China bond outperformance tells a bigger story – Asia Times

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China’s stock investors could be excused for feeling like President Xi Jinping is disinterested in their plight as market valuation losses mount.

Bond punters seem ascendant, though, as Beijing officialdom makes clear it has their backs in the way few international funds saw coming.

The hyper-targeted nature of policy rescue efforts by the People’s Bank of China (PBOC) and other arms of the state explain why yuan-denominated corporate bonds were among the globe’s best-performing asset classes last year.

The dollar bonds of local government financing vehicles (LGFV) were also big winners in 2023. Unlikely, too, given all the hand-wringing about the US$9 trillion LGFV debt mountain.

The borrowing binge has credit rating companies worried that municipal debt will be China’s next crisis, one that could dwarf today’s huge property troubles.

The reason bonds are winning: Xi’s team understands that a vibrant sovereign bond market is needed to defuse the property crisis and head off a local government debt meltdown. The same goes for achieving Xi’s bigger goal of replacing the dollar as the linchpin of trade and finance.

That’s not to say Xi’s team has given up on putting a floor under China’s stock markets or gross domestic product (GDP). In 2023, inflation-adjusted GDP beat Beijing’s target to grow at 5.2%. But nominal GDP slipped to 4.6% from 4.8% a year earlier as deflationary pressures mount.

To economist Zhang Zhiwei at Pinpoint Asset Management, nominal GDP trailing real output “suggests China is likely growing below its potential growth. More supportive fiscal and monetary policies would help China to restore its growth potential.”

Economist Duncan Wrigley at Pantheon Macroeconomics says news that domestic loan growth only expanded by 10.4% year-on-year in January, the slowest pace since 2003, suggests more stimulus is coming.

The downshift indicates “still-relatively sluggish credit demand, despite net new social financing and net new loans beating market expectations.”

But the longer-term goal of increasing China’s financial footprint is the bigger priority. Beijing has made significant inroads into making the yuan a major reserve currency.

The endeavor shifted into higher gear in 2016 when China secured a place in the International Monetary Fund’s “special drawing-rights” program. It was then that Xi won the yuan entry into the globe’s most exclusive currency club along with the dollar, euro, yen and the pound.

In 2023, the yuan topped the yen as the currency with the fourth-largest share in international payments, according to financial messaging service Swift. It overtook the dollar as China’s most used cross-border monetary unit, marking a first.

The yuan is supplanting the dollar in certain spaces. Photo: Facebook Screengrab

Also last year, Chinese government bonds performed better than US Treasuries in terms of total returns. Adding in the outperformance by corporate bonds, 2023 was a milestone year for China’s emergence as a debt-market superpower.

Yet the dollar continues to dominate despite the US national debt topping $34 trillion and as extreme political polarization in Washington has Moody’s Investors Service threatening to yank away America’s last AAA credit rating.

Xi’s reform team is looking to borrow from Washington’s model for luring waves of capital into local assets. Doing so is vital to financing China’s development and sustaining the giant infrastructure projects driving economic growth.

At the moment, foreign investors hold about 30% of the $26 trillion of US public debt outstanding. In China, it’s 10% at most. Xi, in other words, hopes to get foreign governments and the globe’s top asset managers to fund his economy the same way they long have the US’s.

That means building more vibrant and transparent capital markets. Though the magnitude of China’s total debt liabilities isn’t in the same orbit of the US, China’s public IOUs also exceed GDP. In China’s case, the IMF estimates the burden to be about 116% of GDP when you add in local governments’ off-balance-sheet borrowings.

For China, municipal governments are vital to meeting Beijing’s ambitious annual growth targets. Yet following years of runaway investment in infrastructure, fallout from Covid-era downturns, fewer windfalls from land sales and soaring pandemic-related costs, local government debt is now a top financial risk.

Economists agree that Xi and Premier Li Qiang should lean into increasing global demand for Chinese debt. The end of Federal Reserve tightening signals that interest rate differentials between the US and China have peaked. At the same time, China’s deflation trend means investors buying today could be looking at big returns as bond prices rise.

Already, Beijing has increased and widened the channels to welcome foreign investors, including benchmarks like FTSE Russell.

What’s needed now is a top-to-bottom revamp of market mechanisms from efficient pricing to hedging tools to allowing for capital to enter and leave markets easily. Beijing must make its national balance sheet more transparent and move its fiscal management practices more in line with global norms.

Xi also must resist the urge to weaken the yuan for short-term gain. As economic headwinds intensify, nothing would boost Chinese GDP faster than a weaker exchange rate to boost exports. That might turn off global investors who think in dollar terms.

Hence the Chinese central bank’s reluctance to ease policy. Earlier this month, the PBOC cut the amount of cash banks must keep in reserve by 0.5 percentage points. That pumped 1 trillion yuan ($140 billion) in long-term liquidity into markets.

It was enough to tame bond market dynamics but not stabilize Shanghai stocks. Equity investors have been waiting for Xi’s team to launch a giant new stock stabilization fund – so far, to no avail.

Part of the rationale seems to be that China can do the bare minimum to stabilize stocks and keep GDP as close to 5% as possible. The restrained nature of policy moves, though, appears positive for bond markets and negative for stocks.

“This pattern of new lows in bond yields and resumption of declines in equities highlights to us that the market is concerned that stimulus is not sufficient to address the current deflationary environment,” notes strategist Jonathan Garner at Morgan Stanley. “Our economists continue to argue that a major fiscal package targeting the consumer is needed.”

At the same time, it’s possible “policymakers may start shifting their focus from foreign exchange stability toward more monetary easing” as the need for a stable yuan “has become less necessary,” says Jingyang Chen, strategist at HSBC Holdings.

