Newsletter 117 - June 4, 2022
Welcome to the 117th edition of Trade War.
Chinese banks are being told to lend more but borrowers aren’t interested. Consumer confidence collapses but Beijing resists direct payments. And analysts predict a sustained and significant slowdown in China’s GDP growth.
U.S. leaves Taiwan out of new regional economic grouping but strengthens bilateral links. Commemoration of the Tiananmen Square massacre on June 4, 1989 banned in Hong Kong but has new life in Taiwan. And a report shows how the Chinese Communist Party targets female journalists of Chinese heritage for online harassment.
Pump priming to tune of 800 bill yuan
Beijing has ordered its policy lenders including China Development Bank, the Agricultural Development Bank of China and the Export-Import Bank of China, to pump 800 billion yuan ($120 billion) of credit toward infrastructure, in an effort to stimulate the ailing economy, reports Bloomberg News.
The stimulus, announced at a State Council meeting chaired by premier Li Keqiang, aims to help pay for this year’s infrastructure development, as well as help out struggling local governments.
“Xi Jinping has called for an all-out effort to boost infrastructure this year, turning to an old playbook of driving up growth through public investment. Funding the extra spending has proven to be tricky though, after a plunge in land sales and widespread Covid outbreaks battered government revenue,” reports Bloomberg.
Nomura, which recently cut its growth forecast for China’s GDP this year to as low as 3.9 percent, estimates that the Chinese government is short 6 trillion yuan in funding, as revenue from land sales has fallen following last year’s crackdown on the property sector.
Standard Chartered expects infrastructure investment to grow 10 to 15 percent in China in 2022. Last year 23 trillion yuan was spent on infrastructure, Bloomberg Economics has estimated.
“We think the three key ingredients for investment -- projects, financing and incentive -- are all falling into place this year,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered. “The additional 800 billion yuan loans from policy banks will help fill the financing gap if any.”
Borrowers say ‘no thanks!’
Uncertainty about Covid lockdowns has Chinese households and companies nervous about borrowing, reports Bloomberg News.
“After loan growth weakened in April to the worst level in almost five years, several indicators suggest the data for May won’t be much better,” reports the financial news service.
“The sluggish credit demand points to worsening expectations among market entities and slowing business expansion,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group.
This is happening even as Beijing continues to call for more lending to boost the sagging economy, with the central bank telling lenders last week to “go all out” in pushing loans.
“The upshot is that the financial system is awash with cash, and any monetary easing from the central bank -- such as interest rate cuts and liquidity injections -- will likely prove less effective in spurring growth in the economy,” warns Bloomberg.
“Over the next two to four years, as China struggles toward adjustment, growth rates may remain in the 3 percent to 5 percent range. After that they are likely to be much lower,” Peking University finance professor Michael Pettis predicted to Bloomberg in a separate article.
Consumer confidence drops; Beijing resists direct payment
China’s consumer confidence is plumbing new depths but Beijing is still resisting direct payments to stimulate demand, reports the South China Morning Post’s Orange Wang.
China’s consumer confidence index fell to 86.7 in April from 113.2 in March, the lowest reading since data was first collected in 1991, with any reading below 100 showing pessimism.
Despite growing calls for Beijing to issue direct payments to individuals as has been done in the U.S., Chinese premier Li Keqiang spoke out against such a plan last week, saying it was not suitable for a country with 1.4 billion people, and with unbalanced regional development.
“If you hand out cash, people will immediately recognize the government is giving them money and be confident to consume, so that everyone’s confidence will go up, so will consumption and demand,” said Yao Yang, dean of Peking University’s National School of Development, who is a proponent of cash subsidies.
“The central government [should] introduce a policy, and I think there is no obstacle in it,” added Yao, noting that cash payments would do a much better job lifting confidence than building more infrastructure projects, which usually increase debt.
“Consumption was mentioned in the 33-point-plan unveiled by China’s State Council, aimed at propping up the faltering economy, but proposals focused on supply-side issues rather than advocating cash handouts and consumption vouchers,” reports the Hong Kong-based paper.
Xi’s Covid controls & Li’s economy focus share limelight
Chinese media are now highlighting both Xi Jinping’s tough policies on Covid control and Li Keqiang’s efforts to revive the economy, reports the Wall Street Journal’s Lingling Wei.
“Signs of a divergence in policy priorities at the top echelon of Chinese power—with Mr. Xi emphasizing the need to stay the course on strict Covid-19 controls and Mr. Li stressing the importance of getting economic momentum going—had confused local officials as well as investors and exposed cracks in Mr. Xi’s power,” writes Wei. “Now, the party appears to be seeking to unify the messaging.”
“Epidemic prevention and control is in the utmost interest of the nation,” stated the official People’s Daily in a front page article on Thursday. On the same page, however, there was also an article on Li Keqiang’s push to shore up the flagging economy.
