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Trade War

Newsletter 87 - October 9, 2021

Dexter Roberts
Oct 9, 2021
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Welcome to the 87th edition of Trade War. China sends an unprecedentedly high number of PLA flights into Taiwan’s air defense zone while close business and investment relations between the two sides complicate growing tensions.

Beijing commission issues statement considering ban on all private organizations doing news gathering while foreign businesses mull over what Common Prosperity means for their industries.

U.S. Trade Representative Katherine Tai meets virtually with counterpart Liu He to discuss trade and tariff frictions while global financial firms continue to bet on making money in China.

China’s onslaught of military flights near Taiwan

For starters, here is a five minute-plus explainer from yours truly on what China’s onslaught of military flights near Taiwan mean for China, Taiwan, and the U.S. You can watch it here.

And for a good read on how “enormous flows of trade, investment and critical technology also link the two countries” and that “could either put a brake on Beijing’s “reunification” ambitions, or provide an alternative weapon to fulfill them” I recommend reading this piece by Barron’s Craig Mellow.

Twitter avatar for @dtiffroberts
Dexter Roberts @dtiffroberts
Me trying to cover a huge topic - China-Taiwan Tensions - in just five minutes, via Montana World Affairs Council youtu.be/dxkTMMx26-M via @YouTube
youtu.beWSWNW - China-Taiwan Tensions w Tiff RobertsAuthor and China expert Tiff Roberts shares his perspective on tensions between China and Taiwan.
4:55 AM ∙ Oct 8, 2021
4Likes1Retweet

Ban on private money in news rooms?

China has floated the possibility of banning private capital from the news business, report Bloomberg News’ Bei Hu and Coco Liu.

According to a public consultation paper published by the National Development and Reform Commission, China’s top planning organization, private capital would be “barred from news gathering and distribution operations” as would “[reproducing] news content generated by foreign media,” writes the financial news service.

“While it wasn’t immediately clear whether the proposed restrictions unveiled Friday are fresh curbs or incremental rules designed to close loopholes that private investors had exploited, they do signal regulators’ intent to step up enforcement.”

Twitter avatar for @yaling_jiang
Yaling Jiang @yaling_jiang
Scratch my last tweet, journalism apparently is becoming a crime in China. NDRC is seeking public opinion for the non-binding (yet) 2021 Negative List for Market Access: 1. Non-public capital (meaning private companies?) cannot conduct news interviews, editing or broadcasting.
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3:28 PM ∙ Oct 8, 2021
181Likes95Retweets

Is this regulation something new?

And here is an interesting thread from Liqian Ren, director of Modern Alpha, on the possible ban’s significance which considers two key questions: what companies might be affected and is this regulation something new?

Twitter avatar for @liqian_ren
Liqian Ren @liqian_ren
1 A thread on China NDRC proposed ban on private capital in news media business and potential impact on companies like #Weibo #Tencent, @caixin_intel, #36kr etc. and other private financial companies like #蓝鲸 #财联社
baijiahao.baidu.com百度
5:06 AM ∙ Oct 9, 2021
11Likes2Retweets

How Common Prosperity might effect business

Xi’s new focus on ‘Common Prosperity’ will affect where foreign business can make money in China, writes the BBC’s Karishma Vaswani.

“One of the most visible consequences of common prosperity has been the refocusing of corporate China's priorities to the domestic market,” writes Vaswani.

“Technology giant Alibaba, which in recent years has seen its global profile rise, has now committed $15.5 billion to help promote common prosperity initiatives in China, and set up a dedicated task force, spearheaded by its boss Daniel Zhang.” Meanwhile, rival Tencent has pledged to spend $7.75 billion.

The new focus on growing the middle class could help the bottom lines of global businesses, reports the BBC.

"If [young people] feel they are part of social mobility in this country, which has been eroding, then it is good for us. Because when the middle class grows, then there is more opportunity," Joerg Wuttke, president of the EU Chamber of Commerce in China, told the BBC.

But ‘Common Prosperity’ could hurt global luxury consumption, 50 percent of which comes from Chinese consumers, warns Wuttke. “If China's rich decide to buy less Swiss watches, Italian ties and European luxury cars then this industry will take a hit."

Twitter avatar for @BBCKarishma
Karishma Vaswani @BBCKarishma
My latest piece, for the BBC website - thanks to ⁦@PeterHoskinsTV⁩ for conceptualising and commissioning this series: Changing China: How Xi's 'common prosperity' may impact the world - and also to ⁦@sairasy⁩ for a great edit!
bbc.co.ukChanging China: How Xi’s ‘common prosperity’ may impact the worldChina is changing who it prioritises as it grows its economy in ways that could affect us all.
11:38 PM ∙ Oct 6, 2021
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Common Prosperity luxury picks

Foreign luxury brands are already mulling how to tone down their opulent offerings, reports Bloomberg News.

“Common prosperity—the policy directive du jour of President Xi Jinping—won’t banish luxury goods from Chinese malls. But it will usher in a new era where watches are encrusted with fewer diamonds and logos no longer embellish jackets and jewelry,” predicts the financial news service.