The overriding focus, though, must be fixing the cracks in China’s financial system. Trouble is, the “ongoing news flow” points to a property crisis that’s “still hot and not easy to resolve,” says analyst Kieran Calder at Union Bancaire Privee.

The bottom line, he adds, is that investor confidence “cannot return” until the property sector is finally fixed. Indeed, the longer the default troubles at China Evergrande Group and Country Garden make global headlines, the more challenging it will be for Asia’s biggest economy to attract enough capital.

At the moment, Xi and Li also are stepping up efforts to head off a local government debt reckoning. Moves include pulling some of the leverage built up by prefectures around the nation onto Beijing’s own balance sheet.

It’s a delicate process. Xi’s Ministry of Finance must maintain confidence among investors that they won’t sustain massive losses. This perception is vital to attracting healthy demand for new debt issues to finance cleaning up older ones.

Here, it’s vital to get right the mix of banks upping lending in the short run and address local government imbalances in the long run.

Beijing is indeed making some progress. As analysts at UBS argue in a note, “continued local government financing vehicle debt swaps using the previous issuance of special refinancing local government bonds in 2023 may have reduced some existing bank loans, corporate bonds and shadow credit.”

In the long run, the ends could justify the means of China prioritizing bond over stock markets. Yet in other ways, the challenges involved in buttressing confidence among global investors is growing.

This week, Xi’s regulators tightened curbs on China’s rapidly growing quant trading industry. Both the Shanghai and Shenzhen exchanges are increasing monitoring of such dealing, particularly in the leveraged products space, after freezing the account of a major fund for three days.

Such regulatory uncertainty has been a constant worry for global investors since Xi’s tech crackdowns beginning in 2020. Those moves, and myriad others since then, tarnished Xi’s 2013 pledge to let market forces play a “decisive” role in Beijing decision-making.

For all Xi’s promises, China today is fending off worries it’s a buyer-beware market.

In March, Xi entrusted the reform process to Premier Li, who has since promised to accelerate moves to diversify growth engines. One key priority is creating deeper and trusted capital markets so that households invest in stocks and bonds in addition to property.

Chinese President Xi Jinping and Premier Li Qiang in a file photo. Image: NTV / Screengrab

Such retooling is needed to change the narrative that Chinese markets. Too many foreign investors still fear that Chinese markets are underpinned by a developing economy with limited liquidity and hedging tools, a giant and opaque state sector, and an immature credit-rating system that obscures risk and enables the chronic misallocation of capital.

In recent years, foreign investors wondered whether China might be facing a Lehman Brothers-like reckoning. Or a crash akin to the 1997-98 Asian financial crisis. For some, the property-overhang dynamic plaguing China’s 2024 echoes Southeast Asia’s predicament 26 years ago.

As top-heavy economies from Bangkok to Jakarta to Seoul hit a wall, investors fled and crashed currencies in their wake. That made dollar-denominated debt impossible to manage as default rates exploded across the region.

China’s property crisis has caused unpredictable challenges for local governments as tax revenues dry up. To Logan Wright, director of China markets research at Rhodium Group, “a collapse in local government investment would be comparable to the economic impact of the crisis in the property market.”

He notes that the “most important variable impacting” the world’s second-biggest economy “will be the success or failure of local government debt restructuring.”

You can’t restructure much, though, if China’s debt capital markets aren’t up to the task. The good news is that Xi’s team is focused on raising China’s bond market game and at least some global investors appear to be getting the memo.

Follow William Pesek on X at @WilliamPesek

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Understanding Iran’s non-state network – Asia Times

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During a three-day period in January, Iranian-supported militant groups employed an anti-ship missile to attack an oil tanker in the Red Sea, launched rockets into northern Israel from Lebanon, and used a drone strike to kill three US soldiers in Jordan.

These incidents marked the extension of attacks by Iranian-backed groups in the Middle East into the fourth straight month since the outbreak of the Israel-Hamas war on October 7, 2023.

Largely diplomatically isolated since the 1979 Iranian Revolution, unable to challenge US military power, and lacking the nuclear brinkmanship card held by North Korea, Iran has evolved its strategy of utilizing militant groups for decades.

Iran’s Quds Force has provided training, funding, and weapons assistance to various militant groups in the region, including Hamas, Hezbollah, and the Houthis. This strategy has advanced Iran’s geopolitical interests and afforded it plausible deniability, but not all of its associates march in lockstep with Tehran.

Part of Iran’s approach involves transforming militant forces into powerful political actors.

Hamas, founded in 1987 as an offshoot of the Muslim Brotherhood, gained prominence during the First Intifada against Israeli forces. Hamas grew closer to Iran during the early 1990s after the Oslo Accords initiated an ultimately failed peace process, with Iran providing financial and weapons support during the Second Intifada from 2000 to 2005.

When Israeli forces withdrew from Gaza in 2005, Hamas established administrative control over the territory after winning elections the following year, and has forbade elections since.

Consolidating armed Palestinian opposition under Hamas allows Tehran to challenge Israel directly. But as a Persian and Shiite Muslim country operating in a predominantly Arab and Sunni Muslim peninsula, Iran has offset its diplomatic and cultural isolation by using the Palestinian cause to criticize Arab governments growing closer to Israel in recent years.

October 7

Supporting Hamas against perceived inaction from Arab leaders has been a constant feature of Iranian public messaging. Further normalization between Israel and Arab states is now paused because of the Israel-Hamas war.

While Iran denied prior knowledge of the October 7 attack, it has expressed public support for Hamas since. Hamas leader Ismail Haniyeh has meanwhile stated that Iran provides US$70 million annually to the group in addition to ongoing logistical and weapons assistance, largely through smuggling operations.

