Newsletter 84 - September 18, 2021
Welcome to the 84th edition of Trade War.
Australia, the U.K., and the U.S. sign a new security agreement that includes nuclear-powered submarines, angering France and China. Beijing applies to enter the successor trade group to the Trans-Pacific Partnership, once pushed by the U.S.
Beijing blocks Blackstone-Soho China real estate deal. The implosion of Chinese property giant Evergrande continues while the economy shows more weakness. And China in the greatest “state of flux” in decades, argues new report.
AUKUS responds to China’s growing hard power
Australia, the United Kingdom, and the United States have signed a new trilateral security partnership, called for short AUKUS, angering France — who saw its earlier $66 billion agreement to supply submarines to Canberra scrapped -- and China who views the agreement as directed at containing its rise.
“Despite all the industrial, legal, and diplomatic disruption, the Australian government has decided only the stealthy nuclear-powered submarines developed by Britain with US support can provide the genuine naval capability it needs long-term,” writes London-based think tank Chatham House chief executive Robin Niblett.
“The AUKUS announcement showed that China’s growing hard power is now eliciting a genuinely tough and structural political-military reaction,” writes the Chatham House chief.
At the same time it allows Biden “to send the global message that America is indeed back, just three weeks after the ignominious retreat from Afghanistan” and “remind the world that the Indo-Pacific is where the US will be putting its main effort in the future.”
US won’t leave ‘Australia alone on the field’
“The world saw China’s aggressive response when Australia led calls for an inquiry into the origins of COVID-19.” said Secretary of State Antony Blinken at a press conference in Washington D.C. on the new security alliance, that also included the U.S. defense secretary and Australian counterparts.
“Beijing has seen over the past months that Australia will not back down and that threats of economic retaliation and pressure simply will not work,” Blinken said in a reference to China’s recent sanctions on imports of Australian beef, barley, wine and lobsters. “The United States will not leave Australia alone on the field – or better yet, on the “pitch” – in the face of these pressure tactics.”
“We spoke in detail about China’s destabilizing activities and Beijing’s efforts to coerce and intimidate other countries, contrary to established rules and norms,” said defense secretary Lloyd Austin. “And while we seek a constructive, results-oriented relationship with the PRC, we will remain clear-eyed in our view of Beijing’s efforts to undermine the established international order.”
With CPTPP, China too now actively courting partners
Just a day after Biden announced the new security alliance, China announced it had applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), writes the Wall Street Journal’s Lingling Wei
The 11-nation Asia-Pacific trade pact, once promoted by former president Barack Obama in part to counter China, includes Australia, New Zealand, Canada, Japan, Mexico, Chile, Peru, and the Southeast Asia countries of Vietnam, Singapore, Malaysia and Brunei Darussalam.
“It underscores that both the U.S. and China are actively courting partners and looking for coalitions to join or create to promote their interests,” Wendy Cutler, vice president of the Asia Society Policy Institute and a former U.S. trade official told the business paper.
“With its application for the CPTPP membership, Mr. Xi is seizing on the irony of seeking to join a pact with standards set by American negotiators but rejected by a U.S. president [Trump].” writes the Journal’s Wei.
CPTPP bid ‘good old fashioned gaslighting’
“What does it mean for [the] PRC to try and join a trade bloc the U.S. [government] once claimed was ‘equivalent to a carrier battle group’ for advancing U.S. regional interests?” asks PerthUSAsia Centre research director Jeffrey Wilson, in a tweet thread.
“For its entire history, the TPP (and CPTPP successor) have been billed as a US-led alternative model to the PRC's economic initiatives in the Indo-Pacific, such as [the Belt and Road Initiative]. So why the hell would the PRC join?! It’s like if the US had made a bid for COMECON membership during the [Cold War]!”
The answer: Beijing’s move is not about economics or trade — despite the fact the CPTPP countries account for 13.5 percent of the global economy — as there is little chance it could — or is willing — to make the necessary changes to its increasingly state-led economy.
“The reality is the 'reform cost' of joining the CPTPP is completely unimaginable for its political system. It would require the PRC to make structural reforms to its state capitalist model it simply will never make,” Wilson writes.
Instead, Beijing’s aims are twofold: to block Taiwan from entering the group; and “good old fashioned gaslighting. By presenting itself as ‘committed to economic cooperation’, the PRC can diplomatically retail itself as an alternative partner to the US.”
Blackstone drops ‘unpatriotic’ bid for Soho China
Facing unexpectedly long regulatory hurdles, Blackstone has given up on a $3.3 billion takeover of China commercial property developer Soho China, reports the Wall Street Journal.
“After the deal was announced in June, the husband-and-wife team [Soho’s high profile entrepreneurs Pan Shiyi and Zhang Xin] faced criticism in China, with assertions online that they were cashing out and moving money abroad, despite Beijing’s aversion to such practices,” writes the business paper.
“The transaction had caused disquiet in China with several Chinese press and social media posts urging [the State Administration for Market Regulation] to block the transaction due to the premise that the deal is unpatriotic,” wrote Arun George, an analyst at Global Equity Research, adding that “antitrust approval would also not sit well with President Xi Jinping’s recent calls for wealth redistribution.
If Evergrande had to dump its inventory onto the market…
Protests by aggrieved investors are spreading outside offices of beleaguered property developer Evergrande as fears grow the company could collapse, reports Bloomberg News.