“Luxury is likely to be characterized by more subtle designs, with fewer ostentatious details,” reports Bloomberg.

“We could see a return to the mood that engulfed China almost a decade ago, amid a crackdown on corruption, when consumers didn’t want to make their consumption too conspicuous. Products like watches and high-end alcohol were collateral damage.”

Meanwhile, if ‘Common Prosperity’ does succeed in growing the middle class, “that could drive demand for entry-level handbags, costing around $1,000, rather than those made from exotic skins costing at least 10 times more.”

For foreign brands, the biggest potential blow would be if Chinese shoppers started to prefer local brands over global giants. “Handbags are likely to remain the preserve of the European houses. But local players such as Cindy Chao are gaining traction in jewelry,” says Bloomberg.

Twitter avatar for @bopinion
Bloomberg Opinion @bopinion
Young Chinese women might be tempering their love for all things bling. Beijing’s crusade against inequality might influence shoppers to retreat from conspicuous consumption, forcing brands to dial back on hype trib.al/uPuTpvA
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5:21 AM ∙ Oct 6, 2021
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Past performance doesn’t equal future results

Even as Beijing’s crackdowns on private business spook Chinese entrepreneurs and governments abroad increasingly fear the country’s assertive rise, Wall Street only seems more bullish on China, writes the New York Times’ Li Yuan.

“BlackRock, the world’s biggest asset manager, urged investors to increase their exposure to China by as much as three times,” writes Li Yuan. “Is China investable?” asked J.P. Morgan, before answering, “We think so.” Goldman Sachs says “yes,” too.”

That’s hardly surprising: while Beijing clamps down on its own business and economy, it is expanding opportunities for foreign investment firms working with Chinese companies.

“At the height of a market sell-off in late July, the deputy chairman of China’s securities regulator, Fang Xinghai, summoned executives of BlackRock, Goldman Sachs and other firms to a meeting, trying to alleviate investor nervousness over Beijing’s crackdowns, according to a memo I reviewed,” reports the Times. Less than a month later China gave the green light to BlackRock to offer mutual funds.

“I don’t think we can use spreadsheet-type thinking to take a view on China in the 2020s and beyond,” George Magnus, a China researcher at Oxford University and former chief economist for UBS told the paper. China is undergoing “a sharp leftward lurch in politics which is creating a deep contradiction between the craving for political control and the desire for good economic and innovation outcomes.”

“The Wall Street firms are apparently betting that China’s past successes will continue,” notes Li Yuan. “They have a long track record on their side, but they would do well to remember what they constantly tell their customers: Past performance isn’t necessarily indicative of future results.”

Twitter avatar for @LiYuan6
Li Yuan @LiYuan6
After the trade war,the crackdown on the private sector&the human rights abuse in Xinjiang,Wall Street now stands as an increasingly lonely voice arguing for more engagement with China.They're betting China can defy the bearish predictions, again. Can it?
nytimes.comChina is Rocked by Uncertainty. Why is Wall Street Bullish?Beijing is opening its financial system to foreign banks — and they have maintained their traditional openness to the Communist Party’s rule.
9:47 AM ∙ Oct 6, 2021
31Likes17Retweets

China for the long term?

"If you go to China with a medium or short term approach for the next two quarters—you are in the wrong place. You have to go to China for the long term," HSBC’s Nuno Matos said on Bloomberg Television. China’s middle-class and high net worth population are growing by nine percent annually, according to the chief executive of HSBC Wealth and Personal Banking.

“When I was a smart-alecky young Wall Street bond trader we used to joke that whenever a trade made money it was part of the trading book, but whenever a trade lost money it didn't count because it was part of the long-term investment book,” tweets Peking University finance professor Michael Pettis, responding to Matos’ comment.

Twitter avatar for @michaelxpettis
Michael Pettis @michaelxpettis
When I was a smart-alecky young Wall Street bond trader we used to joke that whenever a trade made money it was part of the trading book, but whenever a trade lost money it didn't count because it was part of the long-term investment book.
Twitter avatar for @BloombergLive
Bloomberg Live @BloombergLive
"If you go to China with a medium or short term approach for the next two quarters - you are in the wrong place. You have to go to China for the long term." @HSBC's Nuno Matos tells @YvonneManTV #BloombergInvest https://t.co/kS6WSHICj2
2:37 PM ∙ Oct 7, 2021
597Likes89Retweets

Demography to hit wasteful property investment

With its population quickly aging and China already 60 percent urbanized, its property boom is sure to end, writes the Financial Times’ Martin Wolf.

“How serious a threat to the Chinese economy might the difficulties of Evergrande, the world’s most heavily indebted property company, and now Fantasia, become?,” writes Wolf. “The answer is not that China will experience a devastating financial crisis. It is rather that the economy’s dependence on demand from investment in real estate must end.”

China’s investment which averaged around 38 percent of economic output from the decade lasting from 2000 to 2010, actually has gone up to 43 percent from 2010 to 2019, reports the financial paper. As overall growth has fallen, this means China’s return on investment have also fallen significantly.