However, relations between Iran and Hamas are largely limited to opposition to Israel and the West, and Hamas also receives financial support from Turkey, Qatar, and other sources.

Instead, Hezbollah has emerged as Iran’s most important non-state ally. Established as a Shia militia in 1982 during the Lebanese Civil War, Hezbollah’s significant military forces have been utilized to target Israeli and Western forces in the Middle East.

Since the recent conflict’s onset, Hezbollah has launched hundreds of missiles into northern Israel, but the destruction caused by the 2006 Lebanon War against Israel has made it cautious of further escalation.

Hezbollah is also strategically valuable in its role as an envoy to other militant groups. Hezbollah has historically trained Hamas militants in weapons systems and military exercises in Lebanon and Syria. Like Iran, Hezbollah also denied knowledge of the Hamas attack on October 7, but Iranian, Hezbollah, and Hamas officials have since met regularly to discuss strategy and cooperation.

Hezbollah in government

Beyond its military role, Hezbollah has evolved into Lebanon’s political powerbroker. Eight of its members were first elected to the Lebanese parliament in 1992, it joined the government for the first time in 2005, and in 2018, a Hezbollah-led coalition gained the majority of Lebanese parliamentary seats.

Despite losing its majority in 2022, its lingering influence over Lebanese politics indicates that Iran remains close to a state-capture-like situation, where external forces and interest groups gain systematic control over a country’s decision-making process.

Additionally, Hezbollah operates clinics, schools, banks, businesses, and other entities that have shielded it from Lebanon’s economic collapse and political stagnation since 2019, maintaining its “state-within-a-state” structure.

In addition to weapons and logistical support, Iran is believed to provide $700 million to Hezbollah every year. And when sanctions diminish Iranian assistance, Hezbollah also secures funding from legal businesses to criminal enterprises, activities that span across the Middle East, Africa, Europe, Latin America, and the US.

Iran and Syria, Iraq

Iran’s militant network in Syria meanwhile surged after the civil war broke out in 2011, threatening Iran’s long-term ally President Bashar al-Assad. Hezbollah and Iran recruited from Syria’s Shia community to form such groups as the Mahdi Army and al-Mukhtar al-Thaqafi Brigade, as well as some Sunni groups such as Liwa al-Quds, to aid the Syrian armed forces against Islamic State (ISIS) and pro-Western forces.

The Zainabiyoun Brigade and Fatemiyoun Brigade, largely consisting of Shia Muslims from Pakistan and Afghanistan, have been used by Iran in Syria.

As the Syrian government’s position has stabilized, Iran has attempted to integrate pro-Iranian militant groups into the Syrian armed forces and has used them to increase Iran’s political and economic influence in Syria as it competes with Russia. Since the start of the Israel-Hamas war, they have launched numerous strikes against US and allied forces within Syria.

Pro-Iranian Iraqi Shia militant groups have similarly increased rocket attacks against US forces in Iraq since October 7. Their growing strength goes back to the US-led occupation after 2003 that allowed Iran to bring such groups as the Badr Organization, funded and trained in Iran, back into Iraq. Iran also organized with other developing “Special Groups” of Shia militias to attack US forces.

After the departure of most US forces from Iraq in 2011, Iranian-backed groups sought political integration into Iraq’s fragile democracy. Alongside the Badr Organization, Kata’ib Hezbollah, Harakat Hezbollah al-Nujaba in Iraq (both distinct from Lebanese Hezbollah), and Asa’ib Ahl al-Haq (AAH) became some of Iraq’s most prominent political and militant forces.

In 2014, numerous pro-Iranian militant groups in Iraq were consolidated into the Popular Mobilization Forces (PMF) to combat ISIS, playing a crucial role in liberating much of the country and elevating their status.

In Iraq’s 2018 parliamentary elections, the PMF became the second-biggest bloc and “achieved one element of state capture” by securing government funding for itself the following year. PMF members now directly or indirectly control crucial government institutions such as the Interior Ministry and Supreme Court, and December 2023 elections saw the coalition win 101 of 285 provincial council seats.

The Islamic Resistance in Iraq (IRI), a leading group of PMF militias, has taken the initiative in attempting to push remaining US forces out of the country. Their attacks since October 7 have intensified discussions within Washington over whether to do so, while Iran denied knowledge of the drone attack which killed three US soldiers in January 2024.

Houthis

Washington has similarly been confronted by the Houthis since October 7. Emerging in Yemen in the early 1990s as a Shia Islamist group amid the country’s civil war, the Houthi movement initially focused on religious and cultural revivalism and combating corruption.

Hezbollah performed early outreach to the Houthis before Iran increased its financial, logistical, and weapons support in the 2010s as Yemen’s civil strife escalated. Iranian support increased further after Saudi Arabia invaded Yemen to fight the Houthis in 2015 until Saudi forces pulled out of the country in defeat in 2023.

Since the start of the Israel-Hamas war, the Houthis have fired several missiles into southern Israel. But their principal distraction has been attacks on shipping in the Red Sea in support of Hamas and the Palestinians. Acting in coordination with Iranian and Hezbollah officials, the Houthis have disrupted global trade and raised doubts over the US ability to ensure open sea lanes.

Doing so has enhanced their domestic support and expedited Yemen’s peace process, the conclusion of which would give the Houthis significant political control over the country. Iran has continued to offer support, providing data from an Iranian surveillance vessel to direct Houthi attacks in the Red Sea and ongoing weapons shipments to the group.

Other militant groups

While the more prominent pro-Iranian militias have been mentioned, smaller cells also exist.

