits," Yang Guangpu, a research fellow at the Development Research Center of the State Council, said to the paper.
"This may further hurt the willingness of enterprises to invest and hire, which means the overall employment status might be affected. Therefore, solid efforts are needed to energize consumption, and shore up people's willingness to buy."
China global lending much larger, report says
A new report reveals that China is by far the world’s largest lender, much of it going to poor countries that may struggle to repay the debt, writes the BBC’s Celia Hatton.
“China hands out at least twice as much development money as the U.S. and other major powers, new evidence shows, with most of it coming in the form of risky high-interest loans from Chinese state banks,” writes Hatton, citing the report from William & Mary’s AidData research lab.
“Critics fear that the high-interest loans funding many Chinese projects are saddling unsuspecting populations in sky-high debt,” Hatton writes.
No strings attached
I went on BBC News to discuss what is notable about China’s huge global lending to countries around the world, following the release of the AidData report. Watch it here.
Evergrande, why local governments are hooked on the real estate business and how China's leaders feel they no longer need global know-how and capital as much as before and are pushing 'self-reliance,’ were all part of this podcast I did with The Hindu’s Ananth Krishnan.
China’s Anhui province is seeing a particularly rapid decline in new births with a 17.8 percent drop expected this year, tweets Xinhua reporter Zichen Wang.
“The Summer of 2021,” a lecture on Beijing’s recent dramatic moves to exert far more control over its private sector and economy given by University of California, San Diego economist Barry Naughton, is a must watch.
What is “Common Prosperity” and how serious is Beijing about combatting inequality were both topics discussed by Stanford University’s Scott Rozelle, JP Morgan’s Joyce Chang, and McLarty Associates John Holden recently at this CSIS event.
The emerging framework for Common Prosperity is “unabashedly Marxist” writes Peterson Institute for International Economics senior fellow Martin Chorzempa, commenting on a tweet thread by a Beijing-based Chinese finance and economics think tank.
China Finance 40 Forum (CF40) @ChinaFinance40DIMENSION 1: the relation between productive forces and production relations. Common prosperity involves both of the two aspects: “prosperity” indicates productivity growth, while “common” indicates production relations and distribution. 3/12
Montana fall creek
Here’s a picture of a Montana creek taken just as fall comes to the Rocky Mountains.