The following is the video transcript for 'China Update' published 18 November 2021. It contains material quoted from other sources.
Property Crisis | Economy Update
First up, let’s look at developments in China’s ongoing property sector crisis.
It’s increasingly clear that regulators are softening restrictions on property developers as it tries to manage the current crisis. But there is a catch, new policies appear to disproportionally benefit state owned developers.
Reports from the last two days claim that regulators have told Chinese exchanges that “high quality” developers can apply to issue new special financing instruments to repay outstanding debt, “high quality” is not defined however. The rule that limits the size of new interbank bond issuance by developers to 85% of their outstanding interbank debt also looks to be relaxed.
New data shows that Chinese real estate developers have issued more bonds in the first week of November than the whole of October. However, Chinese financial media it reporting that the companies involved are all state-owned enterprises.
The People’s Bank of China published data yesterday showing that mortgages in October surged after a relaxation in home lending rules, thus bringing much need demand to the real estate industry.
Private developers are still feeling the pressure though. Some creditors of Kaisa Group haven’t received bond interest due last week, starting the clock on a 30-day grace period before a default.
Now let’s turn to the economy generally. We have more economic data for October.
Industrial production was up in October by 3.5% compared to last year and by an average of 5.2% a year compared to 2019, higher than expectations, but still quite low
Retail sales – a proxy for consumption – grew faster than industrial production in 2021, but still lags when looking over the last two years.
In October exports grew in RMB terms by 20.3% year on year, and imports by 14.5%.
For this year’s Double 11 shopping period, e-commerce giant Alibaba Group saw record low growth in gross merchandise volume (GMV), which dipped below double-digits for the first time to hit 8.45%。
Is this representative of wider consumption trends or just representative of Alibaba’s performance.
After several months of mixed economic data, it seems the government believes that there was some stabilisation in October. The National Bureau of Statistics expressed “Generally speaking, in October, the national economy was generally stable and maintained the trend of recovery.”
US-China: “3 Principles, 4 Priorities”
In the last China Update we discussed the virtual meeting between GS Xi Jinping and US president Joe Biden. Over the last two days there has been a lot in Chinese state media about the so-called “three principles and four priorities” which Xi laid out in his exchange with Biden. Since there has been so must attention on this, and since it was directly communicated between the leaders, we should look at it here.
The full title of this formulation is, “the three principles and four priority areas for China-US relations.”
The three principles are:
1) Mutual respect for each other's “social systems and development paths, core interests, and right to development.”
2) Peaceful coexistence
3) Win-win cooperation
We should recognise these ideas, as officials in Beijing have been using them often over the last few years. Unsurprisingly, these principles are quite vague.
Both state-run Global Times and Xinhua news have claimed that the US and China agree on two and three, but that the US fails to accept the first principle, the principle of mutual respect.
Xi didn’t define what “mutual respect” means, but state media has. For example yesterday the Global Times wrote, “the US has continuously interfered in China's domestic affairs such as Hong Kong and Xinjiang matters, and it showed no respect to China.”
Thus, this principle, in part at least, is just a recycling of the old demand of “not interfering in China’s domestic affairs.”
As for the four priorities within the US-China relationship from Beijing’s perspective, Xi expressed these are, and I’ll quote them verbatim:
1) Shouldering responsibilities of major countries and leading global response to outstanding challenges
2) Acting in the spirit of equality and mutual benefit
3) Managing differences and sensitive issues in a constructive way to prevent China-U.S. relations from getting derailed or out of control
4) Strengthening coordination and cooperation on major international and regional hotspot issues to provide more public goods to the world
The “Historical Resolution”, or to use its full title, “the Resolution of the CPC Central Committee on the Major Achievements and Historical Experience of the Party over the Past Century ” was published to the public yesterday.
We covered the importance of this resolution for Xi Jinping during the critical 6th plenum meeting last week. Now that it’s published, we can now examine some of the other details to get a sense of priories for the Party going forward.
GS Xi Jinping’s flagship foreign policy initiative is enshrined in the document:
“Adhering to the principle of achieving shared growth through consultation and collaboration, China has promoted high-quality development of the Belt and Road Initiative”, expressing that the BRI is “widely welcomed public good and platform for international cooperation in today’s world”
The document signals that ideology work will be a priority going forward:
“misguided ideas have often cropped up, such as money worship, hedonism, ultra-individualism, and historical nihilism [that is rejecting Beijing’s official historical narrative], online discourse has been rife with disorder, and certain leading officials have demonstrated ambiguity in their political stance and a lack of fighting spirit.”
And very interestingly, the following was including too:
“The Central Committee has made it clear that failure in the cyberspace domain will spell disaster for the Party’s long-term governance. The Party therefore attaches great importance to the Internet as the main arena, battleground, and frontline of the ideological struggle.”
Anti-corruption work too seems to be a strong theme in the document, “The Party has intensified efforts to address corruption that occurs on the people’s doorsteps, hunt down corrupt officials who fled overseas and recover state assets they had stolen, and root out all corrupt officials.”
And one final thing, common prosperity, appears strongly too:
“With unswerving resolve, we will pursue common prosperity for all.”
Suggesting that Beijing is serious about putting redistribution above GDP growth as an economic priority. Or at the very least, GDP is no longer the primary performance indicator for local governments.
EU & Taiwan Policy
Hong Kong based South China Morning Post is reporting that the EU was set to announce a new policy this Friday for upgrade its trade ties with Taiwan and interacting with Taiwan on trade and economic issues generally, involving, “more regular meetings, collaboration on specific sectors such as semiconductors, and more visits by senior officials.”
The paper reports that according to “multiple sources” the EU has postponed the announcement of this plan as there is internal debate about how to balance its relations with Beijing and Taipei.
It’s difficult to know how accurate this report is, but we will keep an eye on it over the next few weeks.
Third Aircraft Carrier
A new consensus among analysts is that China’s third aircraft carrier — commonly known as the Type 003 — may launch in the coming months, showcasing the incredible speed in which China is developing and building aircraft carriers. Civil satellite imagery of the relevant Chinese Shipyard in late October, reveals that the carrier’s main external components is nearing completion.
The Type 003 vessel is a leap forward in capabilities and technology for China, compared with its first two carriers, the Liaoning and the Shandong, which are frankly obsolete. The Type 003’s new CATOBAR launch system enabling the employment of heavier fixed-wing aircraft, meaning more fuel and more payload.
We should note, Chinese carriers are still far behind US super carriers in terms of technology and firepower. The US also has 20 carriers to China’s soon to be 3, in fact, Japan has more carriers with four.
However, with the speed in which China is building improved carriers, the PLAN is certainly trying hard to reduce that gap.
While we are on military technology. There is speculation that the PLAA is about to announce its next generation H-20 strategic bomber. Based on leaked information, analysts believe the new bomber may have adopted a stealthy flying wing design that can help it strike targets beyond the second island chain.