The Palestinian Islamic Jihad complements Iranian influence in Gaza. In Bahrain, the Al-Ashtar Brigades and Saraya al-Mukhtar have been responsible for numerous attacks on security and government targets in promotion of Shiite interests, and Kuwait has witnessed several scandals involving the surfacing of pro-Iranian Shia militant cells over the past decade.

But Iran’s cultivation of militant groups and political exploitation is not without risk. The ongoing Hamas-Israel conflict has put Hamas’ rule in Gaza to the test, potentially undoing decades of investment. And Iran has only varying degrees of control over all these groups.

Hamas’ open support for Sunni militant groups in the Syrian civil war conflicted with Iran’s support for Syria’s Shia-dominated government, resulting in a temporary withdrawal of Iranian funding. Despite resuming in 2017, the affair highlighted Hamas’ and Tehran’s ideological divisions.

Iran is also alleged to have advised against the Houthis’ seizure of Yemen’s capital in 2014 and Iraqi militia leader Qais al-Khazali’s attack on US forces in 2020. Control over Iraqi militants has similarly weakened since 2020, and even Hezbollah military officials have reportedly refused orders from Iran in Syria.

Yet voicing public dissatisfaction with these groups would undermine Iran’s portrayal of leadership and unity against Israel and Western powers, limiting its ability to rebuke them or reign them in.

Iraq’s Iran-aligned groups meanwhile have “fierce internal rivalries” that inhibit greater coordination, and Iran’s interference in Iraq has resulted in significant consequences.

In the 1980s, Iran’s support for Iraq’s Kurds saw Iraq support Kurdish separatists in Iran, which continue to attack Iran from Iraq to this day. The January 2024 exchange of fire between Iranian forces and Balochistan militants in Pakistan, followed by retaliatory strikes by Pakistan against groups in Iran, revealed the challenges Iran faces in managing militant groups both internally and with its neighbors.

Iran, however, will likely persist with its strategy, even if it obtains nuclear weapons. Its proxy groups’ amassed military and political power have helped Iran challenge its enemies and inch close to state capture (or state failure) in several countries.

As the US continues its gradual pullout from the Middle East, there is no telling how these groups may continue to evolve – with or without Iranian assistance.

This article was produced by Economy for All, a project of the Independent Media Institute, which provided it to Asia Times.

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What China can learn from Japan about burst bubbles – Asia Times

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China is awash in bad debt, but can it learn from Japan’s experience overcoming the collapse of the 1980s bubble? Let’s discuss what China would need to succeed.

The final collapse of Chinese real estate giant, Evergrande, is the latest evidence – as if any were needed – that the People’s Republic of China (PRC) is awash in bad debt. 

There has always been bad debt in the PRC. But now it’s mammoth. Like Texas, in China, everything is bigger – even if not better. The men in Zhongnanhai are rightly worried.

First a tutorial

Bad debt: Someone borrows money and provides collateral to the lender. If repayment isn’t made according to loan terms the loan is declared in default. Then the collateral is seized to compensate the lender for the money lent. 

The debts often involve borrowing to purchase real estate but can be on other assets too. 

Enough loan defaults lead to ripple effects and loss of confidence throughout the entire economy. This in turn leads to more bad debt.

Banks themselves get in trouble. They may have collateral – but nobody will buy it as people don’t have money or don’t know what it is worth. 

A government needs to clean things up and dispose of the debts or else it gums up the entire economy. Think recession or even depression. 

A recent article in the Financial Times was filed by Gillian Tett, who had ably reported from Japan in the 1990s. She suggests China could learn from Japan’s experience cleaning up its own massive bad loan problem in the 1990s and well into the 2000s – following a real estate lending mania during the 1980s “bubble” economy when the entire nation seemed to go insane.

Learning from Japan?

As an executive with a foreign bank, I had a front-row seat to the cleanup effort. There are lessons, but I doubt Xi Jinping is interested. The first lesson the Chinese Communist Party (CCP) might learn from Japan is the need for an honest, impartial legal system that’s free of official influence.

Then there’s the simple ability to enforce a contract. Next, you need guaranteed property rights. And all of these flow from a system of consensual government.

Japan had all of these. The People’s Republic of China does not – and appears intent on keeping things that way. Otherwise, party control is threatened.

There is only one hand guiding the Chinese economy and it is the hand of the CCP.

Our bank did well from Japanese bad loans. The approach was based on using legal process. And you could do that in Japan. Court rulings are obeyed. If organized crime – the yakuza, who were often but not always involved in the bad loans – wanted to take on the judiciary and interfere with court orders they were free to do so.

They didn’t make that choice when it came to foreign firms. Our bank also refused to pay off the yakuza or enlist their help as some other financial outfits reportedly did.

In the 2000s, one foreign bank tried to replicate its success in China. It failed. It couldn’t enforce its rights, even when it had also enlisted someone with “connections.”

Invariably, the debtor would find somebody with better connections who would obstruct the resolution process.

The headquarters of the People’s Bank of China, China’s central bank. Photo: Asia Times files / AFP

Two very different systems and societies

Another major difference that made things easier in Japan was the basic confidence the average citizen had in the government and its competence – despite no shortage of scandals over the years.

Japan also has elections – fair ones, too. The citizenry could vote politicians out of office, and even an entire party. And the Japanese press – parts of it at least – did its job well enough exposing official wrongdoing.

This tended to serve as a pressure release valve of sorts that could absorb even a disaster like the “bubble” collapse.

One gauge of this confidence in their system is that Japanese people have never rushed to move their wealth out of the country. This is unlike the case in China, where the move is ideally made in the company of a relative with a residence permit – to the US or some other free nation. 