While this is reflected in China’s growing debt problem, it also shows investment is being wasted, with much of that misspending happening in China’s inflated real estate sector. “Xi Jinping himself has spoken of the need to shift “to pursuing genuine rather than inflated GDP growth”. This has to be a big part of what he meant,” writes Wolf.

“This combination of high and unproductive investment with soaring debt is closely related to the size and rapid growth of the property sector. A 2020 paper by Kenneth Rogoff and Yuanchen Yang argues that China’s property sector contributed 29 per cent of GDP in 2016,” notes Wolf.

“Among high-income economies, only pre-2009 Spain matched this level. Moreover, almost 80 per cent of this impact came from investment, while about a third of China’s exceptionally high investment has been in property.”

Twitter avatar for @mcgregorrichard
Richard McGregor @mcgregorrichard
"All these signal that the property boom must end." Magisterial overview from @martinwolf_ on China's real estate woes @FT ($):
ft.comSubscribe to read | Financial TimesNews, analysis and comment from the Financial Times, the worldʼs leading global business publication
1:30 AM ∙ Oct 6, 2021
10Likes7Retweets

USTR: China’s ‘authoritarian state-centric approach’

U.S. Trade Representative Katherine Tai met virtually with counterpart Liu He to discuss trade and tariff frictions, reports Reuters.

“Beijing is increasingly explicit that it is doubling down on its authoritarian state-centric approach and is resistant to addressing our structural concerns," a USTR official said in a briefing before the meeting.

"The Chinese side negotiated over the cancellation of tariffs and sanctions, and clarified its position on China's economic development model and industrial policies," Xinhua, China's official news agency reported after the talks.

Twitter avatar for @henrysgao
Henry Gao @henrysgao
China's press release on Liu He's call with @AmbassadorTai: 1. let's talk; 2. let's walk the talk; 3. these are the issues that I don't want to talk about: China's economic model, industrial policy etc.
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4:34 AM ∙ Oct 9, 2021
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Notable/In Depth

Here is the first tweet from Canadian Michael Kovrig, recently released from more than 1,000 days in a Chinese prison.

Twitter avatar for @MichaelKovrig
Michael Kovrig @MichaelKovrig
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1:47 PM ∙ Oct 8, 2021
5,734Likes812Retweets

How does China’s economic system compare to the world’s largest open market economies? Check out the Atlantic Council GeoEconomic Center’s new China Pathfinder.

Twitter avatar for @AtlanticCouncil
Atlantic Council @AtlanticCouncil
How does China’s economic system compare to the world's largest open market economies? Explore the GeoEconomic Center's Flagship China Pathfinder project to find out ➡️ chinapathfinder.org
Image
5:24 PM ∙ Oct 9, 2021
9Likes4Retweets

China’s property developers facing selloff, report Bloomberg News’ Sophia Horta e Costa and Rebecca Choong Wilkins.

Twitter avatar for @RChoongWilkins
Rebecca 钟碧琪 @RChoongWilkins
This feels like a turning point for China's developers -- we're now heading for the worst selloff in at least eight years. The brief calm spurred by speculation authorities would limit economic damage very much o-v-e-r. bloomberg.com/news/articles/… latest w/ @SofiaHCBBG for @markets
bloomberg.comBloomberg - Are you a robot?
9:45 AM ∙ Oct 5, 2021
65Likes33Retweets

"For Chinese foreign policy officials, the safest course is to follow Xi’s lead and to add a little extra zeal for good measure," writes Bloomberg News’ Peter Martin in Foreign Affairs, commenting on the “more assertive, less flexible" approach in China’s foreign policy.

Twitter avatar for @mauracunningham
Maura Cunningham 马丽娜 @mauracunningham
"For Chinese foreign policy officials, the safest course is to follow Xi’s lead and to add a little extra zeal for good measure." @PeterMartin_PCM writes at @ForeignAffairs about China's current "more assertive, less flexible" approach to foreign policy.
buff.lyWhy China Is Alienating the WorldBacklash is building—but Beijing can’t seem to recalibrate.
12:45 PM ∙ Oct 7, 2021
39Likes20Retweets

Upcoming book talk

Don’t miss the upcoming talk at the Mansfield Center by Peter Martin on his new book China's Civilian Army: The Making of Wolf Warrior Diplomacy. You can register here.

Twitter avatar for @MansfieldCenter
Mansfield Center @MansfieldCenter
Register for our next Mansfield Dialogue with Peter Martin, of "China's Civilian Army: The Making of Wolf Warrior Diplomacy," on Wed., Oct. 20 at 7 p.m. Peter will share the story of China's transformation into a global superpower via citizen diplomats. bit.ly/300oxOf
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12:00 AM ∙ Oct 7, 2021
4Likes1Retweet

Fall day in the mountains

And another glorious fall day in the mountains.

Twitter avatar for @dtiffroberts
Dexter Roberts @dtiffroberts
Glorious fall day in the mountains
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8:27 PM ∙ Oct 9, 2021
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