“While it’s impossible to know for sure what would happen if Beijing allows Evergrande’s downward spiral to continue unabated, China watchers are gaming out worst-case scenarios as they contemplate how much pain the Communist Party is willing to tolerate,” writes the financial news service.
“As a systemically important developer, an Evergrande bankruptcy would cause problems for the entire property sector,” Shen Meng, director of boutique investment bank Chanson & Co. said to Bloomberg. “Debt recovery efforts by creditors would lead to fire sales of assets and hit housing prices. Profit margins across the supply chain would be squeezed. It would also lead to panic selling in capital markets.”
Perhaps even scarier for Beijing is the possibility of social unrest, driven by Chinese who have parked their savings in property, an industry which makes up as much as a quarter of China’s economy. “Without a social safety net and with limited places to put their money, Chinese savers have for years been encouraged to buy homes whose prices were only ever supposed to go up,” writes Bloomberg.
“Today, real estate accounts for 40% of household assets and buying a house (or two) is a cultural touchstone. While housing affordability has become a hot topic in the West, many Chinese are more likely to protest falling home prices than spiking ones.”
Market-wide panic & people on the street
“This massively indebted property group might well trigger a market-wide panic. In the meantime, people are already on the street,” tweets Jingzhou Tao, a merger and acquisition lawyer.
Evergrande ‘essentially a ponzi scheme’
Evergrande can be considered a ponzi scheme, argues J Capital Research’s Anne Stevenson-Yang in a commentary in Forbes.
“Evergrande is essentially a Ponzi, collecting cash from the pre-sale of an ever-growing number of apartments, plus hundreds of thousands of individual investors, and using the cash to fund further sales by accelerating construction in progress and funding down-payments,” writes Stevenson-Yang.
“Like any Ponzi, this works as long as it’s accelerating. But inevitable for every Ponzi is the same endgame.When the market slows, those incoming streams of cash start to fall behind the growing arc of cash demands. Evergrande now has about 800 unfinished projects, and there are about 1.2 million people waiting to move in, according to press reports.”
Who will be hit hardest in a possible collapse? “The short answer is that investors, lenders, and apartment owners lose. Insiders win. China’s financial system remains standing. Governments at every level ramp up repression,” Stevenson-Yang writes.
“The losses suffered by a large number of urban families in contrast to the protection of the actual engineers of these schemes may be reaching a rising level of social and political risk that is contributing to Xi Jinping's widely promoted campaign to redistribute the wealth of China's most visible tycoons,” she adds.
Consumption ‘weakest link’ adds to economic troubles
Weak retail sales and falling home purchases are contributing to worries about the strength of China’s growth trajectory, reports the Wall Street Journal’s Jonathan Cheng.
Retail sales, considered an important measure of consumption, grew only 2.5 percent in August from a year earlier, well below economist expectations of 6.3 percent growth. Meanwhile, the value of home purchases dropped by almost 20 percent in August as compared to the same period last year, the biggest fall since April 2020, during the worst of the pandemic.
“China’s property market has long been a key driver of the country’s growth, while reorienting the economy toward domestic consumption has become a priority for policy makers concerned about an unhealthy tilt toward infrastructure- and export-led growth,” notes Cheng. “Consumption has been the weakest link in China’s pandemic recovery and the last corner of the economy to get back on its feet, hurt by stagnant income growth and the government’s stringent Covid-19 measures.”
“We reckon that China’s zero-covid strategy could be increasingly costly for the Chinese economy,” Nomura economist Ting Lu wrote in a recent note.
Carl Minzner @CarlMinznerWSJ: Weakness in retail sales and the property sector add to an increasingly cloudy outlook for China’s economy https://t.co/6RYzra6YeD via @WSJ
China in greatest flux since reform era
“China is in a greater state of flux in its domestic politics and foreign policy than in any time since the reform era began,” argue leading U.S. China experts in a new report entitled “China’s New Direction: Challenges and Opportunities for U.S. Policy.”
“Xi has created a highly centralized, personalized, and ideological authoritarian system that is prone to misperceptions and distorted policymaking. These attributes will only increase as the next leadership transition in 2022 approaches, leading to even more domestic and international overreach in Xi’s policymaking,” warn the report’s authors.
“China’s leaders have long supported state-owned industries and priority sectors, and recent actions show a clear intensification of these policies (for example, in global supply chains). Chinese policymakers are betting that their intensified controls are compatible with continued financial inflows, but risks related to high debt levels may derail these ambitious goals.”
China is pressuring tech companies to improve worker conditions as part of Xi Jinping’s ‘Common Prosperity’ campaign, reports the Wall Street Journal’s Sha Hua.
China’s new ambassador to Washington Qin Gang has met with Henry Kissinger.
Qin Gang 秦刚 @AmbQinGangHad a great time with Dr. Kissinger and benefited a lot from his vision, wisdom and insights. https://t.co/F5KO3LFqNz
The World Bank has decided to end its ‘Doing Business’ report, after an investigation revealed senior staff altered data to please China, reports the Wall Street Journal.
Sounds like the ban on private tutoring is experiencing the common China phenomenon referred to as 上有政策，下有对策 (”Policies from on high will always be countered by strategies from down below.”)
Book plug from activist Wang Dan
Is China's economic rise sustainable and what Xi's 'Common Prosperity' and the crackdown on enterprises and entrepreneurs has to do with it will be topics I cover, when I speak next Wednesday at noon MST, hosted by the Montana World Affairs Council.
And a picture from a popular hiking trail outside Missoula, Montana.