Different people

One fairly notes another huge advantage for Japan in cleaning up the bad debt.

It’s the Japanese expression shoganai. It means it can’t be helped, or that’s life.  With that utterance as justification, the Japanese put up with all sorts of things that no other people on earth would.  

The bubble era hangover – and the official and financial class malfeasance that caused it – was just one of those things. Nobody liked it, but “shoganai.”

The Bank of Japan’s headquarters in Tokyo. Photo: Asia Times files / AFP / Kazuhiro Nogi

Letting foreigners help – and profit

Another advantage for Japan was that they bit the bullet and allowed foreign financial firms to play a major role in the debt workout process.

This got a lot of bad press. The foreign firms were referred to as “vulture funds.” There was plenty of official resentment of outsiders taking advantage of Japan’s misfortune. But they were allowed to operate – and supported.

One can’t imagine Xi Jinping allowing foreign financial companies to “do the necessary” and subject the CCP-ruled People’s Republic of China to another few years of “humiliation” at the hands of foreigners. 

He might offer up a small project to lure in a few Western firms. Their arrival would be used to show the CCP is serious and applying “high quality” approaches. Beyond that, it’s hard to imagine.

Arguably, without the foreigners, Japan would have had a much harder time. Besides distracting attention from who caused the bubble era excesses, there was the small problem of the Japanese underworld. They’d made their position clear early on: If Japanese banks collected on bad debts in which the yakuza stood to lose, that was an unhealthy proposition for those bankers.

Harming foreigners was a different matter.

If not for the foreigners’ intervention, the authorities would have had to crack down on the yakuza, thus harming the groups’ broader moneymaking interests.

What was the yakuza involvement in Japan’s bad debt?

It’s debatable, but from my perch I’d estimate that a huge percentage (90% if I had to give a figure) of the first US$200-300 billion in loans that went bust had a serious yakuza taint.

The Japanese government held back. Beyond fear of bankers getting hurt, the deep involvement of politicians, bankers, and officials would have been exposed. This seized up the financial system and the economy. The ripple effect caused a lot of other bad debt – much of it without yakuza connections. But the damage was done.

Help from where?

Japan also benefitted from having actual and potential support from the United States and other Western nations that saw Tokyo as an integral part of the free-world system.

Exactly who will help China? Russia? Cuba? Iran? 

As crazy as it sounds, the Biden administration might step in to prop up the country that refers to America as “the main enemy.” It’s the same country that is building up a military to kill Americans. 

One is properly skeptical of what’s going on at the recent meetings between US and PRC financial officials. 

Chinese Premier Li Qiang, right, shakes hands with Treasury Secretary Janet Yellen, left, during a meeting at the Great Hall of the People in Beijing, China, Friday, July 7, 2023. Photo: Mark Schiefelbein / Pool

Resolving China’s huge bad loan problem just might be beyond the CCP and its officials. After all, they have no more special expertise than anyone else on earth when it comes to running an economy.

But if the US government, Wall Street, and the two-standing-ovations-for-Xi business class keep pouring money and technology into China, that just might keep Xi Jinping afloat for a good long while – bad debt or no bad debt.

On the other hand, if Washington steps back and says, “We love you, but it’s your problem,” the entire CCP Ponzi scheme will be in all sorts of trouble.

And that would be a win-win.

Grant Newsham is a retired US Marine officer and a former US diplomat and business executive who lived in Japan for 20 years. He is the author of the book When China Attacks: A Warning To America.

This article was first published by JAPAN Forward. It is republished with permission.

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Group-IB unveils first iOS trojan stealing your face

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Chinese-speaking threat actor codenamed GoldFactory, responsible
AI face-swapping services to create deepfakes by replacing their faces with the victims

Group-IB, a creator of cybersecurity technologies to investigate, prevent, and fight digital crime, has reported uncovering a new iOS Trojan, which it has dubbed GoldPickaxe.iOS, designed to steal users’ facial recognition data, identity documents,…Continue Reading

Michael Burry’s ‘Big Short’ logic on China tech stocks – Asia Times

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Wall Street these days is going to great lengths to avoid Chinese stocks. Michael Burry, for one, is bucking the trend, raising tantalizing new questions about whether the herd is getting Asia’s biggest economy wrong after a nearly US$7 trillion stock selloff.

You would expect nothing less from a money manager who rose to fame in Michael Lewis’s 2010 book “The Big Short.” In 2015, actor Christian Bale played Burry in Hollywood’s take on a ragged assortment of players involved in the 2008 subprime crisis.

In that episode, Burry saw the coming meltdown — and the forces, blunders and institutions behind it — more clearly than virtually anyone. Those who invested with his Scion Asset Management in 2000 enjoyed returns of nearly 490% by 2008.

Burry is turning heads anew by betting big on China Inc at a moment when most investors are rushing for the exits. In recent months, Burry’s firm made China’s Alibaba Group its top holding and wagered on JD.com, too.

Filings show Burry’s upped his stake in the e-commerce juggernaut Jack Ma founded by 50% in the year ended December 31. The positions aren’t huge — just under $6 million in each of Alibaba and JD. Yet the trades are bewilderingly at odds with the capital zooming away from China, including a tech sector plagued by regulatory chaos these last few years.

China’s nearly $7 trillion stock rout since 2021 has largely drowned out discussions of contrarian bets or bargain shopping. Burry’s China pivot is the exception, particularly because of the struggles facing both Alibaba and JD, whose shares are down 25% and 53% respectively over the last 12 months.

