I hope you had nice start to August. The first newsletter after a vacation is always hard as I know I have missed a lot, so I will try to catch up over the next few days.
Summary of today’s Essential Eight:
1. Weak July loan growth - The PBoC data for July loan growth came in lower than expected. In an attempt to assuage concerns about the disappointing data, the “Financial News”, a media outlet under the management of the central bank, published an article saying the slowdown in loan growth is expected and part of the structural transformation and upgrading of the economy, and is a sign that the policies to "squeeze out water" in financial data are working. I am not sure most analysts and investors are so sanguine.
2. PBoC doesn’t want too much demand for government bonds - The PBoC is trying hard to reduce demand for longer-term government bonds, to prevent the risk of massive losses if the bond yields surge and prices drop, and probably also to try to get investors to put money into the struggling stock market or more productive investments. A hopeful spin starting to circulate about what the PBoC is doing is that perhaps the pressure on the buyers of government bonds is to get institutions to reduce their exposure before a more direct fiscal stimulus package that would spike yields. But the rush into these bonds is not a sign of confidence in the economy, or in the prospects for other asset classes.
3. Wang Yi and Ministry of Foreign Affairs Party Committee on foreign affairs work after the Third Plenum - Wang Yi published an article in People’s Daily on the need to “foster a favorable external environment for further deepening reform comprehensively to advance Chinese modernization”. There does not seem to be much new in here, but I appreciated the succinct description of the strategic opportunities, risks and challenges in the external environment:
“Currently, changes of the world, of our times and of historical significance are unfolding like never before. Transformation not seen in a century is accelerating across the world. A new round of technological revolution and industrial transformation is well under way. A significant shift is taking place in the international balance of power. The Global South is growing with a strong momentum. Peace, development, and win-win cooperation represent the will of the people and the general trends of our day. China’s development faces new, strategic opportunities. Meanwhile, the international landscape is fraught with changes and turbulence. The trend of de-globalization is picking up. Unilateralism and protectionism are notably on the rise. Regional conflicts and turbulence are frequent. Global challenges keep exacerbating. A certain major power has resorted to power politics and bullying, and willful containment and suppression of emerging forces. China has entered a period of development in which strategic opportunities, risks and challenges are concurrent, and uncertainties and unforeseen factors are rising.“
The Ministry of Foreign Affairs Party Committee published an article titled “Strive to create a new situation in foreign-related rule of law work on the diplomatic front”. All those exchanges with foreign lawyers will likely prove fruitful for the PRC legal teams as they work on international law shaping. The ones for foreign trade law were remarkably useful for figuring out how to work the WTO; one my high school friends’ fathers was a big DC trade lawyer who in retirement ran programs teaching PRC lawyers international trade law. They were all very good students.
4. Another PRC-Philippines flashpoint - Soon after we discussed on the most recent Sharp China podcast the possibility that the Philippines had reinforced the Sierra Madre more than expected and so the situation at Second Thomas Shoal/Ren’ai Jiao (STS/RAJ) may be more stable because the ship will now last for many years longer than expected, Bloomberg reported that the “Philippines has carried out substantial reinforcements on a grounded World War II-era ship in the contested South China Sea, enough to make the outpost at the center of tensions with Beijing last at least another decade”. I doubt they did it without US help, but the good news is that so long as the Philippines can continue to resupply and rotate troops stationed on the grounded ship then both sides can return to the relatively stable status quo of the last few years. But STS/RAJ is not the only territorial flashpoint between the two countries, as the PLA reminded everyone earlier this week when a fighter jet released flares in close proximity to a Philippine plane flying in airspace around Scarborough Shoal/Huangyan Dao.
5. Nvidia chip smuggling and a new Huawei chip - In another sign that US semiconductor controls and their enforcement are leaky, The Wall Street journal reports that Huawei is producing an AI chip on par with Nvidia’s H100, which is banned from export to the PRC. The New York Times and The Information both have disturbing stories about how smugglers are buying export controlled Nvidia chips and getting them to customers inside the PRC, including to some that Nvidia must know about. The lack of enforcement from the Department of Commerce is a problem; why even have these controls if you don’t intend to really enforce them? Expect more semiconductor-related restrictions, I think by the October 7 second anniversary of the controls, but unless the US forces countries like the Netherlands, Japan and South Korea to get on board with more restrictions on sales and service to Huawei and SMIC, Huawei is going to continue to make much more progress than many expected.
6. US to move on connected vehicles from the PRC - Reuters reported last week that the US Department of Commerce will propose banning “Chinese software in vehicles in the United States with Level 3 automation and above” as well as any “vehicles with Chinese-developed advanced wireless communications abilities modules from U.S. roads”. This is not a surprise, we discussed the likelihood of this happening soon in the most recent Sharp China podcast. The tariff rate on PRC EVs does not matter if these cars are effectlively banned in the US for national security reasons, no matter where they are produced so long as the have software or wireless communications from the PRC (sorry Quectel).
7. Tutoring and service consumption - On August 3rd the State Council released a “guideline on boosting high-quality development of service consumption”. The guideline included a section titled “Education and Training Consumption 教育和培训消费”, leading to speculation that the language means the end of the double reduction policy that effectively banned most after-school tutoring and destroyed that industry. ThePaper talked to experts and scholars who disagreed this language means the end of the double reduction policies. But would the government come out and say they are backtracking, or just move forward with policies that allow the return of the tutoring industry, to spur consumption and employment?
8. MSS says foreign anti-China forces infiltrating college consultants - Having just gone through the college application process with our twins, and knowing some very expensive college counselors in the PRC (we did not use one…), how could I not highlight this announcement by the MSS that they have cracked cases showing that “with the "assistance" of certain agencies, foreign anti-China forces have painstakingly infiltrated our youth student groups. They have hidden "private goods" in study abroad application documents, adding and altering a large amount of illegal content. This is not only extremely irresponsible to the young students but also damages our national image and endangers national security”. The MSS post also warns about foreign teachers: “Some agencies do not strictly review their foreign teacher teams, leading to "black foreign teachers 黑外教" with unclear identities and qualifications mixing in. They claim to provide policy admission advantages but actually cater to foreign anti-China forces, ghostwriting or "polishing" documents for applicants.” As I joked in a chat thread about this earlier today an essay about learnings and inspiration from a tour of the revolutionary holy sites 革命聖地, or one on the brilliance of Xi and what the world can learn from his writings and thought may not resonate so well with admissions officers at overseas schools. Perhaps the MSS wants fewer people studying overseas, at least for anything other than subjects that support science and technological self-reliance?