“Another front-page article depicting Shanghai’s recent easing of Covid-19 restrictions as a victory over the virus appeared to acknowledge the economic impact of the city’s two-month lockdown, saying, “We must make up for lost time and losses caused by the epidemic,”” reports the Journal.
“The Communist Party’s hold on power has long depended on its ability to deliver continued growth. Mr. Xi went into 2022 emphasizing economic stability, but has remained adamant about sticking to the zero-Covid policy.”
Li’s new visibility could work to Xi’s advantage: “it gives him a scapegoat if economic-revamp efforts aren’t successful,” notes Wei.
‘Geoeconomics to hedge US geopolitics’
“We must employ geoeconomics to hedge against US geopolitics, which is defined as its use of geopolitics to engage in political and security blocs in an effort to confront China,” says Fudan University’s Wu Xinbo in an interview with Guancha.
“By contrast, we use geoeconomics to engage in extensive economic cooperation with countries in this region, whether it is South Korea, Japan, or Southeast Asian countries,” continues Wu.
"We try to engage in all forms of economic cooperation with them as much as possible, including bilateral, mini-lateral, and multilateral frameworks, among others.”
US-Taiwan economic ties strengthened
The Biden administration is strengthening economic ties with Taiwan as tensions with China grow, reports the Wall Street Journal’s Yuka Hayashi.
The U.S. Trade Representative’s office earlier this week announced an agreement with Taiwan to strengthen bilateral trade, with a focus on digital trade, clean energy and labor rights. Meanwhile the Commerce Department is starting a separate dialogue with Taipei that covers technology trade and investment, citing Taiwan’s leading role in the manufacture of high end semiconductors.
“Taiwan is an incredibly important partner to us, especially as it relates to semiconductors,” Commerce Secretary Gina Raimondo said to reporters Tuesday. “We look forward to continuing to deepen our economic ties with Taiwan, and we are in active conversations with Taiwan.”
Ninety-two percent of the global supply of advanced chips came from Taiwan Semiconductor Manufacturing last year, according to a supply chain report from the White House.
“Imagine what would happen to the United States if Taiwan denied us semiconductors,” Raimondo said at the World Economic Forum earlier. “We predict we will purchase 70-plus percent of all of our advanced semiconductors from Taiwan. That is an untenable, vulnerable situation.”
Even as the U.S. strengthens its economic relationship with Taiwan, it decided to not invite the island to join the Indo-Pacific Economic Framework when it was launched by president Joe Biden on his recent trip to Asia. The decision to not include Taiwan aimed to avoid angering Beijing, reports the Journal.
Banned in Hong Kong, Tiananmen vigil takes root in Taiwan
While an annual vigil commemorating June 4, 1989 that continued for decades in Hong Kong has now been shut down, Taipei has emerged as a “new center for remembrance of the massacre,” report the New York Times’ John Liu, Chris Buckley, and Austin Ramzy.
“On Saturday, smaller crowds gathered in Taipei and other cities around the world — this time mourning not just the people slain 33 years ago, but also the fate of Hong Kong, where the smothering of dissent has put an end to the vigil in Victoria Park, the world’s most prominent public memorial to the victims of 1989,” reports the Times.
“There’s this blending happening of the Hong Kong story and the Beijing story,” says University of California Irvine’s Jeffrey Wasserstrom who is also the author of a Vigil: Hong Kong on the Brink.
“Hong Kong was where you kept alive the memory of what had happened in Beijing in 1989. But now June 4 is also keeping attention back on Hong Kong at a time when the world’s moving on from that,” he said. “It’s also becoming the commemoration of the Hong Kong commemoration.”
“A network of Twitter accounts previously linked to the Chinese government is targeting female journalists of Chinese heritage who work for western news outlets in a campaign of online harassment, according to a new report [by Australian think tank APSI],” writes Axios China reporter Bethany Allen-Ebrahimian.
“In recent weeks, the Twitter accounts of the New Yorker's Jiayang Fan, the Economist's Alice Su, the New York Times' Muyi Xiao, and other journalists and China analysts — mostly female, mostly of ethnic Chinese heritage and largely based outside of China — have been flooded with thousands of tweets criticizing them as traitors and accusing them of ’smearing’ China.”
Activist Han Dongfang speaks briefly to reporters in Hong Kong about the Tiananmen Square massacre of June 4, 1989.
“Consensus expectations have not fully factored in the degree to which China’s economy is weakening this year, or the probability that slower growth will extend into future years,” writes Rhodium Group’s Logan Wright.
“As the gap between this economic reality and rosier expectations closes in the months ahead, we are likely to see significant downgrades to consensus views on global inflation, commodity demand, future carbon emissions, and both direct and portfolio investments in China.”
“China’s development lending further amplifies autocracies relative to democracies because the opaque and closed nature of the lending places fewer constraints on the actions of autocratic regimes. This makes it easier for autocrats to deploy lending to serve autocratic projects that, for instance, benefit political elites over ordinary citizens,” explains a new brief from the Stanford Center on China’s Economy & Institutions.
The creek is getting high.