Along with China’s regulatory risks and slowing economic growth, tech shares face headwinds amid fears about the nation’s property crisis and the exodus of capital out of yuan assets.

Burry’s Scion isn’t alone in thinking Chinese tech, particularly chip companies, is due for a rebound. Barclays and Sanford C Bernstein are nudging clients to look at certain mainland tech names. Bernstein, for example, is spotlighting Naura Technology Group and Hygon Information Technology.

Part of the rationale rests in Huawei Technologies’ success in navigating around US efforts to effectively kill the Chinese telecom company. Might US sanctions aimed at wrecking China’s semiconductor industry catalyze President Xi Jinping’s economy to innovate and move significantly up the value-added ladder?

“We see the US sanctions as a double-edged sword,” says Bernstein analyst Qingyuan Lin. “While they may slow China’s progress in cutting-edge areas, they also compel China to develop its supply chain, pursue self-sufficiency and thrive in segments that benefit from increased domestic substitution.”

Others wonder if the broader Chinese market is being under-appreciated by investors.

“The Chinese stock market is undervalued against cash, Chinese bonds, gold, and other world stock markets — and it is in a state of total panic,” says economist Charles Gave at Gavekal Research. “It has to be the best value proposition in the world.”

Green is down and red is up on China’s stock market ticker boards. Photo: Asia Times Files / AFP

Yet whether Chinese tech shares win a broader audience depends on Xi’s success in championing private sector innovation over antiquated state-owned enterprises (SOEs).

This requires Beijing to act faster and more credibly to level playing fields, build stronger capital markets, increase transparency and strengthen corporate governance. And, of course, to end a property crisis that has China in global headlines for all the wrong reasons.

This week, Premier Li Qiang called for “pragmatic and forceful” action aimed at “boosting confidence” in the economy. Official news agency Xinhua quoted Li as advising policymakers to “focus on solving practical issues that concern the masses and enterprises.”

Li’s comments come as Beijing confirms the lowest level of annual foreign direct investment since 1993 — just $33 billion in 2023. The figure, which records monetary flows involving foreign-owned entities in China — was 82% lower than the 2022 tally.

Earlier this month, the People’s Bank of China (PBOC) reduced the reserve requirement ratio for banks by 50 basis points. Xi’s government also telegraphed a $278 billion financial rescue package for the stock market.

Yet Remi Olu-Pitan, a multi-asset fund manager at Schroders, says this “tactical lift” is no replacement for the “structural” changes China needs to rebuild investor confidence.

“The incentive to reduce exposure is pretty powerful and so we think this provides a pause, but we worry any recovery will be an opportunity to de-risk,” she says.

Luca Paolini, chief strategist at Pictet Asset Management, adds that “while Chinese stocks’ relative valuations are at an all-time low, prospects for the asset class are not particularly bright as investors doubt the willingness of Beijing to deliver large-scale support to revive the stock market. What’s more, a turnaround in the property market, which is key for an improvement in sentiment, is not in sight.”

MSCI’s recent decision to delete dozens of Chinese companies from multiple indexes is an added blow, complicating Beijing’s efforts to restore foreign investor confidence. Analysts at UOB Global Economics said in a note that MSCI’s changes posed “further downside risks in China’s stock markets,” including for investors that “may be forced to liquidate.”

The need for reforms is growing as investors look for less volatile destinations for capital, including neighboring Japan. Unfortunately, Beijing seems to be spending more time dusting off playbooks from stock crashes of the past, particularly in 2015.

In the summer of 2015, Chinese shares fell more than 30% in a matter of weeks. At the time, Team Xi loosened rules on leverage, reduced reserve requirements, delayed all initial public offerings, suspended trading in thousands of listed companies and allowed mainlanders to use apartments as collateral to buy shares. Xi’s government rolled out advertising campaigns to buy stocks out of patriotism.

Taking a longer-term perspective, says economist Jeremy Stevens at Standard Bank, “similar interventions in 2015 did not achieve their goals.” He adds that “it’s worth remembering that in August 2015, Chinese stocks suffered their most drastic four-day downturn since 1996 amid fears that the government might have to retract its market support strategies.”

The severity of China’s deepening property crisis and deflationary pressures suggest that mere stimulus will be even less effective this time. “China’s economic growth,” Stevens says, “is expected to continue sliding without last year’s supportive base effects, and markets will watch carefully as policymakers set a growth target and policy focus at the National People’s Congress in March.”

Another problem is intensifying US efforts to curb China’s development as a tech superpower. The trade war that Donald Trump launched during his 2017-2021 presidency was one thing. The more targeted curbs that US President Joe Biden prioritized since then – strategic bans on China’s access to chips and other vital tech – have caused much greater pain.

Granted, Huawei offers a roadmap for China Inc to steer around Washington’s speedbumps. Though Burry isn’t saying much, it’s quite likely he believes Joseph Tsai, Alibaba’s co-founder and chairman, can strategize beyond today’s regulatory and geopolitical noise to grow Alibaba’s global market share.

But now, China’s electric vehicle industry is under assault as chip-loaded surveillance machines, as many Washington lawmakers see it. As the November 5 US election approaches, Trump’s Republicans and Biden’s Democrats will be under increasing pressure to toss more sand in China Inc’s gears.

US President Joe Biden and former president Donald Trump are competing to be tougher on China on the campaign trail. Image: X Screengrab

Odds are, the next wave of curbs will seek to hobble China’s ambitions in the artificial intelligence (AI) space. Already, the specter of heavy-handed regulation – and the Communist Party putting its own priorities ahead of tech development – are clouding China’s AI future.

The Financial Times reports that Biden’s trade team is warning Xi’s government against “dumping” goods as its overcapacity troubles worsen.

It quotes Jay Shambaugh, US Treasury undersecretary for international affairs, as saying “we are worried that Chinese industrial support policies and macro policies that are more focused on supply rather than thinking about where the demand will come from are both careening towards a situation where overcapacity in China is going to wind up hitting world markets.”

In particular, Biden’s White House worries about China’s deflationary pressures damaging advanced manufacturing sectors like electric vehicles, lithium-ion batteries and solar panels. As Shambaugh told the FT, “the rest of the world is going to respond, and they’re not doing it in a new anti-China way, they’re responding to Chinese policy.”

Analysts at Barclays, meanwhile, are doubtful about China’s ambitious goal of reaching 70% self-sufficiency in semiconductors by 2025. The endeavor is still “at the start of a very long journey,” Barclays says.

To be sure, the tens of billions of dollars Beijing is investing in local production is bearing fruit with mainland producers moving up the value curve, the bank’s analysts say. This, though, depends on Team Xi stepping up reforms.

China has indeed been stepping up the pace on transforming its economy away from smokestack industries and property toward services and technology. Yet, argue analysts at UBS Global Wealth Management, “the time required to transition to these new drivers means that they too need policy support to smooth growing pains.”

As they point out, “these all raise the policy bar to steady the economy, in our view, and call for unconventional demand-targeted policies to revive confidence.”

That’s easier said than done, notes economist Peiqian Liu at Fidelity Investments. Getting the support/reform mix right, she says, is “critical” to stabilizing China’s outlook. As Liu puts it, “the cyclical rebound this time is intertwined with structural headwinds that China is facing.”

Yet, Liu adds, “the reason behind why China is not rolling out bazooka stimulus at this point of time, in my view, is because of some constraints that China is currently facing.”

These include the legacy of a decade’s worth of debt accumulation to prop up growth. “The headline total debt is almost amounting to 300% of GDP,” she says, “which leads China to rethink its growth model as its debt-driven model does not look sustainable going forward.”

Some observers are less concerned about China’s trajectory thanks partly to global demand for its goods. “I remain optimistic about the long-term growth in Chinese exports, as a way to offset the loss from real estate,” says Qi Wang, CEO of MegaTrust Investment.

“The numbers may speak for themselves,” he says. “China’s share of global exports reached 17% in 2020, which is a record for not only China but also any other countries in history. Since then, China continues to dominate the world in exports, despite the US sanctions, geopolitical risks, supply chain shocks and an unstable global economy.”

China continues to dominate global export markets. Photo: DTN / Twitter Screengrab

The plot thickens when China considers the shifting outlook for US bond yields. Inflation isn’t proving to be as transient as global investors and US Federal Reserve officials alike expected, notes Bruce Kasman, global head of economics at JPMorgan.

“While it’s premature to place significant weight on noisy January data, risks have shifted in the direction that core inflation and labor market conditions both surprise the Fed in a hawkish direction in the first half of 2024,” Kasman says. “This stall has been expected to delay the start of the developed world easing cycle to midyear and curb enthusiasm about the overall magnitude of the easing cycle ahead.”

All of which means that Burry’s enthusiasm for Chinese tech is as complicated as it is tantalizing. Suffice to say, students of his exploits in “The Big Short” have their popcorn out to see if this story has a happy ending.

Follow William Pesek on X, formerly Twitter, at @WilliamPesek

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Australia holds Chinese man over suspected North Korea tobacco smuggling

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North Korea military paradeReuters
By Hannah Ritchie
BBC News, Sydney

A Chinese man is being held in Australia over his alleged role in a tobacco smuggling scheme that generated $700m (£570m) for North Korea.

Jin Guanghua now awaits extradition to the US, where he faces prosecution.

He is accused of supplying tobacco to Pyongyang for roughly a decade. It is unclear whether he contests the claim.

US authorities allege the tobacco trade allowed Kim Jong Un’s regime to make and sell counterfeit cigarettes to help fund its weapons programme.

Australia’s Attorney-General’s Department confirmed that Mr Jin had been detained in Melbourne in March last year, and that his “extradition matter” was ongoing.

“The individual is wanted to face prosecution in the US for a number of sanctions, bank fraud, money laundering, and conspiracy offences,” it said in a statement on Tuesday.

According to US court documents, the scheme Mr Jin was allegedly involved in was run through a series of North Korean “state owned companies” and financed by its banks.

“Chinese front companies” were then used to conduct transactions through the US financial system, bypassing sanctions and bringing millions of dollars into Pyongyang, the documents say.

Mr Jin is accused of setting up a number of entities in the UK, New Zealand, the United Arab Emirates and China that “facilitated purchases of [the] tobacco” used.

The revenue from the scheme is believed to have supported North Korea’s ballistic and nuclear proliferation programmes, the US says.

Counterfeit cigarettes have been a “major source of income” for North Korea since the 1990s, according to US authorities. Made in Pyongyang, they are then sold using the fake packaging of well-known tobacco brands, and have turned up in countries such as the Philippines, Vietnam and Belize.

The illegal trade is thought to be one of Pyongyang’s largest sources of hard currency, according to the US government.

If found guilty, Mr Jin faces millions of dollars in fines and decades in prison.

His alleged co-conspirators have been named in court documents as Chinese nationals Qin Guoming, 60, and Han Linlin, 42.

Both are wanted by the FBI and are suspected to have ties to “China, the United Arab Emirates, and Australia”.

A bounty of $498,000 is on offer for any information that could assist with the arrest and conviction of either man.

For years, the US has imposed strict sanctions on North Korea over its nuclear and ballistic missile activities.

In 2023, British American Tobacco was ordered to pay $635m in fines to the US government after one of its subsidiaries admitted to selling cigarettes to Pyongyang. The case was described by authorities as an “elaborate scheme to circumvent US sanctions”.

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India reaping benefits as investors divert billions of dollars away from China amid slowing economy

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MUMBAI: India’s stock market is reaping the benefits as investors divert billions of dollars away from China, amid its slowing economy, towards the South Asian giant.

The trend of China’s economic slowdown is likely to persist in the coming years, as the country struggles with sagging productivity and a rapidly ageing population, the International Monetary Fund (IMF) said earlier this month.

Meanwhile, India’s economic growth, large population, and policy reforms are all factors that are driving cash into its equity markets, according to market analysts.

Potential risks still remain, however, including the outcome of India’s general election this year and the broader geopolitical landscape.

Analysts are widely expecting India’s benchmark Sensex and Nifty indices, which include the country’s largest and most actively traded stocks, to continue rising this year with a double-digit percentage increase.

Sectors across the board are poised to perform well, including those seen as having been overvalued, such as public sector banks and power companies, said analysts.

These could benefit from the government’s budget for the next financial year presented at the start of February, which would increase spending in areas such as infrastructure.

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Scam cases in Singapore jumped almost 50% in 2023; most victims fell for job, e-commerce scams

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ANTI-SCAM MEASURES

SPF gave some updates on anti-scam measures rolled out by SPF and other government agencies, such as the Infocomm Media Development Authority (IMDA).

From Apr 15, people will only be able to purchase and register a maximum of 10 post-paid SIM cards.

This comes after SPF and IMDA have observed signs of such SIM cards, which are predominantly bought by locals, being increasingly misused for scam purposes.

Fraudulently registered post-paid SIM cards can act as an anonymous communications channel for illicit activities, which include scams and unlicensed moneylending.

The police said that the higher cap of 10 cards is meant to cater to the needs of legitimate users who may register SIM cards for family members, while limiting illicit usage. IMDA will review the limit over time to ensure it continue to be relevant.

This will only apply to new registrations. Subscribers who currently have more than 10 post-paid SIM cards will not be affected but will not be able to register more of such cards.

Pre-paid SIM cards have usually been of concern, with people still only being allowed to buy a maximum of three pre-paid cards today.

The Ministry of Home Affairs, which oversees SPF, will be introducing new offences to criminalise the abuse of SIM cards. More details will be announced shortly, said SPF.

Last year, 11 people were arrested during four island-wide operations targeting 17 mobile phone shops. They were suspected to have helped scammers by fraudulently registered SIM cards using others’ particulars.

ANTI-SCAM COMMAND

The police’s Anti-Scam Command, which was set up in March 2022, froze more than 19,600 bank accounts and recovered more than S$100 million.

Staff from six banks as well as the Government Technology Agency were also deployed to work at the Anti-Scam Command to speed up responses to scam cases and flag unusual activities in Singpass accounts.

Since Jan 30, staff from popular e-commerce platform Carousell have also been working at the Anti-Scam Command to better take down “scam-tainted online monikers and suspicious advertisements”, said SPF.

“The fight against scams must continue and the responsibility cannot rest with law enforcement alone,” said Mr David Chew, director of SPF’s Commercial Affairs Department.

“Scams will continue to evolve, so a discerning and vigilant public is essential. The police will continue to work closely with stakeholders and other government agencies to safeguard Singapore against scams.”

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Nearly 2,000 victims fell for Android malware scams, at least S.1 million lost in 2023

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ANTI-MALWARE MEASURES

SPF detailed a series of measures that were implemented last year to combat the spike in Android malware scams.

In August, OCBC became the first bank in Singapore to block some customers from using its internet banking and mobile banking app if it detected potentially risky apps downloaded from unofficial portals. The move drew flak from customers at the time.

Since then, OCBC has prevented 276 customers from losing S$38.8 million. This was based on customers’ reports that they sideloaded a suspicious app and observed anomalies on their devices, or suffered losses from other banks due to malware-enabled scams, said Ms Loretta Yuen, OCBC’s general counsel and head of group legal and compliance, last Thursday.

Various banks also rolled out upgraded versions of their apps with anti-malware measures.

“Since then, malware-enabled scam cases have started to decline drastically as more people had their banking apps upgraded,” SPF noted.

In November 2023, Singapore’s three local banks – DBS, OCBC, and UOB – introduced a money lock feature that allows customers to set aside part of their money in their bank accounts that cannot be digitally transferred.

As of January, more than 49,000 money lock accounts have been set up, with more than S$4.2 billion set aside, said SPF. Other major retail banks will progressively introduce the money lock feature by June.

In January, the director of the Association of Banks in Singapore said the banks will continue to improve on the design of their money-locking features over the coming months.

Currently, DBS and UOB customers have to set up new accounts to use the banks’ money-locking features. OCBC customers do not have to set up a new account.

OCBC’s Ms Yuen told reporters that as of Feb 9, S$4.4 billion has been locked across more than 40,000 OCBC accounts. About a third of these customers are aged 50 or above, while close to half of them are between 30 and 50 years old.

Ms Yuen cautioned that malware scammers’ methods are evolving, with OCBC seeing more scammers circumventing the anti-malware measures by guiding their victims step by step on how to do so and resulting in seemingly authorised transactions.

The bank is exploring two new measures but will give more details in the future, said Ms Yuen.

One such measure aims to detect scammers who are accessing victims’ banking apps without exerting pressure on the mobile phones. Another measure involves experimenting with “cognitive breaks”, such as changing certain wordings in OCBC’s banking app to “break the spell” of being scammed.

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